Regulation of NMS Stock Alternative Trading Systems, 80997-81154 [2015-29890]

Download as PDF Vol. 80 Monday, No. 248 December 28, 2015 Part III Securities and Exchange Commission mstockstill on DSK4VPTVN1PROD with PROPOSALS3 17 CFR Parts 240, 242, 249 Regulation of NMS Stock Alternative Trading Systems; Proposed Rule VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\28DEP3.SGM 28DEP3 80998 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240, 242, 249 [Release No. 34–76474; File No. S7–23–15] RIN 3235–AL66 Regulation of NMS Stock Alternative Trading Systems Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: The Securities and Exchange Commission is proposing to amend the regulatory requirements in Regulation ATS under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) applicable to alternative trading systems (‘‘ATSs’’) that transact in National Market System (‘‘NMS’’) stocks (hereinafter referred to as (‘‘NMS Stock ATSs’’), including so called ‘‘dark pools.’’ First, the Commission is proposing to amend Regulation ATS to adopt Form ATS–N to provide information about the brokerdealer that operates the NMS Stock ATS (‘‘broker-dealer operator’’) and the activities of the broker-dealer operator and its affiliates in connection with the NMS Stock ATS, and to provide detailed information about the manner of operations of the ATS. Second, the Commission is proposing to make filings on Form ATS–N public by posting certain Form ATS–N filings on the Commission’s internet Web site and requiring each NMS Stock ATS that has a Web site to post on the NMS Stock ATS’s Web site a direct URL hyperlink to the Commission’s Web site that contains the required documents. Third, the Commission is proposing to amend Regulation ATS to provide a process for the Commission to determine whether an entity qualifies for the exemption from the definition of ‘‘exchange’’ under Exchange Act Rule 3a1–1(a)(2) with regard to NMS stocks and declare an NMS Stock ATS’s Form ATS–N either effective or, after notice and opportunity for hearing, ineffective. Fourth, under the proposal, the Commission could suspend, limit, or revoke the exemption from the definition of ‘‘exchange’’ after providing notice and opportunity for hearing. Fifth, the Commission is proposing to require that an ATS’s safeguards and procedures to protect subscribers’ confidential trading information be written. The Commission is also proposing to make conforming changes to Regulation ATS and Exchange Act Rule 3a1–1(a). Additionally, the Commission is requesting comment about, among other things, changing the requirements of the mstockstill on DSK4VPTVN1PROD with PROPOSALS3 SUMMARY: VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 exemption from the definition of ‘‘exchange’’ pursuant to Exchange Act Rule 3a1–1(a) for ATSs that facilitate transactions in securities other than NMS stocks. Lastly, the Commission is also requesting comment regarding its consideration to amend Exchange Act Rules 600 and 606 to improve transparency around the handling and routing of institutional customer orders by broker-dealers. DATES: Comments should be received on or before February 26, 2016. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/proposed); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 23–15 on the subject line; or • Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments. Paper Comments • Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number S7–23–15. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/proposed.shtml). Comments will also be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission’s Web site. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Tyler Raimo, Senior Special Counsel, at PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 (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 Derek James, Special Counsel, at (202) 551–5792; Office of Market Supervision, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–7010. SUPPLEMENTARY INFORMATION: The Commission is proposing: (1) New Form ATS–N under the Exchange Act provided by Rule 3a1–1(a) of the Exchange Act [17 CFR 240.3a1–1(a)], which NMS Stock ATSs would rely on to qualify for the exemption from the definition of ‘‘exchange’’; (2) to amend Regulation ATS under the Exchange Act [17 CFR 242.300 through 242.303] to add new Rule 304 to provide new conditions for NMS Stock ATSs seeking to rely on the exemption from the definition of ‘‘exchange’’; and (3) related amendments to Rule 300, 301, and 303 of Regulation ATS and Rule 3a1–1(a) under the Exchange Act [17 CFR 242.300; 17 CFR 242.301, 17 CFR 242.303; and 17 CFR 240.3a1–1]. The Commission is also proposing amendments to Rules 301(b)(10) and 303 of Regulation ATS under the Exchange Act [17 CFR 242.301(b)(10) and 17 CFR 242.303] to require all ATSs to make and keep written safeguards and written procedures to protect subscribers’ confidential trading information. Table of Contents I. Introduction II. Current ATS Regulatory Framework A. Exemption From National Securities Exchange Registration B. Conditions to the ATS Exemption; Confidential Notice Regime III. Role of ATSs in the Current Equity Market Structure A. Significant Source of Liquidity for NMS Stocks B. Heightened Operational Complexity and Sophistication of NMS Stock ATSs C. Lack of Operational Transparency for NMS Stock ATSs D. Prior Comments on Operational Transparency and Regulatory Framework for NMS Stock ATSs IV. Proposed Amendments to Regulation ATS and Rule 3a1–1 To Heighten Regulatory Requirements for ATSs That Transact in NMS Stocks A. Proposed Definition of NMS Stock ATS B. Rule 3a1–1(a)(2): Proposed Amendments to the Exemption From the Definition of ‘‘Exchange’’ for NMS Stock ATSs C. Proposed Rule 304: Enhanced Filing Requirements for NMS Stock ATSs 1. Application of Existing Requirements to NMS Stock ATSs E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules 2. Rule 301(b)(2) and Form ATS; ATSs That Trade in Non-NMS Stocks 3. Proposed Rule 304(a)(1)(i) and (ii): Filing and Review of Form ATS–N 4. Proposed Rule 304(a)(1)(iii): Declarations of Effectiveness or Ineffectiveness of Form ATS–N 5. Proposed Rule 304(a)(1)(iv): Orders Regarding Form ATS–N Effectiveness 6. Proposed Rule 304(a)(2): Form ATS–N Amendments 7. Proposed Rule 304(a)(3): Notice of Cessation 8. Proposed Rule 304(a)(4): Suspension, Limitation, or Revocation of the Exemption From the Definition of Exchange D. Rule 304(b): Public Disclosure of Form ATS–N and Related Commission Orders E. Rule 304(c)(1) and (2): Proposed Form ATS–N Requirements V. Proposed Form ATS–N: Submission Type and Part I of Form ATS–N VI. Part II of Proposed Form ATS–N: BrokerDealer Operator Registration Information VII. Part III of Proposed Form ATS–N: Activities of the Broker-Dealer Operator and Its Affiliates A. The Relationship Between the BrokerDealer Operator’s Operation of the NMS Stock ATS and Its Other Operations 1. Background 2. Potential Conflicts of Interest for the Broker-Dealer Operator or Its Affiliates B. Disclosures Required Under Part III of Proposed Form ATS–N 1. Proposed Definitions of ‘‘Affiliate’’ and ‘‘Control’’ 2. Non-ATS Trading Centers of the BrokerDealer Operator 3. Multiple NMS Stock ATS Operations of the Broker-Dealer Operator 4. Products or Services Offered to Subscribers by the Broker-Dealer Operator 5. Broker-Dealer Operator Arrangements With Unaffiliated Trading Centers 6. Trading on the NMS Stock ATS by the Broker-Dealer Operator and Its Affiliates 7. Broker-Dealer Operator Smart Order Routers (or Similar Functionalities) and Algorithms 8. Shared Employees of NMS Stock ATS 9. Service Providers to the NMS Stock ATS 10. Differences in Availability of Services, Functionality, or Procedures 11. Confidential Treatment of Trading Information VIII. Part IV of Proposed Form ATS–N: The Manner of Operations of the NMS Stock ATS A. Subscribers B. Hours of Operations C. Types of Orders D. Connectivity, Order Entry, and CoLocation E. Segmentation of Order Flow and Notice About Segmentation F. Display of Order and Trading Interest G. Trading Services H. Suspension of Trading, System Disruption or Malfunction I. Opening, Reopening, and Closing Processes, and After Hours Procedures J. Outbound Routing K. Market Data VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 L. Fees M. Trade Reporting, Clearance and Settlement N. Order Display and Execution Access O. Fair Access P. Market Quality Statistics Published or Provided by the NMS Stock ATS to Subscribers IX. Proposed Amendment to Rule 301(b)(10): Written Safeguards and Written Procedures To Protect Confidential Trading Information X. Recordkeeping Requirements XI. General Request for Comment XII. Paperwork Reduction Act A. Summary of Collection of Information 1. Requirements Relating to Rule 301(b)(10) of Regulation ATS 2. Requirements Relating to Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Proposed Form ATS–N B. Proposed Use of Information 1. Proposed Amendments to Rules 301(b)(10) of Regulation ATS 2. Proposed Rules 301(b)(2)(viii), 304 of Regulation ATS, Including Proposed Form ATS–N, and 301(b)(9) C. Respondents D. Total Initial and Annual Reporting and Recordkeeping Burdens 1. Proposed Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS 2. Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Proposed Form ATS–N E. Collection of Information Is Mandatory F. Confidentiality of Responses to Collection of Information G. Retention Period for Recordkeeping Requirements H. Request for Comments XIII. Economic Analysis A. Background B. Baseline 1. Current NMS Stock ATSs 2. Current Reporting Requirements for NMS Stock ATSs 3. Lack of Public Disclosure of NMS Stock ATS Operations and the Activities of the Broker-Dealer Operator and the BrokerDealer Operator’s Affiliates 4. NMS Stock ATS Treatment of Subscriber Confidential Trading Information 5. Current State of Competition Between NMS Stock ATSs and Registered National Securities Exchanges 6. Competition Among NMS Stock ATSs 7. Competition Between Broker-Dealers That Operate NMS Stock ATSs and Broker-Dealers That Do Not Operate NMS Stock ATSs 8. Effect of NMS Stock ATSs on the Current Market for NMS Stock Execution Services C. Economic Effects and Effects on Efficiency, Competition, and Capital Formation 1. Costs and Benefits of Proposed Enhanced Filing Requirements 2. Costs and Benefits of Public Disclosures of Proposed Form ATS–N 3. Written Safeguards and Written Procedures To Protect Subscribers’ Confidential Trading Information, and Proposed Recordkeeping Requirements PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 80999 D. Alternatives 1. Require NMS Stock ATSs To Publicly Disclose Current Form ATS 2. Require Proposed Form ATS–N But Deem Information Confidential 3. Require NMS Stock ATSs To Publicly Disclose Proposed Form ATS–N But Not Declare Proposed Form ATS–N Effective or 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. Lower the Fair Access Threshold for NMS Stock ATSs 9. Apply Proposed Rule 304 to ATSs That Trade Fixed Income Securities and ATSs that Solely Trade Government Securities XIV. Consideration of Impact on the Economy XV. Regulatory Flexibility Act Certification XVI. Statutory Authority and Text of Proposed Amendments I. Introduction Section 11A(a)(2) of the Exchange Act,1 enacted as part of the Securities Acts Amendments of 1975 (‘‘1975 Amendments’’),2 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.3 Among the findings and objectives in Section 11A(a)(1) are that ‘‘[n]ew data processing and communications techniques create the opportunity for more efficient and effective market operations’’ 4 and ‘‘[i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure . . . the economically efficient execution of securities transactions’’ 5 and the ‘‘practicability of brokers executing investors’ orders in the best markets.’’ 6 Congress also found, as noted by the Commission when it adopted Regulation ATS, that it was in the public interest to assure ‘‘fair 1 15 U.S.C. 78k–1(a)(2). Law 94–29, 89 Stat. 97 (1975). 3 15 U.S.C. 78k–1(a)(1). 4 Section 11A(a)(1)(B) of the Exchange Act, 15 U.S.C. 78k–1(a)(1)(B). 5 Section 11A(a)(1)(C)(i) of the Exchange Act, 15 U.S.C. 78k–1(a)(1)(C)(i). 6 Section 11A(a)(1)(C)(iv) of the Exchange Act, 15 U.S.C. 78k–1(a)(1)(C)(iv). 2 Public E:\FR\FM\28DEP3.SGM 28DEP3 81000 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 competition . . . between exchange markets and markets other than exchange markets.’’ 7 Congress recognized that the securities markets dynamically change and, accordingly, granted the Commission broad authority to oversee the implementation, operation, and regulation of the national market system in accordance with Congressional goals and objectives.8 In December 1998, the Commission adopted Regulation ATS to advance the goals of the national market system and establish a regulatory framework for ATSs.9 At that time, there had been a surge in a variety of alternative trading systems that traded NMS stocks and furnished services traditionally provided by national securities exchanges,10 such as matching counterparties’ orders, executing trades, operating limit order books, and facilitating active price discovery.11 The Commission observed at the time that, among other things, activity on ATSs was not fully disclosed, or accessible, to investors, and that these systems had no obligation to provide investors a fair opportunity to participate on the systems or to treat their participants fairly.12 The Commission noted in the Regulation ATS Adopting Release that while ATSs at that time operated in a manner similar to registered national securities exchanges, each type of trading center was subject to different regulatory regimes, and that these differences created disparities that affected investor protection and the operation of the markets as a whole, calling into question the fairness of the then-current regulatory requirements.13 7 See Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998) (Regulation of Exchanges and Alternative Trading Systems, hereinafter ‘‘Regulation ATS Adopting Release’’) at 70858 n.113 and accompanying text (citing Section 11A(a)(1)(C)(ii) of the Exchange Act, 15 U.S.C. 78k–1(a)(1)(C)(ii)). The Commission also noted that a fundamental goal of a national market system was to ‘‘achieve a market characterized by economically efficient executions, fair competition, [and the] broad dissemination of basic market information.’’ See id. at 70858 n.113 (quoting S. Rep. No. 75, 94th Cong., 1st Sess. 8 (1975) at 101). 8 See id. at 70858 n.110 and accompanying text (citing S. Rep. No. 75, 94th Cong., 1st Sess. 8 (1975) at 8–9). The Commission also noted that Congress explicitly rejected mandating specific components of a national market system because of uncertainty as to how technological and economic changes would affect the securities market. See id. at 70858 n.109 and accompanying text (citing S. Rep. No. 75, 94th Cong., 1st Sess. 8 (1975) at 8–9. 9 See generally Regulation ATS Adopting Release, supra note 7. 10 See id. at 70845. 11 See id. at 70848. 12 See id. at 70845. 13 See id. at 70845–46 (noting that alternative trading systems prior to the adoption of Regulation ATS were private markets, which were open to only VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 In response to the substantial changes in the way securities were traded at the time, and the regulatory disparity between registered national securities exchanges and non-exchange markets, the Commission adopted a new regulatory framework that the Commission believed would encourage market innovation, while ensuring basic investor protections,14 by giving securities markets a choice to register as national securities exchanges, or to register as broker-dealers and comply with Regulation ATS. Regulation ATS was designed to permit market centers meeting the Commission’s updated interpretation of the definition of ‘‘exchange,’’ as set forth in Exchange Act Rule 3b–16,15 to select the regulatory framework more applicable to their business models. Among other things, Regulation ATS was intended to better integrate ATSs into the national market system, and ensure that market participants have fair access to ATSs with significant volume.16 In the seventeen years since the Commission adopted Regulation ATS, the equity markets have evolved significantly, resulting in an increased number of trading centers and a reduced concentration of trading activity in NMS stocks.17 The growth in trading centers and trading activity has been fueled primarily by advances in technology for generating, routing, and executing orders. These technologies have markedly improved the speed, capacity, and sophistication of the trading mechanisms and processes that are available to market participants. Today, ATSs that trade NMS stocks have become an integral part of the national market system, as the number of these ATSs, and the volume of NMS stocks transacted on them, has increased significantly since the adoption of Regulation ATS.18 Despite the emergence of ATSs as a significant chosen subscribers, and were regulated as brokerdealers and not like registered national securities exchanges). 14 See id. at 70847. 15 17 CFR 240.3b–16. 16 See Regulation ATS Adopting Release, supra note 7, at 70846, 70874. The Commission also notes that when it adopted Regulation ATS, it stated its belief that the Commission’s regulation of markets should both accommodate traditional market structures and provide sufficient flexibility to ensure that new markets promote fairness, efficiency, and transparency. See Regulation ATS Adopting Release, supra note 7, at 70846. 17 See Securities Exchange Act Release No. 73639 (November 19, 2014), 79 FR 72251 (December 5, 2014), 72262 (adopting final rules for systems compliance and integrity) (‘‘SCI Adopting Release’’) at 72262 n.105 and n.106 and accompanying text (discussing the increased significance of NMS Stock ATSs). 18 See infra notes 116–122 and accompanying text. PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 source of liquidity in NMS stocks among today’s markets, and the fact that ATSs compete with, and operate with almost the same complexity and sophistication as, registered national securities exchanges, the regulatory requirements applicable to ATSs have remained, for the most part, the same since Regulation ATS was adopted.19 Although ATSs and registered national securities exchanges generally operate in a similar manner and compete as trading centers for order flow in NMS stocks, each of these types of trading centers is subject to a separate regulatory regime with a different mix of benefits and obligations, including with respect to their obligations to disclose information about their trading operations. Unlike ATSs, national securities exchanges must register with the Commission pursuant to Section 6 of the Exchange Act,20 and undertake self-regulatory 21 obligations over their members. 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 19 The Commission notes that when the Commission adopted Regulation NMS, it also amended Regulation ATS to lower the threshold that triggers the Regulation ATS fair access requirements from 20% of the average daily volume in a security to 5%. See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37550 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). See also infra notes 92–95 and accompanying text (discussing the fair access requirements of Regulation ATS). When adopting Regulation ATS, the Commission noted that the 20% volume threshold was based on current market conditions, and that if such conditions changed, or if the Commission believed that alternative trading systems with less than 20% of the trading volume were engaging in inappropriate exclusionary practices or in anticompetitive conduct, the Commission could revisit the fair access thresholds. See Regulation ATS Adopting Release, supra note 7, at 70873 n.245. The Commission also stated its intent to monitor the impact and effect of the fair access rules, as well as the practices of ATSs, and consider changing the rules if necessary to prevent anticompetitive behavior and ensure that qualified investors have access to significant sources of liquidity in the securities markets. See id. See also infra note 107 and accompanying text (discussing amendments to Regulation ATS in connection with the adoption of Regulation SCI). 20 15 U.S.C. 78f. 21 Section 3(a)(26) of the Exchange Act defines a self-regulatory organization (‘‘SRO’’) 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). E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules securities laws and the rules of the exchange.22 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.23 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 trading services and fees. As an SRO, a national securities exchange enjoys certain unique benefits, such as limited immunity from private liability with respect to its regulatory functions and the ability to receive market data revenue, among others. Although falling within the statutory definition of ‘‘exchange,’’ an ATS is exempt from that definition if it complies with Regulation ATS. Regulation ATS includes the requirement that, as an alternative to registering as a national securities exchange, an ATS must register as a broker-dealer with the Commission, which entails becoming a member of an SRO, such as the Financial Industry Regulatory Authority (‘‘FINRA’’).24 Unlike national securities exchanges, ATSs are not approved by the Commission, but are instead required only to provide notice of their operations by filing a Form ATS with the Commission 20 days before commencing operations as an ATS.25 Form ATS is ‘‘deemed confidential when filed,’’ 26 and it only requires an ATS to disclose limited aspects of the ATS’s operations. ATSs are neither required to file proposed rule changes with the Commission nor otherwise publicly disclose their trading services, operations, or fees. The Commission is concerned that the current regulatory requirements relating to operational transparency for ATSs, particularly those that execute trades in NMS stocks, may no longer fully meet mstockstill on DSK4VPTVN1PROD with PROPOSALS3 22 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). 23 See generally Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b). 24 Section 15(b)(8) of the Exchange Act requires a broker or dealer to become a member of a registered national securities association, unless it effects transactions in securities solely on an exchange of which it is a member. 15 U.S.C. 78o(b)(8). 25 See Regulation ATS Adopting Release, supra note 7, at 70863 and infra Section II.B (discussing the current requirements of Regulation ATS applicable to all ATSs). 26 See 17 CFR 242.301(b)(2)(vii). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 81001 the goals of furthering the public interest and protecting investors. Today, ATSs account for approximately 15.4% of the total dollar volume in NMS stocks 27 and as noted, compete with, and operate with respect to trading in a manner similar to, registered national securities exchanges. Unlike registered national securities exchanges, however, there is limited public information available to market participants about the operations of ATSs, including how orders and other trading interest may interact, match, and execute on ATSs. The Commission is concerned that the differences between ATSs that trade NMS stocks and registered national securities exchanges with regard to operational transparency may be creating a competitive imbalance between two functionally similar trading centers that may trade the same security but are subject to different regulatory requirements. The Commission is also concerned that this difference in operational transparency disadvantages market participants by limiting their ability to adequately assess the relative merits of many trading centers.28 Specifically, the Commission is concerned that the lack of operational transparency around ATSs limits market participants’ ability to adequately discern how their orders interact, match, and execute on ATSs and to find the optimal market or markets for their orders. The Commission is also concerned about the current lack of transparency around potential conflicts of interest that arise from the activities of the broker-dealer operator of the NMS Stock ATS and its affiliates 29 in connection with the ATS. As discussed herein, an ATS must register as a broker-dealer pursuant to Rule 301(b)(1) of Regulation ATS. This broker-dealer operator, its affiliates, or both, however, may also conduct brokerage or dealing activities in NMS stocks in addition to operating the ATS.30 Broker-dealer operators may also have affiliates that support the operations of the ATS or trade on it. The Commission notes that these multiservice broker-dealers that engage in brokerage and dealing activities, in addition to the operation of their ATSs, have become more prevalent since the adoption of Regulation ATS and the other services multi-service brokerdealers provide have become increasingly intertwined with the operation of their ATSs. Given the unique position that the broker-dealer operator and its affiliates occupy with regard to the operation of an ATS, potential conflicts of interest arise when the various business interests of the broker-dealer operator or its affiliates compete with the interests of market participants that access and trade on the ATS.31 Some of the recent settled actions against ATSs highlight this potential.32 As discussed further below, although the operations of most ATSs and their broker-dealer operators have become more closely connected, market participants receive limited information about the activities of the broker-dealer operator and its affiliates and the potential conflicts of interest that arise from these activities. Transparency is a hallmark of the U.S. securities markets and a primary tool by which investors protect their own interests, and the Commission is concerned that the current lack of transparency around potential conflicts of interest of the broker-dealer operator may impede market participants from adequately protecting their interests when doing business on the NMS Stock ATS. The Commission preliminarily believes that if market participants have more information about the operations of NMS Stock ATSs and the activities of the broker-dealer operators and the broker-dealer operators’ affiliates, they could better evaluate whether to do business with an ATS and make more informed decisions about where to route their orders.33 27 See infra Table 1 ‘‘NMS Stock ATSs Ranked by Dollar Trading Volume—March 30, 2015 to June 26, 2015.’’ Total dollar trading volume on all exchanges and off-exchange trading in the second quarter of 2015 was approximately $16.3 trillion and approximately 397 billion shares. See id. 28 Market participants may include many different types of persons seeking to transact in NMS stocks, including broker-dealers and institutional or retail investors. 29 The Commission is proposing to define ‘‘affiliate’’ for purposes of proposed Form ATS–N as described and discussed further below. See infra note 378 and accompanying text. See also Instruction G to proposed Form ATS–N. 30 Throughout this release, broker-dealer operators of NMS Stock ATSs that also provide brokerage or dealing services in addition to operating an NMS Stock ATS are referred to as ‘‘multi-service broker-dealers’’. 31 See infra Section VII.A (discussing the relationship between NMS Stock ATSs and the other business functions of their broker-dealer operators). The Commission notes that, although it was concerned at the time of adoption of Regulation ATS about conflicts of interest that may be present when the broker-dealer operator of an ATS also performs other trading functions (see infra notes 530–532 and accompanying text discussing the Commission’s concerns regarding the potential for misuse of confidential trading information that led to the adoption of Rule 301(b)(10)), the business structure of broker-dealers that operate NMS Stock ATSs has changed since 1998. 32 See infra note 375 and accompanying text. 33 See, e.g., infra notes 187 and 189 and accompanying text (discussing a comment by the Consumer Federation of America about how more detailed information about ATS operations would PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 E:\FR\FM\28DEP3.SGM Continued 28DEP3 81002 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 The Commission has long recognized that effective competition requires transparency and access across the national market system.34 The Commission preliminarily believes that the proposals discussed below could promote more efficient and effective market operations by providing more transparency to market participants about the operations of ATSs and the potential conflicts of interest of the controlling broker-dealer operator and its affiliates.35 The Commission preliminarily believes that the operational transparency rules being proposed today could increase competition among trading centers in regard to order routing and execution quality. For example, the proposed rules could reveal order interaction procedures that may result in the differential treatment of some order types handled by an NMS Stock ATS. This improved visibility, in turn, could cause market participants to shift order flow to NMS Stock ATSs that provide better opportunities for executions. The Commission preliminarily believes that the proposal could facilitate comparisons among trading centers in NMS stocks and increase competition by informing market participants about the operations of NMS Stock ATSs. The Commission preliminarily believes that a wide range of market participants would benefit from the operational transparency that would result from the proposal. For example, many brokers subscribe to NMS Stock ATSs and route their orders, and those of their customers, to NMS Stock ATSs for execution. The Commission preliminarily believes that improved transparency about the operations of NMS Stock ATSs could aid brokers with meeting their best execution obligations allow participants to assess whether it makes sense to trade on that venue, and a comment by Bloomberg Tradebook LLC that because buy-side representatives might not be customers of all ATSs, they could not assess order interaction that occurs across the market structure); and infra note 374 (citing recent enforcement actions settled by the Commission, many of which, such as the Liquidnet Settlement, the Pipeline Settlement, the UBS Settlement, and the ITG Settlement, included allegations that subscribers were fraudulently misled about the operations of certain ATSs). 34 See generally Regulation ATS Adopting Release, supra note 7. 35 See infra Sections XIII.B and C (analyzing the possible impact from the current lack of public disclosure of NMS Stock ATSs’ operations, as well as disparate levels of information available to market participants about NMS Stock ATS operations and the activities of their broker-dealer operators and their affiliates; the competitive environment between national securities exchanges and NMS Stock ATSs, between NMS Stock ATSs, and between broker-dealers that operate NMS Stock ATSs and broker-dealers that do not operate NMS Stock ATSs; and the anticipated costs and benefits of improving transparency). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 to their customers, as they can better assess the trading venues to which they route orders.36 The duty of best execution requires broker-dealers to execute customers’ trades at the most favorable terms reasonably available under the circumstances (i.e., at the best reasonably available price).37 The Commission has not viewed the duty of best execution as inconsistent with the automated routing of orders or requiring automated routing on an order-by-order basis to the market with the best quoted price at the time.38 Rather, the duty of best execution requires broker-dealers to periodically assess the quality of competing markets to assure that order flow is directed to the markets providing the most beneficial terms for their customer orders.39 In addition, the Commission preliminarily believes that the proposal could also help customers of brokerdealers, whose orders are routed to an NMS Stock ATS for possible execution in the ATS, evaluate whether their broker-dealer fulfilled its duty of best36 See, e.g., infra note 187 and accompanying text (noting 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’’). 37 A broker-dealer’s duty of best execution derives from common law agency principles and fiduciary obligations, and is incorporated in SRO rules and, through judicial and Commission decisions, in the antifraud provisions of the federal securities laws. See Order Execution Obligations, Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290, 48322 (Sept. 12, 1996). See also Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270, 273 (3d Cir. 1998) (en banc), cert. denied, 525 U.S. 811 (1998) (finding that failure to satisfy the duty of best execution can constitute fraud because a broker-dealer, in agreeing to execute a customer’s order, makes an implied representation that it will execute it in a manner that maximizes the customer’s economic gain in the transaction, and stating that‘‘[T]he basis for the duty of best execution is the mutual understanding that the client is engaging in the trade—and retaining the services of the broker as his agent—solely for the purpose of maximizing his own economic benefit, and that the broker receives her compensation because she assists the client in reaching that goal.’’); Matter of Marc N. Geman, Securities Exchange Act Release No. 43963 (Feb. 14, 2001), aff’d, Geman v. SEC, 334 F.3d 1183 (10th Cir. 2003) (citing Newton, but deciding against finding a violation of the duty of best execution based on the record). See also Payment for Order Flow, Securities Exchange Act Release No. 34902 (Oct. 27, 1994), 59 FR 55006, 55009 (Nov. 2, 1994). If the broker-dealer intends not to act in a manner that maximizes the customer’s economic gain when he accepts the order and does not disclose this to the customer, a trier of fact could find that the brokerdealer’s implied representation was false. See Newton, 135 F.3d at 273–274. 38 See Regulation NMS Adopting Release, supra note 19, at 37538. 39 Id. PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 execution. The Commission preliminarily believes that institutional investors, who may 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 the ATS may match and execute customer orders.40 The Commission preliminarily believes that additional information about how NMS Stock ATSs operate could aid these investors in evaluating the routing decisions of their brokers and understanding whether their broker routed their orders to a trading venue that best fits their needs. To illustrate this point, institutional investors would likely find it useful to know whether an NMS Stock ATS provides execution priority to customer order flow, uses strict price-time priority rules to rank and execute orders, or applies certain execution allocation methodologies for institutional orders. Such information could permit an institutional investor to compare NMS Stock ATSs against each other, as well as against national securities exchanges, to determine which trading centers would best fit its needs. Additionally, there may be market participants, who may not currently subscribe to an NMS Stock ATS, that may wish to obtain information about how a particular NMS Stock ATS operates before sending orders to that trading venue. This proposal is primarily designed to provide market participants with greater transparency around the operations of 40 See, e.g., Consumer Federation of America letter, infra note 175, at 22, 37–38 (expressing support for requiring all ATSs to publicly disclose Form ATS ‘‘so that the public can see how these venues operate,’’ and opining that the Commission should ‘‘undertake an exhaustive investigation of the current order types, requiring exchanges and all ATSs . . . to disclose in easily understandable terms what their purpose is, how they are used in practice, who is using them, and why they are not discriminatory or resulting in undue benefit or harm to any traders’’); Citadel letter, infra note 214, at 4 (expressing the view that ‘‘dark pools should be subject to increased transparency,’’ and that ‘‘ATS operational information and filings should be publicly available’’); KOR Group letter, infra note 175, at 12 (opining that the fact that ‘‘ATS filings are hidden from the public while the burden is on SROs to file publicly . . . does not serve the public interest in any way’’ and that there ‘‘should not be any reasoned argument against’’ making Form ATS publicly available); Liquidnet letter #1, infra note 166, at D–5–6, –11 (stating that the Commission should require institutional brokers, including institutional ATSs, to disclose to their customers specific order handling practices, including identification of external venues to which the broker routes orders, the process for crossing orders with other orders, execution of orders as agent and principal, a detailed description of the operation and function of each ATS or trading desk operated by the broker, and a clear and detailed description of each algorithm and order type offered by the broker and expressing the view that Form ATS should be made publicly available). E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules NMS Stock ATSs and potential conflicts of interest that may arise involving the broker-dealer operator and its affiliates. The proposed rules would require public, detailed information to be disclosed about the activities of the broker-dealer operator and its affiliates in connection with the NMS Stock ATS, including: Their operation of non-ATS trading centers and other NMS Stock ATSs; the products and services offered to subscribers; any arrangements with unaffiliated trading centers; trading activities on the NMS Stock ATS of the broker-dealer operator or its affiliates; the use of smart order routers (‘‘SORs’’) (or similar functionality) and algorithms used to send or receive orders or other trading interest to or from the NMS Stock ATS; shared employees of the NMS Stock ATS and third parties used to operate the NMS Stock ATS; any differences in the availability of services, functionalities, or procedures to subscribers and the availability of those services, functionalities, or procedures to the broker-dealer operator or its affiliates; and the NMS Stock ATS’s safeguards and procedures to protect subscribers’ confidential trading information. Form ATS–N would also require detailed information about the operations of the NMS Stock ATS, including: Any eligibility requirements and any terms and conditions imposed for subscribers; the NMS Stock ATS’s hours of operation; the types of orders or other trading interest that can be entered on the NMS Stock ATS; any connectivity, order entry, and colocation procedures or services; the segmentation of order flow (and notice given about segmentation); the display of order and other trading interest; trading services, including matching methodologies, order interaction rules, and order handling and execution procedures; procedures governing the suspension of trading and trading during a system disruption or malfunction; opening, re-opening, closing, and after hours processes or trading procedures; any outbound routing services; the NMS Stock ATS’s use of market data; fees, rebates, or other charges of the NMS Stock ATS; any trade reporting, clearance or settlement arrangements or procedures; order display and execution access and fair access information (if applicable); and market quality statistics published or provided to one or more subscribers. The Commission preliminarily believes that greater transparency in this regard would provide important information to market participants so they can evaluate whether submitting order flow to a particular NMS Stock ATS aligns with VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 their trading or investment objectives. Among other things, these enhanced, public disclosures also are designed to limit the potential that a broker-dealer operator of an NMS Stock ATS could provide certain subscribers with greater disclosure about the operations and system functionalities of the ATS than it provides to other market participants. The Commission also preliminarily believes that proposing a process for the Commission to determine whether an NMS Stock ATS qualifies for the exemption from the Exchange Act definition of ‘‘exchange’’ would facilitate better Commission oversight of NMS Stock ATSs and thus, better protection of investors.41 The proposed process would provide the Commission with an opportunity to review disclosures on Form ATS–N for compliance with the Form ATS–N requirements, Regulation ATS, and other applicable requirements of the federal securities laws and regulations. To qualify for the exemption from the Exchange Act definition of ‘‘exchange,’’ an NMS Stock ATS would be required to file with the Commission a Form ATS–N, in accordance with the instructions therein, and the Form ATS– N would need to be declared effective by the Commission. The Commission would declare ineffective a Form ATS– N if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest and is consistent with the protection of investors.42 If the Commission declares a Form ATS–N ineffective, the NMS Stock ATS would be prohibited from operating as an NMS Stock ATS,43 but would not be prohibited from subsequently filing a new Form ATS–N. The Commission also preliminarily believes that proposing a process for the Commission to review and declare ineffective Form ATS–N Amendments, if it finds that such action is necessary or appropriate in the public interest and is consistent with the protection of investors, would aid the Commission’s ongoing oversight of NMS Stock ATSs.44 In this light, the Commission is proposing to amend Regulation ATS, including as follows: (1) Define in proposed Rule 300(k) of Regulation ATS 41 See proposed Rule 304(a)(1)(i). See also infra Section IV.C (discussing the proposed process for Commission review of Form ATS–N and circumstances under which an NMS Stock ATS may not qualify for the exemption, as well as the benefits that the process should provide to market participants). 42 See proposed Rule 304(a)(1)(iii). 43 See proposed Rule 304(a)(1)(iv). 44 See infra Section IV.C (discussing the proposed process for Commission review of amendments). See also proposed Rule 304(a)(2)(ii). PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 81003 the term NMS Stock ATS, amend the definition of ‘‘control’’ under current Rule 300(f) of Regulation ATS to specify that control means to direct the management or policies of the brokerdealer of an ATS, and amend the exemption from the definition of ‘‘exchange’’ in Rule 3a1–1(a) to require NMS Stock ATSs to comply with proposed Rule 304 (in addition to the other requirements of Regulation ATS) as a condition of the exemption; (2) amend Rule 301(b)(2) to require NMS Stock ATSs to file the reports and amendments mandated by proposed Rule 304, which would include filing proposed Form ATS–N, in lieu of current Form ATS, to provide detailed disclosures about an NMS Stock ATS’s operations and the activities of its broker-dealer operator and its affiliates and amend Rule 301(b)(2) to require an ATS that effects transactions in both NMS stocks and non-NMS stocks to file the reports and amendments mandated by proposed Rule 304 for its NMS stock trading activity and the reports and amendments required under current Rule 301(b)(2) of Regulation ATS for its non-NMS stock trading activity; (3) amend Rule 301(b)(9) to require an ATS that trades both NMS stocks and nonNMS stocks to separately report its transactions in NMS stocks on one Form ATS–R, and its transactions in securities other than NMS stocks on another Form ATS–R; (4) provide a process for the Commission, pursuant to proposed Rule 304(a)(1), to declare a Form ATS–N effective or, after notice and opportunity for hearing, ineffective; (5) establish the requirements for amending Form ATS– N pursuant to proposed Rule 304(a)(2); (6) provide, pursuant to proposed Rule 304(a)(3), that a notice of cessation shall cause the Form ATS–N to be ineffective on the date designated by the NMS Stock ATS; (7) provide a process for the Commission, pursuant to proposed Rule 304(a)(4), to suspend, limit, or revoke the exemption of an NMS Stock ATS’s Form ATS–N upon notice and after opportunity for hearing; (8) provide that the Commission, pursuant to proposed Rule 304(b), will publicly post on its Web site: each effective Form ATS–N, each properly filed Form ATS–N Amendment, and each properly filed Form ATS–N notice of cessation, as well as each order of effectiveness or ineffectiveness of a Form ATS–N, order of ineffectiveness of a Form ATS–N Amendment, and order suspending, limiting, or revoking an NMS Stock ATS’s exemption, issued by the Commission; and also require each NMS Stock ATS that has a Web site to post on the NMS Stock ATS’s Web site a E:\FR\FM\28DEP3.SGM 28DEP3 81004 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2); (9) amend existing Rule 301(b)(10) of Regulation ATS to require all ATSs to adopt written safeguards and written procedures to protect subscribers’ confidential trading information, as well as written oversight procedures to ensure those safeguards and procedures are followed; and (10) amend Rule 303(a) to require that the written safeguards and written procedures required by proposed Rule 301(b)(10) and reports pursuant to proposed Rule 304 be preserved. II. Current ATS Regulatory Framework A. Exemption From National Securities Exchange Registration A fundamental component of the current ATS regulatory framework adopted by the Commission in 1998 is Exchange Act Rule 3b–16.45 Rule 3b–16 was designed to address the blurring of traditional classifications between exchanges and broker-dealers as a result of advances in technology by providing a more comprehensive and meaningful interpretation of what constitutes an exchange under Section 3(a) of the Exchange Act.46 Rule 3b–16(a) provides a functional test to assess whether a trading platform meets the definition of exchange under Section 3(a)(1) of the Exchange Act, and thus is required to register as a national securities exchange pursuant to Sections 5 and 6 of the Exchange Act.47 Under Rule 3b–16, 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 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 45 See 17 CFR 240.3b–16. 46 See Regulation ATS Adopting Release, supra note 7, at 70847. 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). 47 See 15 U.S.C. 78e and 78f. A ‘‘national securities exchange’’ is an exchange registered as such under Section 6 of the Exchange Act. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 other, and the buyers and sellers entering such orders agree to the terms of a trade.48 The Commission adopted Exchange Act Rule 3b–16(b) to explicitly exclude certain systems that the Commission believed did not meet the exchange definition.49 Specifically, Rule 3b–16(b) excludes 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.50 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 51 the system from the definition. For those systems that meet the criteria of Rule 3b–16(a) and are not excluded under Rule 3b–16(b) of the Exchange Act,52 Rule 3a1–1(a)(2) 53 provides an exemption from the definition of ‘‘exchange.’’ Specifically, 48 See 17 CFR 240.3b–16(a). Regulation ATS Adopting Release, supra note 7, at 70852. 50 See 17 CFR 240.3b–16(b). Rule 3b–16(b)(2) excludes systems that allow persons to enter orders for execution against the bids and offers of a single dealer if, as an incidental part of such activities, the system matches orders that are not displayed to any person other than the dealer and its employees; or in the course of acting as a registered market maker with an SRO, the system displays the limit orders of the market maker’s, or other broker-dealer’s, customers, and in addition, matches customer orders with those displayed limit orders and, as an incidental part of its market making activities, the system crosses or matches orders that are not displayed to any person other than the market maker and its employees. See 17 CFR 240.3b– 16(b)(2). The purpose of the exclusions in 17 CFR 240.3b–16(b)(2) was to encompass systems operated by third market makers, as well as those systems operated by dealers, primarily in debt securities, who display their own quotations to customers and other broker-dealers on a proprietary basis. Rule 3b–16(b)(2)(ii) was adopted to exclude registered market makers that display their own quotes and, in order to comply with a Commission or SRO rule, customer limit orders, and allow their customers and other broker-dealers to enter orders of execution against the displayed orders. Additionally, it was designed to allow registered market makers, as an incidental activity resulting from their market maker status, to match or cross orders for securities in which they make a market, even if those orders are not displayed. See Regulation ATS Adopting Release, supra note 7, at 70854. 51 See 17 CFR 240.3b–16(e). 52 See 17 CFR 240.3b–16(b). 53 See 17 CFR 240.3a1–1(a)(2). 49 See PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 Exchange Act Rule 3a1–1(a)(2) exempts from the Exchange Act Section 3(a)(1) definition of ‘‘exchange’’ an organization, association, or group of persons that complies with Regulation ATS,54 which includes, among other things, the requirement to register as a broker-dealer.55 Therefore, an organization, association, or group of persons that complies with Regulation ATS is not subject to Section 5 of the Exchange Act,56 which requires that an ‘‘exchange’’ register with the Commission as a national securities exchange pursuant to Section 6 of the Exchange Act 57 or otherwise be exempt. Additionally, an ATS that is not required to register as a national securities exchange pursuant to Section 5 is not an SRO 58 and is not required to comply with applicable requirements.59 To satisfy the requirements of the Rule 3a1–1(a)(2) exemption, a system that otherwise meets the definition of an ‘‘exchange’’ must comply with Regulation ATS. An ATS that fails to comply with the requirements of Regulation ATS would no longer qualify for the exemption from the definition of an ‘‘exchange’’ provided under Exchange Act Rule 3a1–1(a)(2), and thus, risks operating as an unregistered exchange in violation of Section 5 of the Exchange Act.60 B. 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 54 See 17 CFR 240.3a1–1(a)(2). 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). 55 See 17 CFR 242.301(b)(1). 56 15 U.S.C. 78e. 57 15 U.S.C. 78f. 58 See supra note 21 (setting forth the statutory definition of SRO). 59 See, e.g., Section 19 of the Exchange Act, 15 U.S.C. 78s. 60 See 15 U.S.C. 78e. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules from trading.’’ 61 Governing the conduct of or disciplining subscribers are functions performed by an SRO that the Commission believes should be regulated as such.62 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).63 Rule 301(b)(1) of Regulation ATS requires that every ATS that is subject to Regulation ATS, pursuant to paragraph (a) of Rule 301,64 be registered as a broker-dealer under Section 15 of the Exchange Act,65 and thus become a member of an SRO, such as FINRA.66 In the Regulation ATS Adopting Release, the Commission stated that an ATS that registers as a broker-dealer must, in addition to complying with Regulation ATS, 61 See 17 CFR 242.300(a). Regulation ATS Adopting Release, supra note 7, at 70859. As the Commission noted when it adopted Regulation ATS, the Commission believes that any system that uses its market power to regulate its participants should be regulated as an SRO. The Commission noted 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, the Commission stated its 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 alternative trading system from imposing credit conditions on subscribers or requiring subscribers to submit financial information to the alternative trading system. See id. 63 See id. 64 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 an exchange under Section 6 of the Exchange Act; exempt from 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 is a bank, that limits its activities to certain instruments; or exempted, conditionally or unconditionally, by Commission order, after application by such alternative trading system. See 17 CFR 242.301(a). For example, an ATS that is registered as a broker-dealer, or is a bank, and limits its securities activities solely to government securities is not required to comply with Regulation ATS. See 17 CFR 242.301(a)(4). 65 See 17 CFR 242.301(b)(1). 66 See Section 15(b)(8) of the Exchange Act; 15 U.S.C. 78o(b)(8). See also supra 24 note and infra note 295 and accompanying text (setting forth the requirements of Section 15(b)(8) of the Exchange Act). mstockstill on DSK4VPTVN1PROD with PROPOSALS3 62 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 comply with the filing and conduct obligations associated with being a registered broker-dealer, including membership in an SRO and compliance with SRO rules.67 In addition, Rule 301(b)(2) of Regulation ATS requires an ATS to file an initial operation report with the Commission on Form ATS 68 at least 20 days before commencing operations.69 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.70 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 its operations prior to commencing operations.71 Form ATS requires, among other things, 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 execution; and trade reporting, clearance and settlement of trades on the ATS. Regulation ATS states that information filed by an ATS on Form ATS is ‘‘deemed confidential when filed.’’ 72 Thus, under the current regulatory requirements, market participants generally do not have information about, for example, how orders are entered, prioritized, handled, and executed on an NMS Stock ATS, ATSs are not otherwise required to publicly disclose such information.73 In addition to providing notice of its initial operation, an ATS must notify the Commission of any changes in its operations by filing an amendment to its initial operation report. There are three types of amendments to an initial 67 See Regulation ATS Adopting Release, supra note 7, at 70903. 68 Form ATS and the Form ATS Instructions are available at https://www.sec.gov/about/forms/ formats.pdf. 69 See 17 CFR 242.301(b)(2)(i). 70 See Regulation ATS Adopting Release, supra note 7, at 70864. 71 See id. As discussed more fully below, the current notice process applicable to ATSs is very different than the process by which exchanges register with the Commission and how amendments to exchange rules are regulated. See infra notes 158–162 and accompanying text. 72 See 17 CFR 242.301(b)(2)(vii). 73 The Commission does note, however, that some ATSs may currently make voluntary public disclosures. See, e.g., infra note 156. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 81005 operation report.74 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.75 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.76 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.77 Also, upon ceasing to operate as an ATS, an ATS is required to promptly file a cessation of operations report on Form ATS.78 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,79 and Rule 301(b)(2)(vii) and the instructions to the form state that Form ATS is ‘‘deemed confidential.’’ 80 Rule 301(b)(9) of Regulation ATS also requires ATSs 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.81 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 74 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. 75 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 7, at 70864. See also supra Section IV.C.6 (discussing the proposed materiality standard that would apply to the filing of amendments on Form ATS–N). 76 See 17 CFR 242.301(b)(2)(iii). 77 See 17 CFR 242.301(b)(2)(iv). 78 See 17 CFR 242.301(b)(2)(v). 79 See Regulation ATS Adopting Release, supra note 7, at 70864. 80 See 17 CFR 242.301(b)(2)(vii); Form ATS at 3, General Instructions A.7. 81 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. E:\FR\FM\28DEP3.SGM 28DEP3 81006 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 during the quarter.82 Form ATS–R also requires an ATS that is subject to the fair access obligations under Rule 301(b)(5) of Regulation ATS to: (1) Provide a list of all persons granted, denied, or limited access to the ATS during the period covered by the ATS–R and (2) designate for each person: (a) Whether they were 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.83 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.84 Like Form ATS, Rule 301(b)(2)(vii) and the instructions to Form ATS–R state that Form ATS–R is ‘‘deemed confidential.’’ 85 In addition to the reporting requirements under Rules 301(b)(2) and 301(b)(9) of Regulation ATS, an ATS’s exemption from national securities exchange registration is conditioned on the ATS complying with the other requirements under Regulation ATS. 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: 86 • Pursuant to Rule 301(b)(3)(ii),87 provide to a national securities exchange or national securities association the prices and sizes of the orders at the highest buy price and the lowest sell price for such NMS stock, displayed to more than one person in the ATS, for inclusion in the quotation data made available by the national securities exchange or national securities association pursuant to Rule 602 under Regulation NMS; 88 and • pursuant to Rule 301(b)(3)(iii),89 with respect to any such order 82 See Form ATS–R at 4, Items 1 and 2 (describing the requirements for Exhibit A and Exhibit B of Form ATS–R). 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. 83 See Form ATS–R at 6, Item 7 (explaining requirements for Exhibit C). 84 See Regulation ATS Adopting Release, supra note 7, at 70878. 85 See 17 CFR 242.301(b)(2)(vii); Form ATS–R at 2, General Instruction A.7. 86 See 17 CFR 242.301(b)(3)(i). 87 See 17 CFR 242.301(b)(3)(ii). 88 See 17 CFR 242.602. 89 See 17 CFR 242.301(b)(3)(iii). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 displayed pursuant to Rule 301(b)(3)(ii), provide to any broker-dealer that has access to the national securities exchange or national securities association to which the ATS provides the prices and sizes of displayed orders pursuant to Rule 301(b)(3)(ii), the ability to effect a transaction with such orders that is: Æ equivalent to the ability of such broker-dealer to effect a transaction with other orders displayed on the exchange or by the association; and Æ at the price of the highest priced buy order or lowest priced sell order displayed for the lesser of the cumulative size of such priced orders entered therein at such price, or the size of the execution sought by such brokerdealer. These order display and execution access obligations were adopted by the Commission with the expectation they would promote additional market integration and further discourage twotier markets when trading in an NMS stock on an ATS reaches a certain level.90 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).91 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: 92 • 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: 90 See Regulation ATS Adopting Release, supra note 7, at 70867. 91 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. 92 17 CFR 242.301(b)(5)(i). PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 Æ all grants of access including, for all subscribers, the reasons for granting such access; and Æ 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.93 The above requirements of Rule 301(b)(5) are referred to as the ‘‘fair access’’ requirements and apply on a security-by-security basis.94 A denial of access to a market participant after an ATS reaches the above 5% fair access threshold in an NMS stock would be reasonable if it is based on objective standards.95 Additionally, under Rule 301(b)(6), an ATS that trades only municipal securities or corporate fixed income debt with 20% or more of the average daily volume traded in the U.S. during at least four of the preceding six calendar months, must do the following with respect to those systems that support order entry, order routing, order execution, transaction reporting, and trade comparison: 96 • Establish reasonable current and future capacity estimates; • conduct periodic capacity stress tests of critical systems to determine such system’s ability to process transactions in an accurate, timely, and efficient manner; • develop and implement reasonable procedures to review and keep current its system development and testing methodology; • review the vulnerability of its systems and data center computer operations to internal and external threats, physical hazards, and natural disasters; • establish adequate contingency and disaster recovery plans; • on an annual basis, perform an independent review, in accordance with 93 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). 94 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). 95 See Regulation ATS Adopting Release, supra note 7, at 70874. 96 See 17 CFR 242.301(b)(6)(i). E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 established audit procedures and standards, of the ATS’s controls for ensuring that the above requirements are met, and conduct a review by senior management of a report containing the recommendations and conclusions of the independent review; and • promptly notify the Commission and its staff of material systems outages and significant systems changes.97 Prior to the Commission’s adoption of Regulation SCI,98 the requirements of Rule 301(b)(6) also applied to ATSs with regard to their trading in NMS stocks and non-NMS equity securities.99 Regulation SCI superseded and replaced Rule 301(b)(6)’s requirements with regard to ATSs that trade NMS stocks and non-NMS stocks.100 In general, Regulation SCI requires SCI entities,101 including NMS Stock ATSs that meet the definition of an ‘‘SCI ATS,’’ 102 to 97 See 17 CFR 242.301(b)(6)(ii). Also, as with the fair access requirements pursuant to Rule 301(b)(5), Regulation ATS does not mandate compliance with the requirements under Rule 301(b)(6) when an ATS reaches a 20% trading threshold 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)(6)(iii). 98 See SCI Adopting Release, supra note 17. 99 See Regulation ATS Adopting Release, supra note 7, at 70875–76. 100 Regulation SCI does not apply to ATSs that trade only municipal securities or corporate debt securities. See SCI Adopting Release, supra note 17, at 72262. Prior to the adoption of Regulation SCI, Rule 301(b)(6) of Regulation ATS imposed by rule certain aspects of Commission policy statements with respect to technology systems of significantvolume ATSs. Specifically, Regulation SCI, with regard to SCI entities (as defined in Regulation SCI; see infra note 101), superseded and replaced the Commission’s prior Automation Review Policy (‘‘ARP’’), established by the Commission’s two policy statements, each titled ‘‘Automated Systems of SelfRegulatory Organizations,’’ issued in 1989 and 1991, see Securities Exchange Act Release Nos. 27445 (November 16, 1989), 54 FR 48703 (November 24, 1989), and 29185 (May 9, 1991), 56 FR 22490 (May 15, 1991), including the aspects of those policy statements previously codified in Rule 301(b)(6) of Regulation ATS applicable to significant-volume ATSs that trade NMS stocks and non-NMS stocks. See SCI Adopting Release, supra note 17, at 72252. 101 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. 102 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 VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 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.103 In addition, Regulation SCI requires SCI entities, including NMS Stock ATSs that are SCI entities, to take corrective action with respect to SCI events (defined to include systems disruptions, systems compliance issues, and systems intrusions), and notify the Commission of such events.104 Regulation SCI further requires SCI entities, including NMS Stock ATSs that are SCI entities, to disseminate information about certain SCI events to affected members or participants and, for certain major SCI events, to all members or participants of the SCI entity. In addition, Regulation SCI requires SCI entities, including NMS Stock ATSs that are SCI entities, to conduct a review of their systems by objective, qualified personnel at least annually, submit quarterly reports regarding completed, ongoing, and planned material changes to their SCI systems to the Commission, and maintain certain books and records.105 It also requires SCI entities, including NMS Stock ATSs that are SCI entities, to mandate participation by designated members or participants in scheduled testing of the operation of their business continuity and disaster recovery plans, including backup systems, and to coordinate such testing on an industryor sector-wide basis with other SCI entities.106 Regulation SCI, as compared to the former Rule 301(b)(6), also modified the volume thresholds applicable to SCI ATSs.107 Rule 301(b)(7) 108 requires all ATSs, regardless of the volume traded on their 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. 103 See SCI Adopting Release, supra note 17, at 72252. 104 See id. 105 See id. 106 See id. 107 See supra note 102. Prior to the adoption of Regulation SCI, the requirements of Rule 301(b)(6) also applied to ATSs that, during at least 4 of the preceding 6 calendar months, had with respect to any NMS stock, 20% or more of the average daily volume reported by an effective transaction reporting plan. 108 See 17 CFR 242.301(b)(7). PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 81007 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) 109 requires all ATSs to make and keep current the records specified in Rule 302 of Regulation ATS 110 and preserve the records specified in Rule 303 of Regulation ATS.111 Under Rule 301(b)(10), all ATSs must establish adequate safeguards and procedures to protect subscribers’ confidential trading information, which must include the following: • 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 these or any other applicable rules; and • implementing standards controlling employees of the ATS trading for their own accounts.112 Furthermore, all ATSs must adopt and implement adequate oversight procedures to ensure that the above safeguards and procedures are followed.113 Finally, Rule 301(b)(11) 114 expressly prohibits any ATS from using the word ‘‘exchange’’ or derivations of the word ‘‘exchange,’’ such as the term ‘‘stock market,’’ in its name.115 III. Role of ATSs in the Current Equity Market Structure A. Significant Source of Liquidity for NMS Stocks The equity market structure in 1998 was starkly different than it is today. At the time Regulation ATS was proposed, there were only 8 registered national 109 See 17 CFR 242.301(b)(8). 17 CFR 242.302. 111 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 7, at 70877–78. 112 See 17 CFR 242.301(b)(10)(i). 113 See 17 CFR 242.301(b)(10)(ii). 114 See 17 CFR 240.301(b)(11). 115 When the Commission proposed Regulation ATS, it said that ‘‘it is important that the investing public not be confused about the market role [ATSs] have chosen to assume.’’ See Securities Exchange Act Release No. 39884 (April 21, 1998), 63 FR 23504, 23523 (April 29, 1998) (‘‘Regulation ATS Proposing Release’’). The Commission 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. 110 See E:\FR\FM\28DEP3.SGM 28DEP3 81008 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 securities exchanges,116 and the Commission estimated that there were approximately 43 systems that would be eligible to operate as ATSs.117 Currently, there are 18 registered national securities exchanges, of which there are 11 national securities exchanges that trade NMS stocks,118 and 84 ATSs with a Form ATS on file with the Commission. Currently, there are 46 ATSs that have noticed on their Form ATS that they expect to trade NMS stocks.119 As the Commission noted in the SCI Adopting Release, even smaller trading centers, such as certain highvolume ATSs, now collectively represent a significant source of liquidity for NMS stocks, and some ATSs have similar and, in some cases, greater trading volume than some national securities exchanges.120 In 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), and 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.121 During this period, no individual ATS executed more than approximately 13% of the total share volume on NMS Stock ATSs and no more than approximately 2% of total NMS stock share volume.122 Given this 116 See Regulation ATS Proposing Release, supra note 115, at 23543 n.341. 117 See id. at 23540 n.313 and accompanying text. 118 The Commission notes that National Stock Exchange, Inc. ceased trading on its system as of the close of business on May 30, 2014. See Securities Exchange Act Release No. 72107 (May 6, 2014), 79 FR 27017 (May 12, 2014) (SR–NSX–2014–14). 119 Data compiled from Forms ATS submitted to the Commission as of November 1, 2015. 120 See SCI Adopting Release, supra note 17, at 72262. 121 See infra Table 1—‘‘NMS Stock ATSs Ranked by Dollar Trading Volume—March 30, 2015 to June 26, 2015.’’ Total dollar trading volume on all exchanges and off-exchange trading in the second quarter of 2015 was approximately $16.3 trillion and approximately 397 billion shares. See Market Volume Summary, https://www.batstrading.com/ market_summary/. See also infra Section XIII.B.1. Competitors for listed-equity (NMS) trading services also include several hundred OTC market makers and broker-dealers. 122 The NMS Stock ATS with the greatest volume executed approximately 12.7% of NMS Stock ATS share volume and 1.9% of the total consolidated NMS stock share trading volume. The market share percentages were calculated by Commission staff using market volume statistics reported by BATS and FINRA ATS data collected from ATSs pursuant to FINRA Rule 4552. See infra Table 1—‘‘NMS Stock ATSs Ranked by Dollar Trading Volume—March 30, 2015 to June 26, 2015.’’ FINRA recently adopted a rule that requires NMS Stock ATSs to report aggregate weekly volume information and number of trades to FINRA in certain equity securities, including NMS stocks, VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 dispersal of trading volume in NMS stocks among an increasing number of trading centers, NMS Stock ATSs, with their approximately 15% market share, represent a significant source of liquidity in NMS stocks. Another significant aspect of the increased role of NMS Stock ATSs in equity market structure is the proliferation of ATSs that trade NMS stocks but do not publicly display quotations in the consolidated quotation data, commonly referred to as ‘‘dark pools.’’ 123 Dark pools originally were designed to offer certain market participants, particularly institutional investors, the ability to minimize transaction costs when executing trades in large size by completing their trades without prematurely revealing the full extent of their trading interest to the broader market. The disclosure of large size trades could have an impact on the market, and reduce the likelihood of the orders being filled.124 As the Commission has previously noted, some dark pools, such as block crossing networks, offer specialized size some of which FINRA makes publicly available. Reporting is on a security-by-security basis for transactions occurring within the ATS. Each ATS is also 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 4552, 6160, 6170, 6480 and 6720. See also Securities Exchange Act Release No. 71341 (January 17, 2014), 79 FR 4213 (January 24, 2014) (SR–FINRA–2013– 042) (order granting approval of a proposed rule change to require alternative trading systems to report volume information to FINRA and use a unique market participant identifier) (‘‘FINRA ATS Reporting Approval’’). FINRA publishes on its Web site the trading information (volume and number of trades) reported for each equity security, with appropriate disclosures that the information is based on ATSsubmitted reports and not on reports produced or validated by FINRA. See id. at 4214. See also Alternative Trading System (ATS) Transparency on FINRA’s Web site, https://www.finra.org/Industry/ Compliance/MarketTransparency/ATS/. 123 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 Regulation of Non-Public Trading Interest, Securities Exchange Act Release No. 60997 (November 13, 2009), 74 FR 61208, 61209 (November 23, 2009) (‘‘Regulation of Non-Public Trading Interest’’) (proposing rules and amendment to joint-industry plans describing the term dark pool). 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 release, these trading centers are not defined as dark pools because they are not ATSs. These trading centers may, however, offer electronic dark liquidity services that are analogous to those offered by dark pools. See id. at 61209 n.8. 124 See, e.g., Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594, 3599 n.28 (January 21, 2010) (‘‘2010 Equity Market Structure Release’’). PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 discovery mechanisms that attempt to bring large buyers and sellers in the same stock together anonymously and to facilitate a trade between them.125 The traditional definition of block orders are orders for more than 10,000 shares,126 however average trade sizes can far exceed this and be as high as 500,000 shares per trade.127 Most dark pools today, however, primarily execute trades with small sizes that are more comparable to the average size of trades on registered national securities exchanges, which is 181 shares.128 These dark pools that primarily match smaller orders (though the matched orders may be ‘‘child’’ orders of much larger ‘‘parent’’ orders) execute more than 90% of dark pool volume.129 The majority of this volume is executed by dark pools that are operated by multi-service brokerdealers.130 These broker-dealers typically also offer order routing services, trade as principal in the ATS that they are operating, or both.131 In recent years, as the number of NMS Stock ATSs has increased, so has the number of dark pools. The number of active dark pools trading NMS stocks has increased from approximately 10 in 2002,132 to 32 in 2009,133 to over 40 today.134 Furthermore, in 2009, dark pools accounted for 7.9% of NMS share volume.135 It is now estimated that of the approximately 397 billion shares traded in NMS stocks ($16.3 trillion), 14.9% of total NMS stock share volume is attributable to dark pools, with no 125 See id. at 3599. Rule 600(b)(9) of Regulation NMS (defining block size with respect to an order), 17 CFR 242.600(b)(9). See also Laura Tuttle, Alternative Trading Systems: Description of ATS Trading in National Market System Stocks, at 9–10 (October 2013), https://www.sec.gov/ marketstructure/research/alternative-tradingsystems-march-2014.pdf (‘‘Tuttle: ATS Trading in NMS Stocks’’). 127 See infra, Table 2—‘‘NMS Stock ATSs Ranked by Average Trade Size—March 30, 2015 to June 26, 2015.’’ 128 See infra note 725 and accompanying text. 129 See 2010 Equity Market Structure Release, supra note 124, 75 FR at 3599; see also infra, Table 2—‘‘NMS Stock ATSs Ranked by Average Trade Size—March 30, 2015 to June 26, 2015.’’ 130 See infra note 364 and accompanying text and Table 1—‘‘NMS Stock ATSs Ranked by Dollar Trading Volume—March 30, 2015 to June 26, 2015.’’ 131 See 2010 Equity Market Structure Release, supra note 124, at 3599. 132 See Regulation of Non-Public Trading Interest, supra note 123, at 61209 n.9 and accompanying text. 133 See 2010 Equity Market Structure Release, supra note 124, at 3598 n.22 and accompanying text. 134 Data compiled from Forms ATS and Forms ATS–R filed to the Commission as of the end of, and for the third quarter of, 2015. 135 See 2010 Equity Market Structure Release, supra note 124, at 3598. 126 See E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules single individual dark pool executing more than 1.9% of total NMS stock share volume.136 The Commission also notes that some NMS Stock ATSs, which do not provide their best pricedorders for inclusion in the consolidated quotation data, make available to subscribers real-time information about quotes, orders, or other trading interest on the NMS Stock ATS. In contrast to dark pools, an ATS could be an Electronic Communication Network (‘‘ECN’’). ECNs 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.137 In general, ECNs offer trading services (such as displayed or non-displayed order types, maker-taker pricing, and data feeds) that are analogous to registered national securities exchanges.138 B. Heightened Operational Complexity and Sophistication of NMS Stock ATSs Since Regulation ATS was adopted, ATSs have gained market share in NMS stocks and have also evolved to become more complex and sophisticated trading centers. In addition, ATSs that transact in NMS stocks increasingly are operated by multi-service broker-dealers that engage in significant brokerage and dealing activities in addition to their operation of their ATSs, and the operations of NMS Stock ATSs have become increasingly intertwined with operations of their broker-dealer operator, adding to the complexity of the manner in which those ATSs operate.139 The Commission is concerned that market participants have limited information about the complex operations of NMS Stock ATSs and the unique relationship between an NMS Stock ATS and its broker-dealer operator and the affiliates of the brokerdealer operator, who often provide a significant source of liquidity on the NMS Stock ATS. The Commission preliminarily believes that improving 136 See infra Section XIII.B.1. 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 124, at 3599. 138 See 2010 Equity Market Structure Release, supra note 124, at 3599. See infra note 494 (describing the maker-taker pricing model). 139 As exemplified by some commenters’ responses and as discussed further below, market participants are interested in information about, among other things, ATS affiliations, sharing of order information, operation of smart order routers and to whom they give preference, priority rules, order types, calculation of reference prices, and segmentation. See, e.g., infra notes 186 and 190 and accompanying text (describing comments received from Blackrock, Inc. and Bloomberg Tradebook LLC). mstockstill on DSK4VPTVN1PROD with PROPOSALS3 137 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 transparency of information available to market participants would enable them to better assess NMS Stock ATSs as potential trading venues.140 Since Regulation ATS was adopted, ATSs that effect transactions in NMS stocks have grown increasingly complex in terms of the services and functionalities that they offer subscribers. Over the past 16 years, these ATSs, like registered national securities exchanges, have used advances in technology to improve the speed, capacity, and efficiency of their trading functionalities to bring together the orders in NMS stocks of multiple buyers and sellers using established, non-discretionary methods under which such orders interact and trade. Before Regulation ATS was adopted, ATSs primarily operated as ECNs, as dark pools were not prevalent during that period. Today, the vast majority of NMS Stock ATSs operate as dark pools. Furthermore, based on Commission experience, ATSs that traded NMS stocks prior to the adoption of Regulation ATS did not offer the same services and functionalities as they do today. Today, most NMS Stock ATSs, like most registered national securities exchanges, are fully-electronic, automated systems that provide a myriad of trading services to facilitate order interaction among various types of users on the NMS Stock ATS. For example, NMS Stock ATSs offer a wide range of order types, which are a primary means by which subscribers communicate their instructions for the handling of their orders on the ATS. Based on Commission experience, some NMS Stock ATSs allow subscribers to submit indications of interests, conditional orders, and various types of pegged orders, often with time-in-force, or other specifications, which are similar to those offered by exchanges, such as all or none, minimum execution quantity, immediate or cancel, good till cancelled, and day. Unlike registered national securities exchanges, however, most NMS Stock ATSs have adopted a dark trading model, and do not display any quotations in the consolidated quotation data. Additionally, at the time Regulation ATS was adopted, SORs were not a primary point of access to ATSs that trade NMS stocks. Today, however, brokers compete to offer sophisticated technology tools to monitor liquidity at many different venues and to 140 See, e.g., infra note 187 and accompanying text (describing a comment received from the Consumer Federation of America). PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 81009 implement order routing strategies.141 Using that knowledge of available liquidity, many brokers offer smart order routing technology to route orders to various trading centers to access such liquidity.142 Based on Commission experience, broker-dealer operators frequently use SORs (or similar functionality) to route orders to their NMS Stock ATSs in today’s marketplace. Furthermore, for some NMS Stock ATSs, most orders must pass through the broker-dealer operator’s SOR (or similar functionality) to enter the ATS.143 In today’s highly automated trading environment, NMS Stock ATSs offer various matching systems to bring together orders and counterparties in NMS stocks. These automated matching systems, including limit order books, crossing systems, and various types of auctions, are generally pre-programmed to execute orders pursuant to established non-discretionary methods. These established non-discretionary methods dictate the terms of trading among multiple buyers and sellers entering orders into the NMS Stock ATS and generally include priority and allocation procedures. Based on Commission experience, some NMS Stock ATSs offer price-time priority, while others offer midpoint only matching with time priority, or time priority at other prices derived from the NBBO. Some NMS Stock ATSs may also offer priority mechanisms with additional overlays. For example, amongst orders at a given price, priority may be given to a certain type of order (e.g., agency orders), before then applying time priority. Additionally, some NMS Stock ATSs offer order routing services similar to those offered by national securities exchanges.144 Some NMS Stock ATSs also offer subscribers the ability to further customize trading parameters, or the broker-dealer operator may set parameters around the interaction of various order flow. Based on Commission experience with information disclosed on Form ATS, some NMS Stock ATSs may enable subscribers to select the types of, or 141 See 2010 Equity Market Structure Release, supra note 124, 75 FR at 3602. 142 See id. 143 For a further discussion about the increased use of SORs (or similar functionalities) by brokerdealer operators of NMS Stock ATSs, see infra Section VII.B.7. 144 For example, based on Commission experience, some NMS Stock ATSs, like national securities exchanges, will route a subscriber’s order to another trading center when the NMS Stock ATS cannot execute the order without trading through the NBBO, or if otherwise directed by the subscriber. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81010 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules even specific, subscriber or order flow with which the subscriber wishes to interact. For example, some NMS Stock ATSs may enable subscribers to prevent their orders from interacting with principal order flow of the ATS’s broker-dealer operator, or may enable subscribers to prohibit execution of their order flow against that of subscribers with certain execution characteristics (e.g., so called highfrequency traders or ‘‘HFTs’’). Subscribers may also have the option to prevent self-matching with other order flow originating from the same firm. Some NMS Stock ATSs may also segment order flow into various classifications of subscribers based upon parameters set by the broker-dealer operator, such as historical execution characteristics, or may limit access to certain crossing mechanisms based on a subscriber’s profile (e.g., the system may be programmed such that institutional order flow only executes against other institutional order flow).145 Subscribers may or may not be aware that they have been classified as a particular type of participant on the NMS Stock ATS, which may limit their ability to interact with order flow of certain other subscribers to that NMS Stock ATS. The Commission also preliminarily believes that, since Regulation ATS was adopted, the operations of NMS Stock ATSs have become increasingly intertwined with operations of the broker-dealer operator, providing additional complexity to the manner in which NMS Stock ATSs operate. Given this close relationship, the Commission preliminarily believes that conflicts of interest can arise between the brokerdealer operator’s interest in its NMS Stock ATS and its interest in its other non-ATS businesses. As discussed further below, at the time Regulation ATS was adopted, the Commission recognized that broker-dealer operators may perform additional functions other than the operation of their ATS, such as other trading services, and adopted Rule 301(b)(10), which requires that ATSs have safeguards and procedures to protect confidential subscriber trading information.146 The Commission is concerned that today, the potential for conflicts of interest as a result of a broker-dealer operator’s other business interests, including those of its affiliates, may be greater than it was at that time, particularly due to trading centers that multi-service broker-dealer operators 145 A purported reason for such segmentation may be to help reduce information leakage or the possibility of trading with undesirable counterparties. 146 See infra Section IX. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 own and operate.147 Additionally, the broker-dealer operator of an NMS Stock ATS controls all aspects of the operation of the ATS, including, among other things: Means of access; who may trade; how orders interact, match, and execute; market data used for prioritizing or executing orders; display of orders and trading interest, and determining the availability of ATS services among subscribers.148 The non-ATS operations of a broker-dealer operator and its NMS Stock ATS typically are connected in many ways. For example, in some cases, the broker-dealer operator, or its affiliates, owns, and controls access to, the technology and systems that support the trading facilities of the NMS Stock ATS, and provides and directs personnel to service the trading facilities of the ATS. As discussed in more detail below,149 the Commission is aware that most NMS Stock ATSs are operated by broker-dealers that also engage in brokerage and dealing activities, and offer their customers a variety of brokerage services, including algorithmic trading software, agency sales desk support, and automated smart order routing services, often with, or through, their affiliates. In addition, multi-service broker-dealers and their affiliates may operate, among other things, an OTC market making desk or proprietary trading desk in addition to operating an ATS, 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. Furthermore, the broker-dealer operator of an NMS Stock ATS may have arrangements with third-parties to perform certain aspects of its ATS’s operations, and affiliates of those third parties may subscribe to the NMS Stock ATS, which the Commission is concerned give rise to the potential for information leakage or conflicts of interest, of which market participants may be unaware.150 As discussed further below, the Commission preliminarily believes that details about the operations and trading services of ATSs, such as those described above, are useful to market participants’ understanding of the terms and conditions under which their orders will be handled and executed on a given ATS.151 The Commission also preliminarily believes that market participants should have access to information about the relationship between a broker-dealer, its affiliates, and the NMS Stock ATS that it operates, to adequately understand the operations of the ATS and potential conflicts of interest that may arise. C. Lack of Operational Transparency for NMS Stock ATSs The Commission believes that one of the most important functions it can perform for investors is to ensure that they have access to the information they need to protect and further their own interests.152 As noted above, although 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, market participants have limited knowledge of the operations of ATSs and how orders interact, match, and execute on ATSs.153 The Commission is concerned that market participants have limited information about the non-ATS activities of the broker-dealer operators of NMS Stock ATSs and potential conflicts of interest that might arise from those activities.154 The Commission is also concerned that different classes of subscribers may have different levels of information about the operations of NMS Stock ATSs and how their orders or other trading interests may interact on the NMS Stock ATS. To address these concerns, the Commission’s proposal is designed to provide better access to information about the operations of NMS Stock ATSs to all market participants, including subscribers and potential subscribers. Under current rules, a Form ATS is ‘‘deemed confidential when filed.’’ 155 As a result, market participants 151 See generally infra Sections VII and VIII. e.g., Securities Exchange Act Release No. 42208, 64 FR 70613, 70614 (December 17, 1999) (concept release reviewing regulation of market information fees and revenues). 153 See supra notes 40 and 139 (citing prior comment letters expressing the view that Form ATS should be made publicly available and expressing support for making publicly available ATS filings with the Commission, and exemplifying the kinds of information about NMS Stock ATS operations that market participants, including broker-dealers and intuitional investors, seek, but to which they may not currently have access). 154 See infra Section VII.A. 155 See 17 CR 242.301(b)(2)(vii). The information on Form ATS is available for examination by staff, state securities authorities, and SROs. See Form ATS at 3, Instruction A.7. 152 See, 147 See infra Section VII.A (discussing the activities of broker-dealer operators of NMS Stock ATSs and the possible conflicts of interest that may result, and the Commission’s preliminary belief that providing market participants with information about such activities will enable market participants to assess whether potential conflicts of interest exist so that they may make more informed decisions about whether to send their order flow to a particular NMS Stock ATS). 148 See infra Section VII.A.1. 149 See id. 150 See infra Sections VII.B.6 and 9 (discussing trading on the ATS by the broker-dealer operator and its affiliates, and the relationship between an NMS Stock ATS and its service providers, and proposing to require related disclosure). PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 typically have, at best, limited access to Form ATS filings and the information contained therein. Additionally, Form ATS discloses only limited aspects of an ATS’s operations, and the Commission preliminarily believes that even where an ATS has voluntarily made public its Form ATS,156 market participants currently might not be able to obtain a complete understanding of how ATSs operate. In addition, Form ATS does not solicit information about possible circumstances that give rise to potential conflicts of interest resulting from the activities of the broker-dealer operator and its affiliates. Despite the confidentiality afforded Form ATS, based on Commission experience, including the Commission’s experience reviewing disclosures made by ATSs on Form ATS over the past 16 years, ATSs have often provided minimal, summary disclosures about their operations on Form ATS. Furthermore, the Commission preliminarily believes that the complexity of the operations of NMS Stock ATSs has increased substantially and in a manner that causes the current disclosure requirements of Form ATS to result in a potentially insufficient, and inconsistent, level of detail about the operations of NMS Stock ATSs. By comparison, national securities exchanges, with which NMS Stock ATSs directly compete, are subject to comprehensive registration and rule filing requirements under Section 19(b) of the Exchange Act.157 Under these requirements, national securities exchanges must make public their trading rules and detail their trading operations. As discussed above, national securities exchanges register with the Commission on Form 1, and thereafter file proposed rule changes on Form 19b–4, which are not confidential, are approved by the Commission or become effective by operation of law, and are made public.158 These mandatory filings 156 The Commission notes that some ATSs have chosen to make Form ATS filings publicly available. See, e.g., IEX ATS Form ATS Amendment, dated July 29, 2015, https:// www.iextrading.com/policy/ats/; PDQ ATS Inc’s Form ATS Amendment, dated January 30, 2015, https://www.pdqats.com/wp-content/uploads/2013/ 10/PDQ-FORM-ATS-FILING_01_30_15-Website.pdf; Liquidnet H20 ATS Form ATS Amendment, dated February 4, 2015, https://www.liquidnet.com/ uploads/ATS_(H2O)_Form-Exhibits_CLEAN_ 4feb2015.pdf; SIGMA X Form ATS Amendment, dated May 21, 2014, https:// www.goldmansachs.com/media-relations/in-thenews/current/pdf-media/gs-form-atsamendment.pdf; POSIT Form ATS Amendment, dated January 26, 2015, https://www.itg.com/ marketing/ITG_Form_ATS_for_POSIT_ 02112015.pdf. 157 15 U.S.C. 78s(b). 158 See generally 15 U.S.C. 78s(a) and (b); and 17 CFR 240.19b–4. See also supra notes 20–23 and VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 publicly disclose, among other things, details about the exchange’s trading services, operations, order types, order interaction protocols, priority procedures, and fees.159 A national securities exchange must file such a proposed rule change any time it seeks to change its rules,160 and even noncontroversial rule changes cannot be implemented until the exchange files a Form 19b–4 with the Commission.161 In contrast, an ATS can change its operations in certain cases before notifying the Commission, and in all cases, without obtaining Commission approval or notifying ATS subscribers or the public about the change.162 The Commission preliminarily believes that the increased complexity of NMS Stock ATS operations and the business structures of their brokerdealer operators, combined with a lack of transparency around the operation of NMS Stock ATSs and the activities of their broker-dealer operators, could inhibit a market participant’s ability to assess an NMS Stock ATS as a potential trading venue. Further, the Commission recognizes that Form ATS was designed before NMS Stock ATSs operated at the level of complexity that they do today, and the equity market structure has substantially changed since Regulation ATS was adopted.163 As such, the accompanying text; https://www.sec.gov/rules/ sro.shtml. 159 Among other things, Form 1 requires an exchange applying for registration as a national securities exchange to disclose its procedures governing entry and display of quotations and orders in its system, procedures governing the execution, reporting, clearance and settlement of transactions in connection with the system, and fees. See Form 1, Exhibits E.2–E.4. The disclosures required in Form 1 must include sufficient detail for the Commission to determine the exchange’s rules are consistent with the Act. See generally 15 U.S.C. 78f(b)(1). Once registered, a national securities exchange must file any proposed rule or any proposed change in, addition to, or deletion from its rules. See 15 U.S.C. 78s(b)(2). 160 See 15 U.S.C. 78s(b)(1). 161 See 17 CFR 240.19b–4(f). 162 See supra notes 20–25 and accompanying text and infra notes 342–343 and accompanying text (discussing, in more detail, the differences in the regulatory regimes for registered national securities exchanges and ATSs, including with respect to requirements related to transparency of operations). See also 17 CFR 242.301(b)(2) (requiring ATSs to file amendments on Form ATS at least 20 days prior to implementing a material change to the operation of the ATS, and within 30 calendar days after the end of each calendar quarter to update any other information that has become inaccurate and not previously reported). 163 The Commission preliminarily believes that information solicited on Form ATS–N would be similar to portions of what registered national securities exchange are required to publicly disclose, and thus, that disclosure of the information would not place NMS Stock ATSs at a competitive disadvantage with respect to competing trading venues. See infra Section IV.D. The Commission notes that, while some of the PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 81011 Commission preliminarily believes that transparency of NMS Stock ATSs’ operations will promote competition and benefit investors by informing market participants about differences between trading venues that could impact the quality of the execution of their orders.164 The Commission preliminarily believes that requiring ATSs to respond to proposed Form ATS–N, which would require more detailed information about the ATSs’ operations and be made available to the public on the Commission’s Web site, would facilitate the public’s understanding of NMS Stock ATSs by improving the information available to market participants, enabling them to make better decisions about where to route their orders to achieve their investing or trading objectives. D. Prior Comments on Operational Transparency and Regulatory Framework for NMS Stock ATSs The Commission is proposing to amend Regulation ATS to adopt Form ATS–N, which would require an NMS Stock ATS to publicly disclose detailed information about its operations and the activities of the broker-dealer operator and its affiliates. The Commission is also proposing to modify the regulatory requirements that apply to NMS Stock ATSs and qualify NMS Stock ATSs for the exemption from the definition of ‘‘exchange’’ under Exchange Act Rule 3a1–1(a)(2) by declaring the Form ATS– N effective or ineffective. In 2009, the Commission proposed to amend the regulatory requirements of the Exchange Act that apply to nonpublic trading interest in NMS stocks, including dark pools.165 Among other questions on Form ATS–N are designed to provide information about potential conflicts of interest arising from the activities of the broker-dealer operator or its affiliates and are dissimilar to information required to be disclosed by a national securities exchange, national securities exchanges must have rules that are consistent with the Exchange Act, and in particular Section 6. To date, national securities exchanges have implemented rules to address the potential for conflicts of interest when the national securities exchange is affiliated with a broker-dealer that is a member of the national securities exchange. See, infra, notes 369– 373 and accompanying text (discussing the Commission’s concerns regarding conflicts of interest in the context of national securities exchanges). 164 See infra Section XIII.C (discussing the Commission’s preliminary belief that the proposal would help market participants make better decisions about where to route their orders, improve the efficiency of capital allocation, and execution quality, and also addressing the effect of the disclosure of proprietary information on competition). 165 See Regulation of Non-Public Trading Interest, supra note 123, at 62108 (proposing rules and amendment to joint-industry plans). E:\FR\FM\28DEP3.SGM 28DEP3 81012 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 things, the Commission proposed to substantially lower the trading volume threshold in Regulation ATS that triggers public display obligations for ATSs and to amend joint-industry plans for publicly disseminating consolidated trade data to require real-time disclosure of the identity of an ATS in the consolidated last-sale report. The Commission received four comments on its Regulation of Non-Public Interest proposal that directly relate to the amendments to Regulation ATS that the Commission is proposing today.166 Three commenters expressed the view that the Commission should address the regulatory disparity between national securities exchanges and ATSs. Senator Edward E. Kaufman expressed the view that ‘‘as trading continues to become faster and more dispersed, it is that much more difficult for regulators to perform their vital oversight and surveillance functions,’’ and that ‘‘the Commission should consider strengthening the regulatory requirements for becoming an Alternative Trading System or starting a new trading platform for existing market centers.’’ 167 Senator Kaufman further urged the Commission to ‘‘harmonize rules across all market centers to ensure exchanges and ATSs are competing on a level playing field that serves the interests of all investors.’’ NYSE Euronext stated that because ‘‘ATSs now represent a significant share of trading volume in NMS stocks . . . the time is ripe to move to a framework that has consistent regulatory requirements when the trading activity at issue is essentially the same.’’ 168 The National Investor Relations Institute opined that ‘‘the same regulatory oversight, market surveillance, reporting, and other investor safeguards that exist for exchanges should be in place for all trading venues to ensure maximum investor protection.’’169 166 See letter to Mary L. Schapiro, Chairman, Commission, from Sen. Edward E. Kaufman, United States Senate, dated August 5, 2010 (‘‘Kaufman letter’’); letters to Elizabeth M. Murphy, Secretary, Commission, from Janet M. Kissane, Senior Vice President, Legal & Corporate Secretary Office of the General Counsel, NYSE Euronext, dated February 22, 2010 (‘‘NYSE Euronext letter #1’’); from Jeffrey D. Morgan, CAE, President and CEO, National Investor Relations Institute, dated February 16, 2010 (‘‘National Investor Relations Institute letter’’); letter to the Commission, from Seth Merrin, Chief Executive Officer; Anthony Barchetto, Head of Trading Strategy; Jay Biancamo, Global Head of Marketplace; Vlad Khandros, Market Structure Analyst; Howard Meyerson, General Counsel, Liquidnet, Inc., dated December 21, 2009 (‘‘Liquidnet letter #1’’). 167 Kaufman letter, supra note 166, attachment at 4–5. 168 NYSE Euronext letter #1, supra note 166, at 3. 169 National Investor Relations Institute letter, supra note 166, at 2. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Liquidnet expressed the view that the Commission should require institutional brokers, including institutional ATSs, to disclose to their customers specific order handling practices and that Regulation ATS should be amended to enhance the review process of new ATSs and material changes to ATSs’ business operations.170 Liquidnet stated that disclosures by institutional brokers, including institutional ATSs, to their customers should include, among other things, identification of external venues to which the broker routes orders, the process for crossing orders with other orders received by the broker, execution of orders as agent and principal, a detailed description of the operation and function of each ATS or trading desk operated by the broker, a clear and detailed description of each algorithm and order type offered by the broker, categories of participant and admission criteria for each ATS or trading desk with which the customer’s order can interact, and internal processes and policies to control dissemination of the institution’s order and trade information and other confidential information.171 Liquidnet also suggested that the Commission amend ‘‘Regulation ATS to permit the Commission to delay the effective date of a new ATS commencing operation or of an existing ATS implementing a material business change if the Commission believes that information in the ATS filing is unclear or incomplete or raises an issue of potential non-compliance with applicable law or regulation,’’ and expressed support for making publicly available ATS filings with the Commission.172 In 2010, the Commission issued a Concept Release that, among other things, solicited comment on whether trading centers offering undisplayed liquidity are subject to appropriate regulatory requirements for the type of business they conduct.173 Specifically, the Commission asked, among other things, for comment on the following: 174 • Do investors have sufficient information about dark pools to make informed decisions about whether in fact they should seek access to dark pools? Should dark pools be required to provide improved transparency on their trading services and the nature of their participants? If so, what disclosures 170 See Liquidnet letter #1, supra note 166, at D– 5–6, 11. 171 See Liquidnet letter #1, supra note 166, at D– 5–6. 172 Id. at D–11. 173 See 2010 Equity Market Structure Release, supra note 124, at 3614. 174 See id. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 should be required and in what manner should ATSs provide such disclosures? • Are there any other aspects of ATS regulation that should be enhanced for dark pools or for all ATSs, including ECNs? • Are there any ways in which Regulation ATS should be modified or supplemented to appropriately reflect the significant role of ATSs in the current market structure? The Commission received 20 comment letters that addressed these questions as they relate to the proposal.175 The 20 comment letters offered contrasting views. Five commenters expressed support for Commission action to address the regulatory disparity between national securities exchanges and ATSs, particularly where such trading venues perform similar functions. Security Traders Association of New York noted that it has ‘‘called for the harmonization of regulatory oversight and the need for similar rules across venues, including exchanges, ATSs and other liquidity sources that are connected through the 175 See letters from Theodore R. Lazo, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, dated October 24, 2014 (‘‘SIFMA letter #2); Richie Prager, Hubert De Jesus, Supurna Vedbrat, and Joanne Medero, BlackRock, Inc., dated September 12, 2014 (‘‘Blackrock letter’’); Micah Hauptman, Consumer Federation of America, dated September 9, 2014 (‘‘Consumer Federation of America letter’’); Christopher Nagy and Dave Lauer, KOR Group LLC, dated April 4, 2014 (‘‘KOR Group letter’’); Bill Neuberger, Andrew Silverman, Paul Fitzgerald, and Sapna Patel, Morgan Stanley, dated March 7, 2011 (‘‘Morgan Stanley letter’’); Raymond M. Tierney III and Gary Stone, Bloomberg Tradebook LLC, dated June 28, 2013 (‘‘Bloomberg Tradebook letter’’); Greg Tusar, Goldman Sachs Execution & Clearing, L.P., and Matthew Lavicka, Goldman Sachs & Co., dated June 25, 2010 (‘‘Goldman Sachs letter’’); Jeffrey S. Wecker, Lime Brokerage LLC, dated May 21, 2010 (‘‘Lime Brokerage letter’’); Andrew C. Small, Scottrade, dated May 19, 2010 (‘‘Scottrade letter’’); Kimberly Unger, The Security Traders Association of New York, Inc., dated May 10, 2010 (‘‘Security Traders Association of New York letter’’); Stuart J. Kaswell, Managed Funds Association, dated May 7, 2010 (‘‘Managed Funds Association letter’’); Raymond M. Tierney III, Bloomberg L.P., dated May 7, 2010 (‘‘Bloomberg L.P. letter’’); James J. Angel, Georgetown University, McDonough School of Business, dated January 16, 2011 (‘‘Angel letter’’); Joan C. Conley, Nasdaq OMX Group, Inc., dated April 30, 2010 (‘‘Nasdaq OMX letter’’); Ann Vlcek, Securities Industry and Financial Markets Association, dated April 29, 2010 (‘‘SIFMA letter #1’’); Joseph M. Velli, BNY ConvergEx Group, LLC, dated April 29, 2010 (‘‘BNY CovergEx Group letter’’); O. Mason Hawkins, Richard W. Hussey, Deborah L. Craddock, Jeffrey D. Engelberg, and W. Douglas Schrank, Southeastern Asset Management, Inc., dated April 28, 2010 (‘‘Southeastern Asset Management letter’’); Janet M. Kissane, NYSE Euronext, dated April 23, 2010 (‘‘NYSE Euronext letter #2’’); David C. Cushing, Wellington Management Company, LLP, dated April 21, 2010 (‘‘Wellington Management Company letter’’); Seth Merrin, Howard Meyerson, and Vlad Khandros, Liquidnet, Inc., dated March 26, 2010 (‘‘Liquidnet letter #2’’). E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Reg. NMS regulatory framework.’’ 176 Nasdaq OMX expressed the view that the ‘‘Commission has flexibility to adopt a more principles-based regulatory structure’’ which it could use to ‘‘level the competitive playing field between ATSs and exchanges,’’ and that ‘‘[i]n areas where ATS and exchange activities overlap, differences in [regulatory] approach should persist only if there is a clear policy basis for those differences.’’ 177 NYSE Euronext opined that the ‘‘lighter regulatory oversight for ATSs puts transparent, regulated markets at a competitive disadvantage, to the potential detriment of investors’’ and that ‘‘now that ATSs represent a significant share of trading volume in NMS stocks, . . . the Commission should address the regulatory disparity between registered exchanges and ATSs that engage in trading activities analogous to traditional exchange trading.’’ 178 Wellington Management Company expressed the view that ‘‘regulatory requirements for types of venues should differ only to the extent the differentiated requirements are specifically designed to address clearly identifiable and compelling needs’’ and that ‘‘material disparities in regulatory requirements could make it difficult for exchanges to compete with ATSs and broker-dealers and could threaten their long-term survival.’’ 179 Liquidnet stated that ‘‘[t]o the extent that an exchange conducts the equivalent business function as a broker or an ATS, regulators should ensure that levels of regulation are consistent.’’ 180 However, three commenters expressed the view that in order to rectify the regulatory disparity, the Commission should lessen regulatory burdens on exchanges, rather than enhance its regulation of ATSs. Goldman Sachs urged the Commission to ‘‘consider expanding the types of rule changes that exchanges . . . can propose on an immediately effective basis,’’ which ‘‘would help to level the playing field between exchanges and ATSs.’’ 181 Wellington Management Company opined that ‘‘the burden of regulation should be shared fairly by execution venues’’ and that ‘‘exchanges should be granted the ability to make certain rule changes in a manner similar to ATSs (i.e., as a notification with SEC veto authority, and not as part of a lengthy notice, comment, and approval process).’’ 182 Liquidnet stated that ‘‘regulators should not impose unnecessary burdens on ATSs and brokers, but rather should remove unnecessary regulatory burdens from exchanges, to the extent that they exist.’’ 183 Ten commenters expressed the view that ATSs and broker-dealers should be required to provide more enhanced disclosures regarding their operations, and described specific disclosures that the Commission should require of ATSs. SIFMA stated that the Commission ‘‘should require broker-dealers to publish on their Web sites, on a monthly basis, a standardized disclosure report that provides an overview of key macro issues that are of interest to clients,’’ including, among other things, ‘‘order types supported on the broker-dealer’s ATS (if applicable).’’ 184 Blackrock, Inc. expressed the view that although some ATSs voluntarily publish their Form ATS filings and supplemental materials, the ‘‘particular operational features specified and degree of detail lack consistency from one [Form ATS] submission to another’’ and that ‘‘[a]dditional standardization and information are required in disclosures about ATS practices.’’ 185 Blackrock further stated that ‘‘[m]andatory ATS disclosures should include greater detail on how the platform calculates reference prices, determines order priority, matches orders between client segments, monitors execution quality, advertises orders, interacts with affiliates and is compensated by subscribers.’’ 186 The Consumer Federation of America stated 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.’’ 187 The Consumer Federation of America further opined that ‘‘the Commission should undertake an exhaustive investigation of the current order types, requiring exchanges and all ATSs, including dark pools, to disclose in easily understandable terms what their purpose is, how they are used in practice, who is using them, and 176 Security Traders Association of New York letter, supra note 175, at 2. 177 Nasdaq OMX letter, supra note 175, at 13, 16. 178 NYSE Euronext letter #2, supra note 175, at 7. 179 Wellington Management Company letter, supra note 175, at 3. 180 Liquidnet letter #2, supra note 175, at F–7. 181 Goldman Sachs letter, supra note 175, at 10. 182 Wellington Management Company letter, supra note 175, at 3. 183 Liquidnet letter #2, supra note 175, at F–7. 184 SIFMA letter #2, supra note 175, at 13. 185 Blackrock letter, supra note 175, at 4. 186 Id. 187 Consumer Federation of America letter, supra note 175, at 22. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 81013 why they are not discriminatory or resulting in undue benefit or harm to any traders.’’ 188 Bloomberg Tradebook LLC noted that buy-side representatives with whom it met at a workshop for members of equity trading desks of asset managers stated that although they periodically send questionnaires to their brokers regarding order handling and internalization (dark pool) matching protocols, because the buy-side representatives might not be customers of all ATSs, they could not assess order interaction that occurs across the market structure.189 Bloomberg Tradebook also recommended that the Commission ask exchanges and ATSs to complete a questionnaire with ‘‘Yes’’ and ‘‘No’’ checkboxes that would provide an overview of each exchange’s or ATS’s operations, and which Bloomberg Tradebook suggested could be posted on the Commission’s Web site. Bloomberg Tradebook provided a sample questionnaire that included questions relating to, among other things, affiliations, riskless principal trades, trades effected in a proprietary capacity, sharing of orders or order information with affiliates or other trading venues and compensation for such sharing, operation of a smart order router and whether it gives preference to the exchange or ATS or an affiliate, priority rules, order types that enable customers to gain preference, and special fees or rebates which lead to a preference of one order over another.190 Goldman Sachs recommended an enhanced disclosure regime for exchanges and ATSs consisting of four components. First, exchanges and ATSs would be required to ‘‘provide descriptions of the types of functionalities that they provide, such as types of orders (e.g., flash/pinging orders, conditional orders), services (e.g., co-location, special priority), and data (e.g., depth-of-book quotations, per order information).’’ Second, they would ‘‘disclose the basis upon which members/subscribers access the type of order, service or data,’’ and ‘‘whether only a certain class of market participants has access.’’ Third, they would be required to disclose how commonly the functionality is used. Fourth, the exchanges and ATSs would disclose more market quality statistics ‘‘so that investors and other market 188 Id. at 37–38. Tradebook letter, supra note 175, at 189 Bloomberg 1. 190 Id. E:\FR\FM\28DEP3.SGM at 2–3. 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81014 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules participants could better gauge execution quality.’’ 191 Lime Brokerage, LLC recommended that the Commission should require ‘‘transparency around pricing, access criteria and membership of dark pools.’’ 192 Managed Funds Association stated that ‘‘as long as co-location is available to investors, traders and larger brokers on an equal basis, the secondary market for such services to smaller customers from their brokers should be competitive and thus, fairly priced,’’ and therefore, ‘‘we believe market centers should disclose if they or third parties offer co-location services on a priority basis other than first available.’’ 193 SIFMA stated its belief that ‘‘added disclosure about co-location and other market access arrangements would be beneficial to market participants,’’ and that ‘‘[s]uch disclosure might describe standard, high speed, co-location, or other means by which members may access an exchange or ATS, and provide market participants with details regarding the categories of market participants that use each means of access, the data capacity associated with each arrangement, and the quotation and transaction volume attributable to each arrangement.’’ 194 Southeastern Asset Management, Inc. commented that brokers and trading venues should disclose to investors information such as payments, rebates, and fees related to execution venues, venue rankings by routing brokers and routing venues, and the inputs that create the routing rankings, and the transparency of customer specific order routing and execution available to the specific customer.195 Liquidnet recommended that institutional ATSs make similar disclosures to those it recommended when commenting on the Regulation of Non-Public Interest proposing rules and amendment to joint-industry plans.196 In addition to the ten commenters that provided specific Form ATS disclosure recommendations, one commenter provided some examples of customer questions and requests specific to dark pools that it received. Such questions and requests related to, among other things, whether the commenter’s dark pool is truly dark, categorization or tagging of order flow, whether participants may opt out of or into 191 Goldman Sachs letter, supra note 175, at 9–10. Brokerage letter, supra note 175, at 7. 193 Managed Funds Association letter, supra note 175, at 27. 194 SIFMA letter #1, supra note 175, at 7. 195 See Southeastern Asset Management letter, supra note 175, at 7. 196 See Liquidnet letter #2, supra note 175, at F– 1–F–2; see also supra note 129. 192 Lime VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 interaction with certain flow, proprietary orders interaction with the dark pool, priority rules, requests to exclude certain types of venues for routing of orders, maintenance of confidential trading information, use of direct market data feeds by the dark pool’s servers and algorithmic strategies, and co-location of servers and algorithmic strategies to exchange and ATS servers.197 The commenter also provided some sample questions for its clients to ask of their dark pool providers. These included questions relating to the dark pools methods of access, client/subscriber base, types of orders permitted, matching of dark pool orders at the NBBO, price improvement, interaction of the dark pool’s principal and proprietary orders with client orders on the dark pool, categorization or tagging of order flow, and order types.198 The commenter also included several questions that clients should ask dark pools about the sell-side brokerdealers and exchanges that the dark pools access. In response to the questions the Commission raised in the Equity Market Structure Release, one commenter raised questions relating to the transparency of ATSs’ operations. The commenter asked, among other things, whether: • Form ATS filings provide the Commission with complete and timely information about the operation of ATSs, and whether such filings are sufficiently frequent and detailed to allow the Commission to understand planned system changes by ATSs; • the Commission has adequate tools to respond to concerns about the operations of ATSs; • the Commission has adequate information about the relationships between ATSs and their subscribers, including how ‘‘toxicity’’ ratings are assigned to subscribers, and their impact on individual subscriber’s access and fees, and whether it is acceptable that ATS subscribers can assign such ratings to counterparties within and outside the ATS without disclosing objective criteria; • the Commission has adequate information about ATS pricing, noting 197 See Morgan Stanley letter, supra note 175, at 12–14. Additionally, representatives from Morgan Stanley met with staff from the Commission’s Division of Trading and Market to discuss market structure issues. During that meeting, Morgan Stanley provided, among other things, examples of frequently asked questions that it believes could be standardized to provide mandated transparency about how orders are handled on dark pools. See Memorandum from the Division of Trading and Markets regarding an October 1, 2015, meeting with representatives of Morgan Stanley, https:// www.sec.gov/comments/s7-02-10/s70210.shtml. 198 See Morgan Stanley letter, supra note 175. PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 that but for the Rule 3a1–1 exemption from exchange registration, ATSs would be required to charge fees that are fair and not unreasonably discriminatory; and • the Commission receives enough information from ATSs about their access policies to make comprehensive assessment about competitive dynamics at work in the market.199 The commenter stated its belief that responding to the Commission’s questions in the Equity Market Structure Release with the commenter’s own responsive questions was ‘‘entirely appropriate’’ because the ‘‘public cannot comment on the adequacy of Form ATS filings,’’ and therefore, ‘‘the Commission and its staff are uniquely qualified to assess whether the requirements of the Form and the content of actual submitted filings provide adequate and timely information.’’ 200 One commenter discussed a May 2009 Opinion Research Corporation survey of 284 executives from NYSE-listed companies, noting that only 17% of the executives were satisfied with the transparency of trading in their company’s stock, and that 69% of the executives ‘‘indicated there is inadequate regulatory oversight of nonexchange trading venues, including dark pools.’’ 201 Five commenters expressed the view that Form ATS filings should be made publicly available. SIFMA opined that ‘‘[t]o enhance transparency and confidence, all ATSs should publish the Form ATS and make their forms available on their Web sites.’’ 202 Blackrock stated that current and historical Form ATS filings for active ATSs ‘‘should be made immediately available to the public, subject to appropriate redaction of confidential information,’’ noting that some ATS operators ‘‘have already displayed exemplary transparency by voluntarily publishing their Form ATS filings and supplemental materials.’’ 203 The Consumer Federation of America stated its support for requiring all ATSs, including dark pools, to publicly disclose their Forms ATS ‘‘so that the public can see how these venues operate.’’ 204 KOR Group LLC opined that the fact that ‘‘ATS filings are hidden from the public while the burden is on SROs to file publicly . . . does not serve the public interest in any 199 See Nasdaq OMX letter, supra note 175, at 14– 16. 200 Id. at 16. Euronext letter #2, supra note 175, at 7. 202 SIFMA letter #2, supra note 175, at 13. 203 Blackrock letter, supra note 175, at 4. 204 Consumer Federation of America letter, supra note 175, at 22. 201 NYSE E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules way, and makes it easy for media and others to sensationalize and demonize what is occurring in this part of the market,’’ further opining that there ‘‘should not be any reasoned argument against’’ making Form ATS publicly available.205 Goldman Sachs recommended disclosing Form ATS publicly because ‘‘[s]uch disclosure would provide investors with useful information regarding the business practices of ATSs,’’ and supported a requirement for ‘‘ATSs to provide public notice of material changes to their business practices,’’ but also stated its opposition to ‘‘any requirement that ATSs disclose information about their matching algorithms or the nature of their subscribers’’ because such disclosure ‘‘could result in information leakage that would detrimentally impact liquidity.’’ 206 James J. Angel commented that Form ATS should be publicly available on the Commission’s Electronic Data Gathering, Analysis, and Retrieval System (‘‘EDGAR’’).207 As it had done when commenting on the Regulation of Non-Public Interest proposing rules and amendment to joint-industry plans,208 Liquidnet recommended that ATS filings with the Commission be made publicly available.209 Three commenters expressed their opposition to enhanced regulation of ATSs. Scottrade, Inc. stated it believed that ATSs had ‘‘brought innovation and better execution quality to the equity markets,’’ and that it ‘‘would not be in favor of additional regulation that would reduce competition, raise barriers to entry for ATSs or force orders to be routed to specific destinations.’’ 210 Bloomberg L.P. stated that it had ‘‘heard exchanges argue it would be in the interest of the exchanges to regulate ATSs more aggressively,’’ but that it had ‘‘not seen evidence why that which is in the exchanges’ interest is necessarily in the public interest,’’ and suggested that the Commission should ‘‘look to investors’ needs,’’ which Bloomberg L.P. thought ‘‘do not . . . justify increasing the regulatory burdens on alternative trading systems.’’ 211 BNY ConvergEx Group stated its belief that ‘‘the current system of ATS regulation works well and structural changes are not necessary,’’ and that because ‘‘[d]ark ATSs market their services to 205 KOR Group letter, supra note 175, at 12. Sachs letter, supra note 175, at 10. 207 See Angel letter, supra note 175, at 13. 208 See Liquidnet letter #1 supra note 166. 209 See Liquidnet letter #2, supra note 175, at F– 206 Goldman 8. 210 Scottrade letter, supra note175, at 4. L.P. letter, supra note175, at 4–5. 211 Bloomberg VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 institutional customers and prospective customers on a continuous basis . . . institutions know full well what types of customers each ATS caters to and the services they offer.’’ 212 BNY ConvergEx Group acknowledged that ‘‘some retail investors may not understand precisely how dark ATSs operate,’’ but opined that ‘‘[a]ny perceived lack of information for retail investors about an ATS’s trading services would only become an issue if the ATS was to become subject to the Fair Access provisions of Regulation ATS,’’ and that ‘‘because retail investors are unlikely to pass the objective credit and other financial standards that would be required under a Fair Access regime to become subscribers of the ATS, this may not be a real issue.’’ 213 The Commission received two comment letters on its Market Structure Web site relevant to the Commission’s proposal to amend Regulation ATS.214 Blackrock submitted the same comment letter to the Market Structure Web site that it submitted with respect to the 2010 Equity Market Structure Release.215 Citadel expressed the view that ‘‘dark pools should be subject to increased transparency,’’ and that ‘‘ATS operational information and filings should be publicly available.’’ 216 The Commission has considered these comments, and, for the reasons set forth throughout this release, is proposing the amendments to Regulation ATS and Exchange Act Rule 3a1–1 as described herein. IV. Proposed Amendments to Regulation ATS and Rule 3a1–1 to Heighten Regulatory Requirements for ATSs That Transact in NMS Stocks A. Proposed Definition of NMS Stock ATS The Commission is proposing to amend Rule 300 of Regulation ATS to provide for the definition of ‘‘NMS Stock ATS’’ in a new paragraph (k). The purpose of proposed Rule 300(k) is to specify the type of ATS that would be subject to the heightened conditions under Exchange Act Rule 3a1–1, as described further below. Proposed Rule 300(k) would define ‘‘NMS Stock ATS’’ 212 BNY ConvergEx Group letter, supra note175, at 18, 21. 213 See id. at 21. 214 See Blackrock letter, supra note 175; letter from John C. Nagel, Managing Director and Senior Deputy Counsel, Citadel LLC, dated July 21, 2014 (‘‘Citadel letter’’). See also Securities and Exchange Commission Market Structure Web site (‘‘Market Structure Web site’’), https://www.sec.gov/ marketstructure/. 215 See Blackrock letter, supra notes 175, 185, 186, and 203 and accompanying text. 216 See Citadel letter, supra note 214, at 4. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 81015 to mean an ‘‘an alternative trading system, as defined in Exchange Act Rule 300(a), that facilitates transactions in NMS stocks, as defined in Exchange Act Rule 300(g).’’ 217 Rule 300(g) of Regulation ATS currently provides, and would continue to provide, that the term ‘‘NMS stock’’ has the meaning provided in Exchange Act Rule 600 of Regulation NMS; provided, however, that a debt or convertible debt security shall not be deemed an NMS stock for purposes of Regulation ATS.218 Pursuant to Exchange Act Rule 600(b), an NMS stock is any NMS security other than an option,219 and an NMS security is ‘‘any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan.’’ 220 Thus, under the proposed amendment to Regulation ATS, an NMS Stock ATS would include 217 See proposed Rule 300(k). 17 CFR 242.300(g). 219 See 17 CFR 242.600(b)(47). 220 See 17 CFR 242.600(b)(46). Transaction reports for securities that are listed and registered, or admitted to unlisted trading privileges on a national securities exchange, are collected, processed, and made available pursuant to the Consolidated Tape Association (‘‘CTA’’) plan (‘‘CTA Plan’’) and the OTC/UTP Plan. See, e.g., CTA Plan (dated as of October 1, 2013), https:// www.ctaplan.com/publicdocs/ctaplan/ notifications/plans/trader-update/5929.pdf at 34 (describing the types of securities to which the CTA plan applies). See also Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchange on an Unlisted Trading Privilege Basis, https://web.archive.org/web/20070114023844/https:// www.utpdata.com/docs/UTP_PlanAmendment.pdf at 2, 10–13 (‘‘OTC/UTP Plan’’) (describing the securities for which transaction information is collected and disseminated as any Nasdaq Global Market or Nasdaq Capital Market security, as defined in then-operative NASDAQ Rule 4200). Nasdaq Rule 5005(a)(26) defines Nasdaq Global Market security as: Any security listed on Nasdaq that (1) satisfies all applicable requirements of the Rule 5100 and 5200 Series and meets the criteria set forth in the Rule 5400 Series; (2) is a right to purchase such security; (3) is a warrant to subscribe to such security; or (4) is an Index Warrant which meets the criteria set forth in Rule 5725(a). Nasdaq Rule 5005(a)(28) defines Nasdaq Capital Market security as: Any security listed on The Nasdaq Capital Market that (1) satisfies all applicable requirements of the Rule 5100, 5200 and 5500 Series but that is not a Nasdaq Global Market security; (2) is a right to purchase such security; or (3) is a warrant to subscribe to such security. These plans are filed with, and approved by, the Commission in accordance with the requirements of Rule 608 of Regulation NMS, and pursuant to Rule 601 of Regulation NMS, which requires every national securities exchange to ‘‘file a transaction reporting plan regarding transactions in listed equity and Nasdaq securities executed through its facilities’’ and every national securities association to ‘‘file a transaction reporting plan regarding transactions in listed equity and Nasdaq securities executed by its members otherwise than on a national securities exchange.’’ 218 See E:\FR\FM\28DEP3.SGM 28DEP3 81016 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules any ATS that effects transactions in securities that are listed on a national securities exchange (other than options, debt or convertible debt). In addition, to meet the definition of an NMS Stock ATS, the organization, association, person, group of persons or system must meet the definition of an alternative trading system under Rule 300(a) of Regulation ATS.221 The Commission requests comment on the proposed definition of NMS Stock ATS. In particular, the Commission solicits comment on the following: 1. Do you believe the Commission should adopt a more limited or expansive definition of NMS Stock ATS? Why or why not? Please support your arguments. 2. Should the Commission create the NMS Stock ATS category? Why or why not? Please support your arguments. 3. Should the Commission modify its proposed definition in any way? If so, in what way and why? If not, why not? Please support your arguments. B. Rule 3a1–1(a)(2): Proposed Amendments to the Exemption From the Definition of ‘‘Exchange’’ for NMS Stock ATSs mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Exchange Act Rule 3a1–1(a) exempts from the definition of ‘‘exchange’’: (1) Any alternative trading system operated by a national securities association,222 (2) any alternative trading system that complies with Regulation ATS,223 and (3) any alternative trading system that under Rule 301(a) of Regulation ATS is not required to comply with Regulation ATS.224 Most ATSs fall within the second prong of Exchange Act Rule 3a1–1 and thus, must comply with Regulation ATS to qualify for an exemption from the statutory definition of an ‘‘exchange.’’ As discussed in more detail below, the Commission is now proposing to expand the conditions with which NMS Stock ATSs would be required to comply in order to use the exemption from the definition of ‘‘exchange.’’ To provide for these new conditions, the Commission is proposing to amend 221 17 CFR 242.300(a). As it did in the Regulation ATS Adopting Release, the Commission notes that whether the actual execution of the order takes place on the system is not a determining factor of whether a system falls under Rule 3b–6. A trading system that falls within the Commission’s functional definition of ‘‘exchange’’ pursuant to Rule 3b–6 will still be an ‘‘exchange,’’ even if it matches two trades and routes them to another system or exchange for execution. See Regulation ATS Adopting Release, supra note 7, at 70851–70852. 222 17 CFR 240.3a1–1(a)(1). 223 17 CFR 240.3a1–1(a)(2). 224 17 CFR 240.3a1–1(a)(3). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Rules 3a1–1(a)(2) and (3) to include proposed Rule 304 within the scope of Regulation ATS.225 Amended Rule 3a1– 1(a)(2) would condition the exemption for any ATS that meets the definition of ‘‘NMS Stock ATS’’ on compliance with Rules 300 through 303 of Regulation ATS (except Rule 301(b)(2)) and proposed Rule 304.226 The Commission is proposing to amend Rule 3a1–1(a)(3) by changing the reference to Rule 303 to proposed Rule 304. This is merely a conforming change 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. Rule 3a1– 1(a)(1), which exempts any ATS that is operated by a national securities association, is not impacted by the amendments the Commission is proposing today. The Commission preliminarily believes that amending the conditions to the Rule 3a1–1(a) exemption would more appropriately calibrate the level of operational transparency between registered national securities exchanges and NMS Stock ATSs, which in many regards, are functionally similar trading centers, while maintaining the regulatory framework that permits NMS Stock ATSs to decide whether to register and be regulated as brokerdealers or as national securities exchanges.227 The Commission notes, as it has in other contexts,228 that SRO and non-SRO markets, such as NMS Stock ATSs, are subject to different regulatory regimes, with a different mix of benefits and obligations. Pursuant to this proposal, NMS Stock ATSs would continue to be able to choose to register as national securities exchanges or as broker-dealers. The Commission is proposing, however, to increase the scope of the conditions to the exemption for the purpose of providing more transparency around the operations of NMS Stock ATSs and 225 In Exchange Act Rules 3a1–1(a)(2) and (3), Regulation ATS is currently defined as ‘‘17 CFR 242.300 through 242.303.’’ The Commission is proposing to amend these references to Regulation ATS to define Regulation ATS as ‘‘17 CFR 242.300 through 242.304.’’ 226 See infra Section IV.C. Specifically, the Commission is proposing to amend Rule 3a1–1(a)(2) by changing the reference to Rule 303 to proposed Rule 304. Under the proposal, an NMS Stock ATS would not be required to file the reports and amendments that it is currently required to file on Form ATS pursuant to Rule 302(b)(2), unless the ATS also effects transactions in securities other than NMS stock and is not otherwise exempt. See proposed Rule 301(b)(2)(viii). 227 See Regulation ATS Adopting Release, supra note 7, at 70856–70857. 228 See, e.g., SCI Adopting Release, supra note 17, at 72264. PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 potential conflicts of interest resulting from the unique relationship between the broker-dealer operator and the NMS Stock ATS, as discussed further below. While questions have been raised in other contexts as to whether the broader regulatory framework for national securities exchanges and ATSs should be harmonized,229 the Commission preliminarily believes that the proposals are an appropriate response to concerns about the need for transparency about the operations of NMS Stock ATSs and potential conflicts of interest resulting from the activities of their broker-dealer operators and the broker-dealer operators’ affiliates. The Commission preliminarily believes that the proposals would help market participants make better informed decisions about where to route their orders for execution; the proposed disclosures would also provide the Commission with improved tools to carry out its oversight of NMS Stock ATSs. Moreover, as explained above, the Commission is concerned that market participants have limited information about the increasingly complex operations of NMS Stock ATSs,230 and need more transparency on NMS Stock ATSs to fully evaluate how their orders are handled and executed on NMS Stock ATSs. The Commission preliminarily believes that the enhanced disclosures about the operations of NMS Stock ATSs elicited by proposed Form ATS–N would provide better information about how NMS Stock ATSs operate and, thereby, enable the Commission to determine whether additional regulatory changes for either or both national securities exchanges and ATSs are necessary. The Commission has considered the alternative of requiring different levels of disclosure among NMS Stock ATSs based on volume.231 However, the Commission preliminarily believes that it is necessary and appropriate for the protection of market participants to apply the proposed heightened conditions for the Rule 3a1–1(a)(2) exemption to all NMS Stock ATSs. The Commission notes that market participants may subscribe to multiple ATSs and route orders in NMS stocks among various ATSs prior to receiving an execution. The Commission preliminarily believes that because orders in NMS stocks may be routed to any NMS Stock ATS, regardless of the volume traded on the NMS Stock ATS, all market participants would benefit from the disclosures provided pursuant to proposed Rule 304. Accordingly, the 229 See id. supra Sections III.B and C. 231 See infra Section XIII.D.4. 230 See E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Commission believes that the proposed rules addressing greater operational transparency should apply equally to all NMS Stock ATSs. The Commission requests comment on the scope of the proposed amendments to Rules 3a1–1(a)(2) and (3), which would apply the proposed new conditions of Rule 304 to all NMS Stock ATSs. In particular, the Commission solicits comment on the following: 4. Do you believe that the current conditions to the exemption from the definition of ‘‘exchange’’ for NMS Stock ATSs are appropriate in light of market developments since Regulation ATS was adopted in 1998? Why or why not? Please support your arguments. 5. Do you believe there is sufficient transparency with respect to the operations of NMS Stock ATSs? If not, what information do you believe should be disclosed regarding the operations of an NMS Stock ATS, how frequently should it be disclosed, and why? Does the need for, and availability of, information about the operations of NMS Stock ATSs vary among market participants? If so, how? Please explain in detail. 6. Do you believe there is sufficient transparency with respect to the activities of the broker-dealer operator and its affiliates in connection with NMS Stock ATSs? If not, what information do you believe should be disclosed regarding the activities of the broker-dealer operator and its affiliates and why? Does the need for, and availability of, information about the activities of the broker-dealer operator and its affiliates vary among market participants? If so, how? Please explain in detail. 7. Should the Commission adopt the proposal to apply the requirements of proposed Rule 304 to all NMS Stock ATSs? Why or why not? Please support your arguments. 8. Do you believe that the Commission should provide any exceptions to the application of proposed Rule 304 to NMS Stock ATSs seeking to operate pursuant to the Rule 3a1–1(a)(2) exemption? Why or why not? For example, should the requirements to comply with proposed Rule 304, including the disclosure requirements of proposed Form ATS–N, only be applicable to NMS Stock ATSs that meet certain thresholds (such dollar volume, trading volume, or number of subscribers)? If so, what should the threshold be, and why? If not, why not? Please support your arguments. 9. Do you believe that the Commission should require different levels of disclosure for any proposed VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Form ATS–N items based on the NMS Stock ATS’s volume? If so, why, what should the different thresholds be, and which items on proposed Form ATS–N should depend on an NMS Stock ATS’s volume? If not, why not? Please support your arguments. At this time, the Commission preliminarily believes that the above operational transparency conditions to the exemption to Exchange Act Rule 3a1–1(a) should only apply to NMS Stock ATSs. The Commission, however, requests comment and data on whether its preliminary view is warranted for each category of non-NMS stock ATS. First, approximately 27 ATSs that currently have a Forms ATS on file with the Commission disclose that they exclusively trade fixed income securities, such as corporate or municipal bonds, and approximately 2 ATSs effect transactions in both fixed income securities and other securities, including NMS stocks.232 Based on Commission experience, the equity markets, which are generally highly automated trading centers that are connected through routing networks, operate and execute orders at rapid speeds using a variety of order types. Unlike the complex trading centers of the equity markets, the Commission preliminarily believes that fixed income markets currently rely less on speed, automation, and electronic trading to execute orders and other trading interest,233 although that may be changing in some fixed income markets such as those that trade certain government securities.234 Generally, fixed income ATSs offer less complex order types to their subscribers than those offered by NMS Stock ATSs, sometimes restricting incoming orders to limit orders, and the execution of matched interest involves negotiation or a process. In addition, the municipal and corporate fixed income markets tend to be less liquid than the equity markets, with slower execution times and less complex routing strategies.235 Furthermore, market participants trading fixed income securities are typically not comparing transparent trading venues against non-transparent trading venues in the same manner as market participants seeking to execute NMS stock orders. Although two affiliated national securities exchanges 232 Data compiled from Forms ATS and ATS–R submitted to the Commission as of November 1, 2015. 233 See SCI Adopting Release, supra note 17, at 72270. 234 See October 15 Staff Report, infra note 247 at 35–36. 235 See SCI Adopting Release, supra note 17, at 72270. PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 81017 operate electronic systems for receiving, processing, executing, and reporting bids, offers and executions in fixed income debt securities,236 the Commission preliminarily believes that the majority of trading in fixed income securities occurs on the bilateral market.237 As such, ATSs that effect trades in fixed income securities primarily compete against other trading venues with limited or no operational transparency requirements or standards. By contrast, NMS Stock ATSs, which provide limited information to market participants about their operations, compete directly with national securities exchanges, which are required to publicly disclose information about their operations in the form of proposed rule changes and a public rule book. Accordingly, the Commission preliminarily believes that any proposed revisions to the disclosure requirements for fixed income ATSs under Regulation ATS should be specifically tailored to the attributes of the fixed income market and, therefore, may require different changes to the current Regulation ATS regime and Form ATS than those being proposed herein, which are in direct response to specific transparency concerns related to the operational complexities of NMS Stock ATSs and market participants’ general inability to compare NMS Stock ATSs to one another and to national securities exchanges. The Commission recognizes, however, that trading on fixed income ATSs continues to evolve as fixed income securities are increasingly being traded on ATSs and that trading is occurring in an automated manner. Furthermore, while the specific conflicts of interest that might arise on NMS Stock ATSs operated by multiservice broker dealers may not be identical to the potential conflicts of interest that might arise on 236 See Securities Exchange Act Release Nos. 55496 (March 20, 2007) 72 FR 14631 (March 28, 2007) (NYSE–2006–37) (approving the establishment of NYSE Bonds as an electronic order-driven matching system for debt securities, including, but not limited to corporate bonds (including convertible bonds), international bank bonds, foreign government bonds, U.S. government bonds, government agency bonds, municipal bonds, and debt-based structured products under NYSE Rule 86) and 58839 (October 23, 2008) 73 FR 64645 (October 30, 2008) (NYSEALTR–2008–03) (notice of filing and immediate effectiveness of the Exchange’s proposal to relocate the Exchange’s debt trading and adopt NYSEAlternext Equities Rule 86 (now NYSEMKT—Equities Rule 86) in order to facilitate trading on the system NYSE Alternext Bonds system (now NYSEMKT Bonds)). 237 For interdealer trading for ‘‘benchmark’’ U.S. Treasury securities, however, trading occurs mainly on centralized electronic trading platforms using a central limit order book, namely ATSs. See October 15 Staff Report, infra note 247 at 11. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81018 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules a fixed income ATS,238 the current operations of fixed income ATSs may give rise to potential conflicts of interest between the non-ATS operations of a broker-dealer operator, or its affiliates, and the fixed income ATS. Accordingly, the Commission seeks comment on the following: 10. Do you believe that market participants have sufficient information about the operations of fixed income ATSs to evaluate such ATSs as potential trading venues? Why or why not? Please support your arguments. 11. Do you believe that the Commission should apply proposed Rule 304, in whole or in part, to fixed income ATSs, or some subset of fixed income ATSs? Why or why not? If proposed Rule 304 should be applied only in part to fixed income ATSs, which parts should be applied and why? What, if any, specific modifications or additions to proposed Rule 304 should be made in any application of it to fixed income ATSs? Please support your arguments. 12. Do you believe that fixed income ATSs raise the same or similar operational transparency concerns that the Commission preliminarily believes to exist for NMS Stock ATSs? Why or why not? Please support your arguments. If not, do you believe that fixed income ATSs raise other operational transparency concerns that warrant inclusion of fixed income ATSs within the scope of proposed Rule 304? Why or why not? Please support your arguments. 13. Do you believe that there are potential conflicts of interest for brokerdealer operators of fixed income ATSs, or their affiliates, that may warrant inclusion of fixed income ATSs within the scope of proposed Rule 304? Why or why not? Please support your arguments. If yes, what are those potential conflicts of interest and how do those potential conflicts of interest differ from or resemble the potential conflicts of interest for broker-dealer operators of NMS Stock ATSs and their affiliates? Please be specific. 14. Do you believe that the current conditions to the exemption from the definition of ‘‘exchange’’ are appropriate for fixed income ATSs? Why or why not? Please support your arguments. 15. Do you believe that applying proposed Rule 304 to fixed income ATSs would place them at a competitive 238 For instance, the Commission preliminarily believes that non-ATS business units of brokerdealer operators of fixed income ATSs may not trade proprietarily on their ATSs to the same extent that proprietary trading desks, or other business units, of multiservice broker-dealer operators trade on NMS Stock ATSs. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 disadvantage with respect to non-ATS trading venues that trade fixed income securities and would not be subject to such disclosure requirements? Why or why not? Please support your arguments. 16. Should the Commission adopt a new form that is designed specifically to solicit information about the operations of fixed income ATSs or the operations of certain types of fixed income ATSs? If so, please explain, in detail, the information the new form should require. If not, why not? Please support your arguments. Do you believe that part or all of any new form designed specifically for fixed income ATSs should be made available to the public? Why or why not? Please support your arguments. As noted above, the Commission recognizes that fixed income securities markets continue to evolve as fixed income securities are increasingly being traded on ATSs in an automated manner. Thus, under the current regulatory requirements, market participants generally do not have information about how fixed income ATSs operate as ATSs are not otherwise required to publicly disclose such information 239 and Forms ATS filed with the Commission by fixed income ATSs are deemed confidential. As such, the Commission is seeking public comment on whether it should make public current Forms ATS filed by fixed income ATSs. Though the solicitations on current Form ATS are not specifically tailored to fixed income ATSs like proposed Form ATS–N would be tailored to NMS Stock ATSs, market participants could use the information to assess and compare fixed income ATSs when deciding where to trade fixed income securities. The Commission is cognizant, however, that fixed income ATSs currently file Form ATS with the understanding that the Form ATS is deemed confidential and thus, a fixed income ATS may not have chosen to operate as an alternative trading system if its Form ATS filing was originally intended to be made public. In response to any change in the regulatory requirements, a fixed income ATS may change its business model and choose to curtail its activities or cease operating as an ATS. Accordingly, the Commission seeks comment on the following: 17. Do you believe that the current Forms ATS initial operation report, or parts thereof, filed by fixed income ATSs should be made available to the 239 The Commission does note, however, that some ATSs may currently make voluntary public disclosures. See, e.g., infra note 156. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 public? Why or why not? Please support your arguments. 18. Do you believe that amendments to Form ATS initial operation reports, or parts thereof, filed by fixed income ATSs should be made available to the public? Why or why not? Please support your arguments. 19. Do you believe that current Form ATS is sufficient to elicit useful information about the operations of fixed income ATSs? If so, why? If not, in what ways should Form ATS be modified to better inform the Commission about the operations of fixed income ATSs? Please explain in detail the manner in which Form ATS should be modified for fixed income ATSs. 20. Do you believe that fixed income ATSs may curtail or cease operations if the Commission rescinded the confidential treatment of Form ATS and made Forms ATS filed by fixed income ATSs public? Why or why not? Please support your arguments. 21. Do you believe that if fixed income ATSs curtail or cease operations in response to the Commission rescinding the confidentiality of the Form ATS, the limitation or exit of those ATSs from the fixed income market would impact the quality of the fixed income markets in any way? Why or why not? Please support your arguments. The questions above relate to all fixed income securities, but the Commission is also interested in learning commenters’ specific views about whether ATSs that effect transactions in fixed income securities that are government securities, as defined under the Exchange Act,240 should be subject to increased regulation, operational transparency requirements, or both. Under Rule 301(a)(4) of Regulation ATS, an ATS that solely trades government securities and is registered as a brokerdealer or is a bank is exempt from the requirement to either register as a national securities exchange or comply with Regulation ATS.241 If an ATS trades both government securities and non-government securities—such as NMS stocks, corporate or municipal fixed income securities—it must either register as a national securities exchange or comply with Regulation ATS. However, these ATSs are not subject to several requirements under Regulation ATS with regard to their trading in government securities. First, ATSs that 240 See 15 U.S.C. 78c(a)(42) (defining ‘‘government securities’’ as, among other things, ‘‘securities which are direct obligations of, or obligations guaranteed as to principal or interest by, the United States’’). 241 See 17 CFR 242.301(a)(4)(i) and (ii)(A). E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules do not trade NMS stocks are not subject to the order display and execution access provisions under Rule 301(b)(3).242 Additionally, the government securities activities of ATSs that trade both government and other securities are not subject to either the fair access provisions of Rule 301(b)(5) 243 or the capacity, integrity, and security of automated systems provisions under Rule 301(b)(6).244 Pursuant to the Exchange Act (particularly the provisions of the Government Securities Act of 1986, as amended 245) and federal banking laws, brokers and dealers in the government securities market are regulated jointly by the Commission, the United States Department of the Treasury (‘‘U.S. Treasury Department’’), and federal banking regulators.246 Recently, staff members from the U.S. Treasury Department, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the Commission, and the U.S. Commodity Futures Trading Commission issued a joint report about the unusually high level of volatility and rapid round-trip in prices that occurred in the U.S. Treasury market on October 15, 2014 (the ‘‘October 15 Staff Report’’).247 The October 15 Staff Report discusses the conditions that contributed to the October 15, 2014 developments and key findings from the analysis of data from that day. The October 15 Staff Report also provides an overview of the market structure, liquidity, and applicable regulations of the U.S. Treasury market, as well as the broad changes to the structure of the U.S. Treasury market that have occurred over the past two decades.248 For the secondary market in cash U.S. Treasury securities (‘‘Treasury securities’’), the October 15 Staff Report explains that trading occurs: (1) In bilateral transactions via voice or a 242 See supra notes 86–90 and accompanying text. supra notes 92–94 and accompanying text. supra notes 96–97 and accompanying text. 245 See Public Law 99–571, October 28, 1986, and Public Law 103–202, December 17, 1993. 246 The Government Securities Act authorized the U.S. Treasury Department to promulgate rules governing transactions in government securities by government securities brokers and dealers. See October 15 Staff Report, infra note 247, at 9. The Commission, FINRA, and federal bank regulators— in consultation with the U.S. Treasury Department—also have the authority to issue sales practice rules for the government securities secondary market. See id. 247 See Joint Staff Report: The U.S. Treasury Market on October 15, 2014 (July 13, 2015) (the ‘‘October 15 Staff Report’’), https:// www.treasury.gov/press-center/press-releases/ Documents/Joint_Staff_Report_Treasury_10-152015.pdf. 248 See October 15 Staff Report, supra note 247, at 8–14, 35–44. 243 See mstockstill on DSK4VPTVN1PROD with PROPOSALS3 244 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 variety of electronic means; or (2) on centralized electronic trading platforms using a central limit order book.249 The October 15 Staff Report notes that the structure of the U.S. Treasury market has ‘‘evolved notably in recent years’’ and electronic trading has become an increasingly important feature of the modern interdealer market for Treasury securities.250 Like modern-day trading in NMS stocks, the majority of interdealer trading in benchmark Treasury securities,251 which is the most liquid type of Treasury security, currently occurs on centralized electronic trading platforms using a central limit order book, namely ATSs.252 The October 15 Staff Report notes that the growth in high-speed electronic trading has contributed to the growing presence of Principal trading firms (‘‘PTFs’’) in the Treasury market, with these firms accounting for the majority of trading and providing the vast majority of market depth.253 PTFs, which have direct access to electronic trading platforms for Treasury securities, now represent more than half of the trading activity on electronic interdealer trading platforms for Treasury securities.254 Similar to HFTs in the equity markets, PTFs trading on the electronically brokered interdealer market for Treasury securities often employ automated algorithmic trading strategies that rely on speed and allow the PTFs to cancel or modify existing quotes in response to perceived market activity.255 Furthermore, most PTFs trading Treasury securities on electronic platforms also restrict their activities to proprietary trading and do not hold long positions.256 The October 15 Staff Report also notes that increased trading speed due to automated trading in the U.S. Treasury market has challenged the traditional risk management protocols for market participants, trading platforms, and clearing firms.257 The October 15 Staff Report notes that automated trading can occur at speeds that exceed the capacity 249 See id. at 11. id. at 35. 251 Benchmark issues are the most recently issued nominal coupon securities. See id. at 11. Nominal coupon securities pay a fixed semi-annual coupon and are currently issued at original maturities of 2, 3, 5, 7, 10, and 30 years. See id. at 11, n.6. 252 See id. at 11, 35–36. The October 15 Staff Report also notes that the majority of interdealer trading of ‘‘seasoned’’ Treasury securities and the majority of dealer-to-customer trading is via bilateral transactions. See id. at 11, 35–36 n.31. 253 See id. at 36. 254 See id. 255 See id. at 32, 35–36, 39. 256 See id. at 38. 257 See id. at 36. 250 See PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 81019 of manual detection and intervention, posing a challenge to traditional risk management protocols, and forcing market participants, trading platforms, and clearing firms to develop internal risk controls and processes to manage the potential for rapidly changing market and counterparty risk exposures.258 As indicated in the October 15 Staff Report, the staff of the U.S. Treasury Department, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the Commission, and the U.S. Commodity Futures Trading Commission plan to continue to analyze the events of October 15, 2014 and examine changes to the U.S. Treasury market structure. The October 15 Staff Report identified four areas for further work. One of the four areas includes the continued monitoring of trading and risk management practices across the U.S. Treasury market and a review of the current regulatory requirements applicable to the government securities market and its participants.259 In connection with this, the cross-agency staff expressed support for a review of the current regulatory requirements applicable to the government securities market and its participants and suggested studying the implications of a registration requirement for firms conducting certain types of automated trading in the U.S. Treasury market and for government securities trading venues.260 The staff also recommended an assessment of the data available to the public and to the official sector on U.S. Treasury cash securities markets, which would include efforts to enhance public reporting on U.S. Treasury market venue policies and services.261 Based on the rapid and continued evolution of the market for government securities, the Commission is seeking comment on whether as part of its continued cooperation and coordination with other regulators, it should include ATSs whose trading activity is solely in government securities within the scope of current Regulation ATS and amend Regulation ATS to provide for enhanced operational transparency for ATSs that trade government securities.262 258 See id. at 36–37. id. at 45. 260 See id. at 47. 261 See id. at 48. 262 Prior to adopting any changes to Regulation ATS with regard to ATSs that trade government securities, the Commission would, as appropriate, consult with and consider the views of the Secretary of the Treasury and any other appropriate regulatory agencies. See 15 U.S.C. 78o(c)(2)(E). 259 See E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81020 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Specifically, the Commission seeks comment on the following: 22. Do you that believe market participants have sufficient information about the operations of ATSs that effect transactions in government securities in order to evaluate such ATSs as potential trading venues? Why or why not? Please support your arguments. 23. Do you believe that the Commission should adopt amendments to Regulation ATS to remove the exemption under Rule 301(a)(4)(ii)(A) of Regulation ATS for ATSs whose trading activity is solely in government securities? Why or why not? Please support your arguments. If so, do you believe that the Commission should make public Form ATS filings or otherwise increase the transparency requirements under Regulation ATS for ATSs whose sole trading activity is in government securities? Why or why not? Please support your arguments. 24. Do you believe that the Commission should adopt amendments to Regulation ATS to enhance the transparency requirements applicable to ATSs that effect transactions in both government securities and nongovernment securities? Why or why not? If so, how? Please support your arguments. 25. Do you believe that ATSs that effect transactions in government securities raise the same operational transparency concerns that the Commission preliminarily believes to exist for NMS Stock ATSs? Why or why not? Please support your arguments. If not, do you believe that ATSs that effect transactions in government securities raise other operational transparency concerns that warrant expanding the scope of Regulation ATS to encompass ATSs whose sole trading activity is in government securities or increasing the transparency requirements for ATSs that effect transactions in both government securities and non-government securities? Why or why not? Please support your arguments. 26. Do you believe that there are potential conflicts of interest for brokerdealer operators of ATSs, or their affiliates, that effect transactions in government securities that may justify greater operational transparency for ATSs that effect transactions in government securities? Why or why not? Please support your arguments. If yes, what are those potential conflicts of interest and how do those potential conflicts of interest differ from or resemble the potential conflicts of interest for broker-dealer operators of NMS Stock ATSs and their affiliates? Please be specific. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 27. Do you believe that current Form ATS is sufficient to elicit information about the operations of ATSs that effect transactions in government securities? If not, in what ways should Form ATS be modified to better inform the Commission about the operations of ATSs that effect transactions in government securities? Please explain in detail the manner in which Form ATS should be modified. Do you believe that the current Forms ATS, or parts thereof, for ATSs that effect transactions in government securities and nongovernment securities should be made available to the public? Why or why not? Please support your arguments. 28. Do you believe that the Commission should adopt amendments to existing rules under Regulation ATS, including, Rules 301(b)(3) (order display and execution access), 301(b)(5) (fair access), and 301(b)(6) (capacity, integrity, and security of automated systems), to make those rules applicable to trading in government securities on ATSs? Why or why not? If so, how? Please provide support for your arguments. Should the Commission adopt amendments to Rule 301(b)(3) of Regulation ATS to require ATSs that trade government securities to report quotes and/or trade information for public dissemination after crossing certain volume thresholds in a government security? Should such information be reported only after a delay? Why or why not? Please support your arguments. 29. Do you believe that the Commission should apply proposed Rule 304, in whole or in part, to ATSs that effect transactions in government securities? Why or why not? Please support your arguments. 30. Do you believe that the Commission should adopt a new form that is specifically designed to solicit information about the operations of ATSs that effect transactions in government securities? If so, please explain, in detail, the information the new form should require from ATSs that effect transactions in government securities. If not, why not? Please support your arguments. Do you believe that any new form designed specifically for ATSs that effect transactions in government securities should be made available to the public? Why or why not? Please support your arguments. 31. Do you believe that broker-dealers that effect transactions in government securities may modify their business models in order to need not comply with Regulation ATS in response to enhanced regulatory or operational transparency requirements for ATSs that effect transactions in government PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 securities? Why or why not? Please support your arguments. There are also ATSs whose activity is solely the facilitation of trading in OTC Equity Securities.263 At this time, the Commission preliminarily believes that many of its specific concerns related to the current operations of NMS Stock ATSs, which proposed Rule 304 and proposed Form ATS–N seek to address directly, are not equally applicable to OTC Equity Securities ATSs. The Commission preliminarily believes that OTC Equity Securities ATSs do not currently operate with the same complexities as NMS Stock ATSs. Additionally, trading in OTC Equity Securities is almost always facilitated through ATSs, through inter-dealer quotation systems that are not ATSs,264 or elsewhere in the bilateral market. Accordingly, trading in the market for OTC Equity Securities is typically facilitated by platforms or amongst market participants that are not subject to operational transparency requirements comparable to those imposed on national securities exchanges (i.e., the self-regulatory organization rule filing process). The Commission also preliminarily believes that OTC Equity Securities ATSs are evolving and, therefore, the Commission seeks comment on the following: 32. Do you believe that market participants have sufficient information about the operations of OTC Equity Securities ATSs to evaluate such ATSs as potential trading venues? Why or why not? Please support your arguments. 33. Do you believe that OTC Equity Securities ATSs raise the same operational transparency concerns that the Commission preliminarily believes to exist for NMS Stock ATSs? Why or why not? Please support your arguments. If not, do you believe that OTC Equity Securities ATSs raise other operational transparency concerns that warrant inclusion of OTC Equity 263 For the purposes of this analysis and request for comment, the Commission is using the term ‘‘OTC Equity Security’’ as it is defined in FINRA’s 6400 rule series for quoting and trading in OTC Equity Securities. FINRA defines OTC Equity Security as ‘‘any equity security that is not an ‘NMS stock’ as that term is defined in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that the term ‘OTC Equity Security’ shall not include any Restricted Equity Security,’’ which FINRA defines as ‘‘any equity security that meets the definition of ‘restricted security’ as contained in Securities Act Rule 144(a)(3).’’ See FINRA Rules 6420(f), (k). 264 FINRA Rule 6420 defines an interdealer quotation system as ‘‘any system of general circulation to brokers or dealers which regularly disseminates quotations of identified brokers or dealers.’’ See FINRA Rule 6420(c). An example of an interdealer quotation system is the OTC Bulletin Board that FINRA operates. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Securities ATSs within the scope of proposed Rule 304? Why or why not? Please support your arguments. 34. Do you believe that there are potential conflicts of interest for brokerdealer operators of ATSs, and their affiliates, that facilitate transactions in OTC Equity Securities that may justify greater operational transparency for OTC Equity Securities ATSs? Why or why not? Please support your arguments. If yes, what are those potential conflicts of interest and how do those potential conflicts of interest differ from or resemble the potential conflicts of interest for broker-dealer operators of NMS Stock ATSs and their affiliates? Please be specific. 35. Do you believe that the Commission should apply proposed Rule 304, in whole or in part, to OTC Equity Securities ATSs? Why or why not? Please support your arguments. 36. Do you believe that applying proposed Rule 304 to OTC Equity Securities ATSs would place them at a competitive disadvantage with respect to other trading venues that facilitate transactions in OTC Equity Securities in the bilateral market, which would not be subject to such disclosure requirements? Why or why not? Please support your arguments. 37. Do you believe that current Form ATS is sufficient to elicit relevant information about the operations of OTC Equity Securities ATSs? If so, why? If not, in what ways should Form ATS be modified to better inform the Commission about the operations of OTC Equity Securities ATSs? Please explain in detail the manner in which Form ATS could be modified. Do you believe that the current filed Forms ATS, or parts thereof, for OTC Equity Securities ATSs should be made available to the public? Why or why not? Please support your arguments. 38. Do you believe that the Commission should adopt a new form that is designed specifically for OTC Equity Securities ATSs to promote operational transparency of such ATSs? If so, please explain, in detail, the information the new form should require. If not, why not? Please support your arguments. Do you believe that any new form designed specifically for OTC Equity Securities ATSs should be made available to the public? Why or why not? Please support your arguments. Additionally, the Commission notes that there are active ATSs that trade in securities other than NMS stocks, fixed income securities, or OTC Equity Securities.265 For example, an ATS might help match orders for options contracts or facilitate trades in cooperative interests or membership units in limited liability companies. At this time, the Commission does not believe that these ATSs raise the same operational transparency concerns as NMS Stock ATSs. The products traded on these ATSs are not traded on national securities exchanges and, therefore, these ATSs are not competing against platforms with greater transparency requirements. Furthermore, the Commission preliminarily believes that ATSs that trade in securities other than NMS stocks, fixed income securities, or OTC Equity Securities do not currently operate with the same complexities as NMS Stock ATSs. For such ATSs, however, the Commission seeks comment on the following: 39. Do you believe that market participants have sufficient information about the operations of ATSs that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities as potential trading venues? Why or why not? Please support your arguments. 40. Do you believe that ATSs that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities raise the same operational transparency concerns that the Commission preliminarily believes to exist for NMS Stock ATSs? Why or why not? Please support your arguments. 41. Do you believe that there are potential conflicts of interest for brokerdealer operators of ATSs, and their affiliates, that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities that may justify greater operational transparency for ATSs that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities? Why or why not? Please support your arguments. If yes, what are those potential conflicts of interest and how do those potential conflicts of interest differ from or resemble the potential conflicts of interest for brokerdealer operators of NMS Stock ATSs and their affiliates? Please be specific. 42. Do you believe that the Commission should apply proposed Rule 304, in whole or in part, to ATSs that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities? Why or why not? Please support your arguments. If so, please 265 The Commission notes that, based on information provided on Forms ATS and ATS–R as of November 1, 2015, 5 ATSs may trade such securities. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 81021 explain the types of ATSs to which proposed Rule 304 should apply and why. If not, why not? Please support your arguments. 43. Do you believe that Form ATS is sufficient to elicit useful information about the operations of ATSs that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities? If so, why? If not, in what ways should Form ATS be modified to better inform the Commission about the operations of ATSs that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities? Please explain in detail the manner in which Form ATS could be modified. Do you believe that current filed Forms ATS, or parts thereof, for ATSs that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities should be made available to the public? Why or why not? Please support your arguments. 44. Do you believe that the Commission should adopt a new form specifically designed for ATSs that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities in order to promote operational transparency of such ATSs? If so, please explain, in detail, the information the new form should elicit from ATSs that effect or facilitate transactions in such securities. If not, why not? Please support your arguments. Do you believe that any new form designed specifically for ATSs that effect or facilitate transactions in securities other than NMS stocks, fixed income securities, or OTC Equity Securities should be made available to the public? Why or why not? Please support your arguments. C. Proposed Rule 304: Enhanced Filing Requirements for NMS Stock ATSs 1. Application of Existing Requirements to NMS Stock ATSs Proposed Rule 304(a) would require 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), as discussed in Section IV.C.2 below) to be exempt from the definition of an exchange pursuant to Rule 3a1– 1(a)(2).266 The Commission is not proposing to change Rule 301(a) as part of this proposal, but is simply making 266 As discussed above, the Commission is proposing to amend Rule 3a1–1(a) to provide for modified conditions to the exemption set forth in proposed Rule 304. See supra Section IV.B. E:\FR\FM\28DEP3.SGM 28DEP3 81022 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 clear that Rule 301(a) continues to apply to NMS Stock ATSs, unless otherwise exempt.267 Thus, NMS Stock ATSs would still be required to comply with the existing requirements of Rules 300 through 303 of Regulation ATS, and would additionally be required to comply with proposed Rule 304. The Commission also notes that the requirements of Rule 301(b) (except Rule 301(b)(2)) of Regulation ATS 268 would continue to apply to NMS Stock ATSs. As discussed above, Rule 301(b) sets forth the conditions with which an ATS must comply to benefit from the exemption provided by Exchange Act Rule 3a1–1(a).269 The Commission continues to believe that compliance by NMS Stock ATSs with the provisions of Rule 301(b) of Regulation ATS (except Rule 301(b)(2)), as amended, is a necessary and appropriate condition to the Rule 3a1–1(a)(2) exemption from the definition of exchange in that the purpose of such condition is the protection of investors.270 The Commission would no longer require an NMS Stock ATS to comply with the reporting and amendment requirements of Rule 301(b)(2) because such conditions would be replaced with the more specific disclosure requirements of proposed Rule 304 for NMS Stock ATSs, discussed in further detail below. The Commission is also proposing to make non-substantive amendments to Rule 301(b)(2)(i) and Rule 301(b)(2)(vii) 271 to delete outdated references to dates for phased in compliance with Regulation ATS for ATSs that were operational as of April 21, 1999, and to update the 267 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 an exchange under Section 6 of the Exchange Act; exempt from exchange registration based on limited volume; operated by a national securities association; registered as a broker-dealer, under Sections 15(b) or 15C of the Exchange Act, or that is a bank, that limits its securities activities to certain instruments; or exempted, conditionally or unconditionally, by Commission order, after application by such alternative trading system from one or more of the requirements of Rule 301(b). See 17 CFR 242.301(a). See also Regulation ATS Adopting Release, supra note 7, at 70859–63. 268 See 17 CFR 242.301(b)(1), (b)(3)–(11). 269 See supra Section II.B. 270 See, e.g., Regulation ATS Adopting Release, supra note 7, at 70856. In adopting the existing conditions in Rule 301, the Commission determined that the exemption in Rule 3a1–1 was consistent with the protection of investors because the Commission believed that investors would benefit from the conditions governing an alternative trading system, in particular Regulation ATS’s enhanced transparency, market access, system integrity, and audit trail provisions. See id. 271 See proposed Rules 301(b)(2)(i) and (vii), respectively. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 name of the Division of Trading and Markets, respectively.272 The Commission requests comment generally on all aspects of proposed Rule 304(a). 2. Rule 301(b)(2) and Form ATS; ATSs That Trade in Non-NMS Stocks The Commission is proposing Rule 301(b)(2)(viii) to provide that an NMS Stock ATS shall file the reports and amendments required by proposed Rule 304 and would not be subject to the requirements of Rule 301(b)(2). Existing Rule 301(b)(2) requires an ATS to file with the Commission a Form ATS initial operation report, amendments to the Form ATS initial operation report, and cessation of operations reports on Form ATS, all of which are ‘‘deemed confidential when filed.’’ 273 Because the Commission is proposing rules to govern the content and manner in which an NMS Stock ATS would be required to disclose information to the public and the Commission on proposed Form ATS–N, existing Rule 301(b)(2), which applies, and will continue to apply, to ATSs that do not effect transactions in NMS stocks would be duplicative of the proposed amendments.274 Proposed Rule 301(b)(2)(viii) would also provide that an ATS that effects transactions in both NMS stocks and non-NMS stocks would be subject to the requirements of proposed Rule 304 with respect to NMS stocks and Rule 301(b)(2) with respect to non-NMS stocks. The Commission recognizes that some existing ATSs that would meet the definition of NMS Stock ATS also transact in securities other than NMS stocks. For these ATSs to be eligible for the exemption under Rule 3a1–1(a)(2), the Commission preliminarily believes that it is not necessary to mandate compliance with the heightened transparency requirements under proposed Rule 304 with respect to their non-NMS stock operations. Based on Commission experience, these ATSs are designed so that the platform on which non-NMS stock order flow interacts and executes differs from the platform on which NMS stock order flow interacts and executes. Furthermore, as explained above, the Commission preliminarily believes that the operational transparency concerns for NMS Stock 272 See 17 CFR 242.301(b)(2)(i) and (vii), respectively. 273 See 17 CFR 242.301(b)(2). 274 See supra Section IV.B. (discussing the proposed conditions to the exemption in Rule 3a1– 1(a) for ATSs that trade NMS stocks, as compared to the conditions for ATSs that trade other securities or that trade NMS stocks as well as other securities). PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 ATSs do not apply equally to the markets for non-NMS stocks.275 As such, the Commission has tailored proposed Form ATS–N to address the specific operational transparency concerns raised by the current functionalities of the ATS platforms on which NMS stock order flow interacts and executes. Additionally, the Commission preliminarily believes that applying proposed Rule 304 to the nonNMS stock operations of ATSs that trade both NMS stocks and non-NMS stocks would impose unequal regulatory burdens across ATSs that transact in non-NMS stocks. Under such a rule, ATSs that trade both NMS stocks and non-NMS stocks would be required to meet the heightened standards of proposed Rule 304 to be eligible for the exemption under Rule 3a1–1(a)(2) with regard to their non-NMS stock operations, whereas ATSs that only trade non-NMS stocks would not be subject to the standards under proposed Rule 304. The Commission also proposes to amend Rule 301(b)(9),276 which requires an ATS to report transaction volume on Form ATS–R on a quarterly basis and within 10 calendar days after it ceases operation. The Commission proposes to amend Rule 301(b)(9) to require an ATS that trades both NMS stocks and nonNMS stocks to separately report its transactions in NMS stocks on one Form ATS–R, and its transactions in nonNMS stocks on another Form ATS–R. The information filed on Form ATS–R permits the Commission to monitor trading on an ATS.277 As noted above, the Commission proposes to require each ATS with both NMS stock and non-NMS stock operations to file a Form ATS–N for its NMS stock operations and a separate Form ATS for its nonNMS stock operations. Because the proposed Form ATS–N and Form ATS filings of such ATSs would describe separate functionalities—the functionalities for the trading of NMS stocks and those for the trading of nonNMS stocks, respectively—the Commission preliminarily believes that these ATSs should file a separate Form ATS–R to report the trading activity for each functionality to avoid confusion and for regulatory efficiency. Accordingly, the Commission is proposing to require that these ATSs file a Form ATS–R to report transaction volume resulting from their NMS stock operations, as disclosed on a Form ATS–N, and a separate Form ATS–R to 275 See supra Section IV.B. 17 CFR 242.301(b)(9). 277 See Regulation ATS Adopting Release, supra note 7, at 70878. 276 See E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 report transaction volume resulting from their non-NMS stock operations, as disclosed on Form ATS. The Commission notes that Form ATS–R would continue to be deemed confidential. The Commission requests comment on the proposed amendments to Rules 301(b)(2) and 301(b)(9). In particular, the Commission solicits comment on the following: 45. Should the Commission require ATSs that trade both NMS stocks and non-NMS stocks to make filings on both proposed Form ATS–N, with respect to its NMS stock operations, and Form ATS, with respect to its non-NMS stock operations? Why or why not? Please support your arguments. 46. Should the Commission require ATSs that trade both NMS stocks and non-NMS stocks to file a Form ATS–R with respect to their NMS stock operations and a separate Form ATS–R with respect to their non-NMS stock operations? Why or why not? Please support your arguments. 47. Do you believe that ATSs that trade both NMS stocks and non-NMS stocks should be subject to proposed Rule 304, in whole or in part, for both their NMS stock operations and nonNMS stock operations? Why or why not? Please support your arguments. Do you believe that ATSs that trade both NMS stocks and non-NMS stocks should be required to disclose their NMS stock and non-NMS stock operations solely on proposed Form ATS–N? If so, why, and what additional disclosures should be required on proposed Form ATS–N to reflect nonNMS stock operations? If not, why not? Please support your arguments. 3. Proposed Rule 304(a)(1)(i) and (ii): Filing and Review of Form ATS–N Proposed Rule 304(a)(1)(i) would provide that no exemption from the definition of ‘‘exchange’’ is available to an NMS Stock ATS pursuant to Exchange Act Rule 3a1–1(a)(2) unless the NMS Stock ATS files with the Commission a Form ATS–N and the Commission declares the Form ATS–N effective. The Commission preliminarily believes that an NMS Stock ATS that is not operating on the effective date of proposed Rule 304 should not be permitted to commence operations until the Commission has had the opportunity to assess whether the NMS Stock ATS qualifies for the Rule 3a1– 1(a)(2) exemption. As discussed above,278 the current requirements of the Rule 3a1–1(a)(2) exemption mandate that an ATS only provide notice of its 278 See supra Section IV.B. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 operation on a Form ATS initial operation report 20 days prior to commencing operations.279 The Commission’s review of Form ATS–N would help ensure that an NMS Stock ATS’s disclosures comply with the requirements of proposed Rule 304 and that a consistent level of information is made available to market participants in evaluating NMS Stock ATSs.280 Proposed Rule 304(a)(1)(i) is also designed as a transition for currently operating ATSs that meet the proposed definition of NMS Stock ATS. Proposed Rule 304(a)(1)(i) would require an existing ATS that facilitates transactions in NMS stocks and that operates pursuant to a previously filed initial operation report on Form ATS as of the effective date of proposed Rule 304 (i.e., a ‘‘legacy NMS Stock ATS’’) to file a Form ATS–N with the Commission no later than 120 calendar days after the effective date of proposed Rule 304. In other words, the effectiveness of an existing Form ATS would not suffice for a legacy NMS Stock ATS to retain its exemption from the definition of ‘‘exchange’’ with respect to its Rule 3b– 16 activity in NMS stocks beyond the transition period following the effectiveness of proposed Rule 304. The Commission is also proposing in Rule 304(a)(1)(i) that a legacy NMS Stock ATS may continue to operate pursuant to a previously filed initial operation report on Form ATS pending the Commission’s review of the filed Form ATS–N.281 This provision would allow the NMS Stock ATS to continue its current operations without disruptions to the NMS Stock ATS or its current subscribers and provide the NMS Stock ATS with sufficient time to make an orderly transition from compliance under the current Regulation ATS requirements to compliance with the proposed requirements of Rule 304. The Commission notes that during the Commission’s review of the filed Form ATS–N, the NMS Stock ATS would continue to operate pursuant to its existing Form ATS initial operation report and would continue to be required to file amendments on Form 279 17 CFR 242.301(b)(2). Commission notes, however, that Form ATS–N is intended to provide regulatory and public transparency. As such, its review of Form ATS–N will be focused on an evaluation of the completeness and accuracy of the disclosure thereon, and compliance with federal securities laws. Even if the Commission declares a Form ATS–N effective, the Commission would not be precluded from later determining that an NMS Stock ATS had violated the federal securities laws or the rules and regulations thereunder. See infra Section IV.C.8. 281 The NMS Stock ATS would be required to continue to comply with Regulation ATS. 280 The PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 81023 ATS to provide notice of changes to the operations of its system.282 The Commission considered the alternative of allowing an existing ATS that engages in Rule 3b–16 activity in NMS stocks to retain its exemption from the definition of ‘‘exchange’’ by virtue of its existing Form ATS, and to require only a new NMS Stock ATS to file Form ATS–N. However, the Commission preliminarily believes that this alternative would not be appropriate as it would create a significant competitive disparity between a ‘‘new’’ and ‘‘legacy’’ NMS Stock ATS, with the latter benefitting from substantially lighter disclosure requirements. More importantly, it would perpetuate the problem of limited information being available to market participants. Nevertheless, the Commission preliminarily believes that it would be appropriate to provide existing ATSs that engage in Rule 3b–16 activity with regard to NMS stocks an adjustment period after the effective date of proposed Rule 304 to file a Form ATS– N. The Commission preliminarily believes that 120 calendar days is sufficient time for a legacy NMS Stock ATS to respond to the disclosure requirements on the new Form ATS–N because an ATS that is currently operating should be knowledgeable about the operations of its system and the activities of its broker-dealer operator and its affiliates. Proposed Rule 304(a)(1)(ii)(A) would provide that the Commission declare a Form ATS–N filed by an NMS Stock ATS operating as of the effective date of proposed Rule 304 effective or ineffective no later than 120 calendar days from filing with the Commission. Similarly, Proposed Rule 304(a)(1)(ii)(B) would provide that the Commission declare a Form ATS–N filed by an NMS Stock ATS that was not operating as of the effective date of proposed Rule 304 effective or ineffective no later than 120 calendar days from filing with the Commission. The disclosures required by proposed Form ATS–N are more comprehensive than those required on current Form ATS, particularly in terms of volume, complexity, and detail. Based on its experience over the past seventeen years of receiving and reviewing notices on Form ATS, the Commission preliminarily believes that it would receive a large amount of information provided in Form ATS–N filings. The Commission preliminarily believes that 120 calendar days would provide the Commission adequate time to carry out its oversight functions with respect to its review of Forms ATS–N 282 17 E:\FR\FM\28DEP3.SGM CFR 242.301(b)(2)(ii) through (iv). 28DEP3 81024 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules filed by legacy and new NMS Stock ATSs, including its responsibilities to protect investors and maintain fair, orderly, and efficient markets.283 Proposed Rule 304(a)(1)(ii)(A) would further provide a process for the Commission to extend the review period for Forms ATS–N filed by NMS Stock ATSs operating as of the effective date of proposed Rule 304: (1) An additional 120 calendar days, if the Form ATS–N is unusually lengthy or raises novel or complex issues that require additional time for review, in which case the Commission will notify the NMS Stock ATS in writing within the initial 120day review period and will briefly describe the reason for the determination that additional time for review is required; or (2) any extended review period to which the NMS Stock ATS agrees in writing. Proposed Rule 304(a)(1)(ii)(B) would include a similar provision for NMS Stock ATSs not operating as of the effective date of proposed Rule 304, except that the Commission could extend its review period up to 90 calendar days. The proposed disclosure requirements require more detailed disclosures regarding the operations of an NMS Stock ATS than do the current requirements; thereby increasing the amount of information for the Commission to review. The Commission preliminarily believes that the additional time provided by the proposed rule is appropriate because it would allow Commission and its staff to conduct a thorough review of certain lengthy, novel, or complex Form ATS– N filings and provide sufficient opportunity to discuss the filing with the NMS Stock ATS if necessary. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Request for Comment 48. Do you believe the Commission should adopt a rule in which it is required to declare a Form ATS–N filed by an NMS Stock ATS effective or ineffective within 120 calendar days of filing? Do you believe this is an appropriate time frame in light of the amount and nature of information to be submitted on Form ATS–N? Why or why not? Does any experience with Exchange Act Rule 19b–4 filings by selfregulatory organizations, either in draft or in formal submission, inform the appropriate time frame? 49. Should the Commission adopt a process to further extend the period of review under certain circumstances? If 283 As discussed above, a legacy NMS Stock ATS would be able continue to operate pursuant to a previously filed initial operation report on Form ATS pending the Commission’s review of the filed Form ATS–N. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 so, what circumstances and why? Please support your arguments. 50. If the Commission does not declare a Form ATS–N filing effective or ineffective within 120 calendar days from filing with the Commission, or any extension of the 120-day period pursuant to proposed Rule 304(a)(1)(ii), do you believe the Form ATS–N should be automatically deemed effective? Why or why not? Please support your arguments. 51. If the Commission does not declare a Form ATS–N filing effective or ineffective within 120 calendar days from filing with the Commission, or any extension of the 120-day period pursuant to proposed Rule 304(a)(1)(ii), do you believe the Form ATS–N should be automatically deemed ineffective? Why or why not? Please support your arguments. 4. Proposed Rule 304(a)(1)(iii): Declarations of Effectiveness or Ineffectiveness of Form ATS–N Proposed Rule 304(a)(1)(iii) would provide that the Commission will declare effective a Form ATS–N if the NMS Stock ATS qualifies for the Rule 3a1–1(a)(2) exemption. Proposed Rule 304(a)(1)(iii) would also provide that the Commission will declare ineffective a Form ATS–N if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors.284 Under the proposal, the Commission would use Form ATS–N to evaluate whether an entity qualifies for an exemption under Rule 3a1–1(a)(2).285 For the Commission to declare a Form ATS–N effective, it would evaluate, among other things, whether the entity satisfies the definition of ATS,286 and 284 A submitted Form ATS–N that contains technical deficiencies, such as missing pages or one in which the entity does not respond to all questions, including all sub-questions, would not be complete and would be returned to the NMS Stock ATS. See also 17 CFR 240.0–3. Return of a Form ATS–N would not prejudice any decision by the Commission regarding effectiveness or ineffectiveness should the NMS Stock ATS resubmit a Form ATS–N. The Commission notes an NMS Stock ATS also can choose to withdraw a filed Form ATS–N. 285 An NMS Stock ATS would also be required to comply with other requirements of Rules 300 through 303 of Regulation ATS (except Rule 301(b)(2)) and proposed Rule 304. 286 Regulation ATS defines an ATS as any organization, association, person, group of persons, or system that constitutes 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 Exchange Act Rule 3b–16, and does not set rules governing the conduct of subscribers, other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 more specifically, the definition of NMS Stock ATS.287 The Commission preliminarily believes that whether an entity meets the definition of ‘‘NMS Stock ATS’’ should be a threshold requirement for the Commission to declare a Form ATS–N effective, and therefore for the ATS to qualify for the Rule 3a1–1(a)(2) exemption. Proper classification of an entity would clearly indicate to market participants, as well as the Commission, the functions that entity performs and the regulatory framework and attendant obligations that attach to that entity.288 Thus, if the proposed category of NMS Stock ATS is adopted, the Commission preliminarily believes it needs to mitigate concerns that market participants may be confused or misled about whether an entity in fact meets the definition of an NMS Stock ATS. If an entity does not meet the definition, market participants may hold false expectations about how their orders may interact or be matched with other orders or they may not fully understand whether the entity with which they are doing business is required to comply with Regulation ATS. For these reasons, the Commission preliminarily believes that it would be necessary or appropriate in the public interest, and consistent with the protection of investors, to declare ineffective a Form ATS–N if it finds, after notice and opportunity for hearing, that the Form ATS–N was filed by an entity that does not meet the functional test under Exchange Act Rule 3b–16, does not perform functions commonly performed by a stock exchange, or or system, or discipline subscribers under the Exchange Act other than by exclusion from trading. See 17 CFR 242.300(a). Under Exchange Act Rule 3b–16, an organization, association, or group of persons shall be considered to constitute, maintain, or provide ‘‘a marketplace 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, nondiscretionary 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. See supra note 48 and accompanying text. See also supra Section IV.A (discussing the proposed definition of ‘‘NMS Stock ATS’’). 287 See proposed Rule 300(k). See also supra Section IV.A (discussing the proposed definition of NMS Stock ATS). 288 For example, an ATS that is not an NMS Stock ATS would be subject to different conditions to be eligible for the Rule 3a1–1(a)(2) exemption. Similarly, depending on the facts and circumstances, an entity that is not an ATS may be subject to requirements as a broker-dealer, but not the conditions of Regulation ATS, or may be required to register as an exchange. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 exercises SRO powers.289 Similarly, the Commission preliminarily believes that it would be necessary or appropriate in the public interest, and consistent with the protection of investors, to declare ineffective a Form ATS–N if it finds, after notice and opportunity for hearing, that the Form ATS–N was filed by an entity that does not meet the proposed definition of ‘‘NMS Stock ATS.’’ The Commission also preliminarily believes that it would be necessary or appropriate in the public interest, and consistent with the protection of investors, to declare ineffective a Form ATS–N if it finds, after notice and opportunity for hearing, that one or more disclosures on Form ATS–N are materially deficient with respect to their accuracy, currency, or completeness. The requirements of proposed Form ATS–N are set forth in proposed Rule 304(c)(1), which provides that an NMS Stock ATS must respond to each item on Form ATS–N, as applicable, in detail and disclose information that is accurate, current, and complete. The Commission preliminarily believes that market participants would use information disclosed on Form ATS–N to evaluate whether a particular NMS Stock ATS would be a desirable venue to which to route their orders. In addition, the Commission intends to use the information disclosed on the Form ATS–N to exercise oversight over and monitor developments of NMS Stock ATSs. Given these potential uses, the Commission preliminarily believes that it is important that Form ATS–N contain detailed disclosures that are accurate, current, and complete.290 The following non-exhaustive examples are provided to illustrate various applications of proposed Rule 304(a)(1)(iii) that could cause the Commission to declare a Form ATS–N ineffective because it contains one or more disclosures that appear to be materially deficient.291 For instance, if 289 See supra Section IV.A. (discussing the definition of NMS Stock ATS and the underlying definition of ATS). The entity would not fall within the definition of an ‘‘exchange’’ under Section 3(a)(1) of the Exchange Act and the exemption provided in Exchange Act Rule 3a1–1 would not be applicable. 290 Proposed Form ATS–N is designed to provide market participants and the Commission with, among other things, current information about the operations of the NMS Stock ATS and the activities of the broker-dealer operator and its affiliates. Accordingly, an NMS Stock ATS would be required to provide information on proposed Form ATS–N that reflects the operations of the NMS Stock ATS at the time its Form ATS–N is declared effective by the Commission. Any changes in the operations of the NMS Stock ATS must be disclosed by the NMS Stock ATS in a Form ATS–N Amendment. 291 The Commission notes that these are some, but not necessarily all, of the types of circumstances VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 an NMS Stock ATS discloses an order type on Form ATS–N but does not describe the key attributes of the order type, such as time-in-force limitations that can be placed on the ability to execute the order, the treatment of unfilled portions of orders, or conditions for cancelling orders in whole or in part, the Form ATS–N would not be sufficiently detailed. Likewise, if an NMS Stock ATS generally describes some of its priority rules, but fails to describe conditions or exceptions to its priority rules, or fails to describe any priority overlays,292 the Form ATS–N would lack sufficient detail. If a Form ATS–N states that the NMS Stock ATS has only one class of subscribers but the Commission or its staff learns through discussions (during the review period) with the NMS Stock ATS or otherwise that the NMS Stock ATS in fact has several classes of subscribers, or if the Form ATS–N states that two classes of subscribers are charged the same trading fees but the Commission or its staff learns through discussions with the NMS Stock ATS or otherwise that in fact one class receives more favorable fees than the other, the Form ATS–N would not be accurate. If a Form ATS–N includes inconsistent information, such as a statement in one part of the form that the entity uses private feeds to calculate the NBBO, but in another part of the form it indicates that it uses the Securities Information Processor (‘‘SIP’’), the Form ATS–N would not be accurate. The Commission preliminarily believes that it would be necessary or appropriate in the public interest, and consistent with the protection of investors, to declare ineffective a Form ATS–N if it finds, after notice and opportunity for hearing, that one or more disclosures reveals noncompliance with federal securities laws, or the rules or regulations thereunder, including Regulation ATS. The Commission notes that the responsibility for accurate, current, and complete disclosures on Form ATS–N lies with the NMS Stock ATS.293 The Commission’s review of Form ATS–N would focus on an evaluation of the that could result in the Commission declaring a Form ATS–N ineffective under the proposed rule. 292 In other words, if the NMS Stock ATS fails to describe which order would receive priority when two or more orders are otherwise on par, such as whether customer orders receive priority in a price priority system if a customer and non-customer order are at the same price, the disclosure would not be sufficient. 293 See infra Section IV.E. and accompanying discussion. Proposed Rule 304(c)(1) would require NMS Stock ATSs to respond to each item on Form ATS–N, as applicable, in detail and disclose information that is accurate, current, and complete. PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 81025 completeness and accuracy of the disclosures, and compliance with federal securities laws, including Regulation ATS. The Commission’s evaluation regarding compliance with federal securities laws would involve a ‘‘red-flag’’ review of the Form ATS–N disclosures for apparent noncompliance with federal securities laws, or other rules or regulations thereunder, including Regulation ATS, and would focus on the disclosures made on the Form ATS–N. For example, as a condition to the Rule 3a1–1(a)(2) exemption, Rule 301(b)(1) of Regulation ATS requires that an ATS register as a broker-dealer under Section 15 of the Exchange Act.294 Section 15(b)(8) of the Exchange Act295 prohibits a registered broker or dealer from effecting a transaction unless the broker or dealer is a member of a securities association registered pursuant to Section 15A of the Exchange Act 296 or effects transactions solely on a national securities exchange of which it is a member. Therefore, to comply with Regulation ATS, and thus qualify for the Rule 3a1–1(a)(2) exemption, an ATS must become a member of an SRO. If an entity were to file a Form ATS–N before registering as a broker-dealer under Section 15 of the Exchange Act, the entity would not be in compliance with Rule 301(b)(1) of Regulation ATS.297 Moreover, if the entity were to file a Form ATS–N before becoming a member of an SRO, the entity would not be in compliance with Rule 301(b)(1) of Regulation ATS because Section 15(b)(1) provides that a Commission order granting registration is not effective until the broker-dealer has become a member of a national securities association registered pursuant to Section 15A of the Exchange Act,298 and the Commission’s order granting broker-dealer registration would not be effective.299 The Commission preliminarily believes that it would be necessary or appropriate in the public interest, and consistent with the protection of investors, to declare ineffective a Form ATS–N if it finds, after notice and opportunity for hearing, that a Form ATS–N reveals noncompliance with Regulation ATS because such non-compliance would be inconsistent with proposed Rule 304(a), which requires that an NMS Stock ATS 294 17 CFR 242.301(b)(1). U.S.C. 78o(b)(8). 296 15 U.S.C. 78o–3. 297 See 17 CFR 301(b)(1). Rule 301(b)(1) requires an ATS to register as a broker-dealer under Section 15 of the Exchange Act. 298 See 15 U.S.C. 78o(b)(1). 299 See 17 CFR 242.301(b)(1). 295 15 E:\FR\FM\28DEP3.SGM 28DEP3 81026 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules comply with Rules 300 through 304 (except Rule 301(b)(2)) as a condition to the exemption from the definition of exchange pursuant to Rule 3a1– 1(a)(2).300 As another example, if a Form ATS–N reveals non-compliance with Rule 612 of Regulation NMS, known as the ‘‘Sub-Penny Rule,’’ which prohibits market participants, including ATSs, from displaying, ranking, or accepting orders, quotations, or indications of interest in NMS stock priced in an increment smaller than $0.01,301 the Form ATS–N would not be consistent with the proposed Rule because the NMS Stock ATS would operate in a manner that would violate the federal securities laws. During its review, the Commission and its staff may provide comments to the entity, and may request that the entity supplement information in the Form ATS–N or revise its disclosures on Form ATS–N.302 An order declaring a Form ATS–N effective would not constitute a finding that the NMS Stock ATS’s operations are consistent with the Exchange Act and the rules and regulations thereunder. Rather, the declaration of effectiveness would only address the issue of whether the NMS Stock ATS has complied with the requirements of Form ATS–N and would focus on the disclosures made on the Form ATS–N. The Commission would not be precluded from later determining that an NMS Stock ATS had violated the federal securities laws or the rules and regulations thereunder. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Request for Comment 52. Should Form ATS–N be deemed immediately effective without Commission action? Why or why not? Please support your arguments. 53. Should Form ATS–N be considered ineffective on filing with the Commission until the Commission affirmatively declares the Form ATS–N 300 The Commission notes that determining whether an NMS Stock ATS qualifies for the exemption from the definition of ‘‘exchange’’ would be based on information as it appears in Form ATS– N. If the Commission were to learn of different information, that determination may change. 301 Specifically, Rule 612(a) of Regulation NMS provides that ‘‘no national securities exchange, national securities association, alternative trading system, vendor, or broker or dealer shall display, rank, or accept from any person a bid or offer, an order, or an indication of interest in any NMS stock priced in an increment smaller than $0.01 if that bid or offer, order, or indication of interest is priced equal to or greater than $1.00 per share.’’ See 17 CFR 242.612(a). 302 The Commission notes, however, that Form ATS–N is intended to provide regulatory and public transparency. As such, its review of Form ATS–N will be focused on an evaluation of the completeness and accuracy of the disclosure thereon, and compliance with federal securities laws. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 ineffective? Why or why not? Please support your arguments. 54. Should the process for making a Form ATS–N effective for a legacy NMS Stock ATS be different from the process for making a Form ATS–N effective for an NMS Stock ATS that files a Form ATS–N after the effective date of the proposed rule? Why or why not? Please support your arguments. If so, how should the processes for the two categories of NMS Stock ATSs differ? 55. Do you believe that the proposed 120 calendar days after the effective date of proposed Rule 304 is a reasonable amount of time for legacy NMS Stock ATSs to complete and file a Form ATS–N? If so, why? If not, why not, and what amount of time would be reasonable? Please support your arguments. 56. Do you believe that new NMS Stock ATSs would be at a competitive disadvantage if existing NMS Stock ATSs were not required to file a Form ATS–N? Why or why not? Please support your arguments. 57. Do you believe that the proposed 120 calendar day period from filing with the Commission is a reasonable amount of time for the Commission to declare a Form ATS–N filed by an NMS Stock ATS that was not operating as of the effective date of proposed Rule 304 effective or ineffective? Do you believe the review period would place an undue burden on the NMS Stock ATS that filed the Form ATS–N? If yes, what amount of time would be reasonable? Please support your arguments. 58. Should the Commission adopt the proposal to allow a legacy NMS Stock ATS to continue operations pursuant to an existing filed initial operation report on Form ATS pending the Commission’s review of its Form ATS– N? Why or why not? Please support your arguments. 59. Do you believe that if a legacy NMS Stock ATS is allowed to continue operations during the Commission’s review of its Form ATS–N the Commission should make such NMS Stock ATS’s Form ATS–N publicly available upon filing? Why or why not? Please support your arguments. 60. Should the Commission permit existing NMS Stock ATSs to be exempt from the definition of ‘‘exchange’’ by virtue of the NMS Stock ATS’s current Form ATS on file with the Commission and require only new NMS Stock ATSs to file Form ATS–N? Why or why not? Would this raise competitive concerns with respect to disparate regulatory treatment of ‘‘new’’ and ‘‘legacy’’ NMS Stock ATSs? Why or why not? Please support your arguments. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 61. Do you believe that the proposed 90 calendar days for the Commission to extend the Form ATS–N review period for new NMS Stock ATSs where the Form ATS–N is unusually lengthy or raises novel or complex issues is reasonable? Do you believe it would place an undue burden on the NMS Stock ATS? If so, why, and what amount of time would be reasonable? Do you believe that the proposed 90 calendar day extension period disproportionately affects new NMS Stock ATSs? Please support your arguments. 62. Should the Commission adopt the proposal to declare ineffective a Form ATS–N if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors? Please support your arguments. 63. Do you believe that the Commission’s examples of reasons that the Commission might declare a proposed Form ATS–N ineffective are appropriate? If yes, why? If not, why not? Please support your arguments. 64. Do you believe that the Commission should consider any other factors in determining whether a Form ATS–N should be declared effective or ineffective? If so, what are they and why? If not, why not? Please support your arguments. 65. Should the Commission require public notice and comment before declaring a Form ATS–N effective or ineffective? Why or why not? Please support your arguments. 5. Proposed Rule 304(a)(1)(iv): Orders Regarding Form ATS–N Effectiveness Proposed Rule 304(a)(1)(iv) would provide that the Commission will issue an order to declare a Form ATS–N effective or ineffective. Proposed Rule 304(a)(1)(iv) would also provide that upon the effectiveness of the Form ATS–N, the NMS Stock ATS may operate pursuant to the conditions in proposed Rule 304. Proposed Rule 304(a)(1)(iv) would also provide that if the Commission declares a Form ATS– N ineffective, the NMS Stock ATS shall be prohibited from operating as an NMS Stock ATS. Proposed Rule 304(a)(1)(iv) would provide that a Form ATS–N declared ineffective would not prevent the NMS Stock ATS from subsequently filing a new Form ATS–N. Proposed Rule 304(a)(1)(iv) is designed to provide notice to the public that the NMS Stock ATS that filed a Form ATS–N qualifies for the exemption provided under Exchange Act Rule 3a1–1(a)(2) and may commence operations, or if the NMS E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Stock ATS was operating pursuant to a previously filed Form ATS, may continue to operate as an NMS Stock ATS. For an NMS Stock ATS operating before the effective date of proposed Rule 304 pursuant to a current Form ATS, the Form ATS for that NMS Stock ATS would no longer have any legal effect with respect to the regulatory status of the NMS Stock ATS upon the Commission declaring its Form ATS–N effective. As a result, the effective Form ATS–N would supersede and replace the NMS Stock ATS’s previously filed Form ATS; and the NMS Stock ATS would no longer be subject to Rule 301(b)(2) of Regulation ATS and would not be required to file a Form ATS cessation of operation report because the NMS Stock ATS would continue operations under the effective Form ATS–N. Declaring a Form ATS–N ineffective would provide the public with notice that an entity that filed a Form ATS–N does not qualify for the exemption under Exchange Act Rule 3a1–1(a)(2) and would be precluded from operating as an NMS Stock ATS. Under Proposed Rule 304(a)(1)(iv), an entity that had filed a Form ATS–N that had been declared ineffective by the Commission would be able to subsequently file a new Form ATS–N. This would allow an entity an opportunity to attempt to address any disclosure deficiencies or compliance issues that caused the first Form ATS– N to be declared ineffective. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Request for Comment 66. Do you believe that a Commission order declaring a Form ATS–N ineffective would have an unduly prejudicial effect on an entity when it refiles Form ATS–N, even where the Commission declares effective the refiled Form ATS–N? Why or why not? Please support your arguments. 6. Proposed Rule 304(a)(2): Form ATS– N Amendments The Commission is proposing Rule 304(a)(2) to provide the requirements for filing a Form ATS–N Amendment, which would be a public document that would provide information about the operations of the NMS Stock ATS and the activities of its broker-dealer operator and its affiliates. The information required to be filed on proposed Form ATS–N is designed to enable market participants to make more informed decisions about routing their orders to the NMS Stock ATS. The Commission’s proposal to require such public disclosure is designed, in part, to bring operational transparency of NMS Stock ATSs more in line with the operational transparency of national VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 securities exchanges.303 Proposed Form ATS–N is also designed to provide information to the Commission that would allow it to monitor developments among NMS Stock ATSs and carry out its oversight functions of protecting investors and the public interest. Given these intended uses, the Commission believes that it is important for an NMS Stock ATS to maintain an accurate, current, and complete. The Commission is proposing Rule 304(a)(2)(i) to require an NMS Stock ATS to amend an effective Form ATS– N in accordance with the instructions therein: (A) At least 30 calendar days prior to the date of implementation of a material change to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that are subject to disclosure on Form ATS–N; (B) within 30 calendar days after the end of each calendar quarter to correct any other information that has become inaccurate for any reason and has not been previously reported to the Commission as a Form ATS–N Amendment; or (C) promptly, to correct information in any previous disclosure on Form ATS–N, after discovery that any information filed under Rule 304(a)(1)(i) or (a)(2)(i)(A) or (B) was inaccurate or incomplete when filed.304 Proposed Rule 304(a)(2)(ii) would provide that the Commission will, by order, if it finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors, declare ineffective any Form ATS–N Amendment filed pursuant to Rule 304(a)(2)(i)(A) through (C) no later than 30 calendar days from filing with the Commission. If the Commission declares a Form ATS–N Amendment ineffective, the NMS Stock ATS shall be prohibited from operating pursuant to 303 See, e.g., supra notes 158–162 and accompanying text (discussing generally differences in disclosure requirements for national securities exchanges and ATSs). The Commission also notes that Rule 19b–4(m)(1) of the Exchange Act (17 CFR 240.19b–4(m)(1)), requires each SRO to post and maintain a current and complete version of its rules on its Web site. This requirement was designed to assure that SRO members and other interested persons have ready access to an accurate, up-to-date version of SRO rules. See Securities Exchange Act Release No. 50486 (October 5, 2004), 69 FR 60287 (October 8, 2004) (adopting amendments to Rule 19b–4 under the Act). 304 The Commission notes that ATSs currently are required to file amendments to the disclosures describing their operations on Form ATS (see supra Section II.B describing the current requirements applicable to ATSs), and that national securities exchanges, as SROs, are required to file proposed rule changes with the Commission before implementing such changes, even if such changes are non-controversial (see generally supra note 161 and accompanying text). PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 81027 the ineffective Form ATS–N Amendment. The NMS Stock ATS could, however, continue to operate pursuant to a Form ATS–N that was previously declared effective. A Form ATS–N Amendment declared ineffective would not prevent the NMS Stock ATS from subsequently filing a new Form ATS–N Amendment that resolves the disclosure deficiency that resulted in the declaration of ineffectiveness. a. Proposed Rule 304(a)(2)(i)(A): Material Amendments Proposed Rule 304(a)(2)(i)(A) would, in part, require an NMS Stock ATS to amend an effective Form ATS–N in accordance with the instructions therein at least 30 calendar days prior to the date of implementation of a material change to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that are subject to disclosure on Form ATS–N. Proposed Rule 304(a)(2)(i)(A) is designed to provide advance notice to the Commission and market participants of a material change to the operations of the NMS Stock ATS and the disclosures regarding the activities of the brokerdealer operator or its affiliates. The Commission notes that under current Rule 301(b)(2)(ii) of Regulation ATS, ATSs are required to file an amendment on Form ATS at least 20 calendar days prior to implementing a material change to the operation of the ATS.305 The Commission is proposing to apply a longer time period of 30 days in proposed Rule 304(a)(2)(i)(A) due to the additional detail and information that would be provided in response to the solicitations on Form ATS–N as compared to Form ATS. As stated in the Regulation ATS Adopting Release, the Commission believes that requiring an ATS to provide the Commission advance notice of certain changes to its operation is a reasonable means for the Commission to carry out its market oversight and investor protection functions.306 The Commission preliminarily believes that the 30 calendar day advance notice period before material changes are implemented would give the Commission the opportunity to make inquiries to clarify any questions that might arise or to take appropriate action, if appropriate, regarding problems that 305 See 17 CFR 242.301(b)(2)(ii). Regulation ATS Adopting Release, supra note 7, at 70864. The Commission also stated that ‘‘[i]f a system were only required to provide notice after it commenced operations, the Commission would have no notice of potential problems that might impact investors before the system begins to operate.’’ Id. 306 See E:\FR\FM\28DEP3.SGM 28DEP3 81028 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 may impact market participants, including investors, before the NMS Stock ATS implemented the changes. Because material changes would be publicly disclosed upon filing, the 30 calendar day advance notice would also allow market participants to evaluate the changes before implementation and assess the NMS Stock ATS as a continued, or potential, trading venue.307 The Commission preliminarily believes that a change to the operations of an NMS Stock ATS, or the disclosures regarding the activities of the broker-dealer operator and its affiliates, would be material if there is a substantial likelihood that a reasonable market participant would consider the change important when evaluating the NMS Stock ATS as a potential trading venue. When the Commission adopted Regulation ATS in 1998, it noted that ATSs ‘‘implicitly make materiality decisions in determining when to notify their subscribers of changes.’’ 308 The Commission is proposing to modify the conditions to the exemption to the definition of ‘‘exchange’’ under Rule 3a1–1(a)(2) for NMS Stock ATSs, which includes, among other things, the increased disclosure of information required on Form ATS–N. Because proposed Form ATS–N would be a public document, the Commission preliminarily believes that the use of this materiality standard discussed below would be appropriate as it is similar to materiality standards applied in the context of securities disclosures made pursuant to other Commission rules.309 To determine whether a change is material, and thus subject to the 30-day advance notice requirement, an NMS Stock ATS would need to consider all the relevant facts and circumstances, including the reason for the change and how it might impact the NMS Stock ATS and its subscribers, as well as 307 See infra Section IV.D (explaining proposed public disclosure requirements for Form ATS–N filings under proposed Rule 304(b)(2)). 308 See id. at 70864. 309 See, e.g., Securities Exchange Act Release No. 43154 (August 15, 2000), 65 FR 51716, 51721 (August 24, 2000) (Selective Disclosure and Insider Trading) (stating that to satisfy the materiality requirement, there must be a substantial likelihood that a fact would be viewed by the reasonable investor as having significantly altered the total mix of information made available); see also Regulation C under the Securities Act of 1933, 17 CFR 230.405 (‘‘The term material, when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered.’’). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 market participants that may be evaluating the NMS Stock ATS as a potential trading venue. Scenarios that are particularly likely to implicate a material change are (1) a broker-dealer operator or its affiliates beginning to trade on the NMS Stock ATS; (2) a change to the broker-dealer operator’s policies and procedures governing the written safeguards and written procedures to protect the confidential trading information of subscribers pursuant to Rule 301(b)(10)(i) of Regulation ATS; (3) a change to the types of participants on the NMS Stock ATS; (4) the introduction or removal of a new order type on the NMS Stock ATS; (5) a change to the order interaction and priority procedures; (6) a change to the segmentation of orders and participants; (7) a change to the manner in which the NMS Stock ATS displays orders or quotes; and (8) a change of a service provider to the operations of the NMS Stock ATS that has access to subscriber confidential subscriber trading information. This list, however, is not intended to be exhaustive, and the Commission does not mean to imply that other changes to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates could not constitute a material change. Rather an NMS Stock ATS should be expected to consider the facts and circumstances of every change to determine whether advance notice is required. Request for Comment 67. Do you believe that the Commission’s proposal to require an NMS Stock ATS to file a Form ATS–N Amendment at least 30 calendar days before implementing a material change is reasonable? Why or why not? Please support your arguments. Do you believe that the advance notice period for material change on Form ATS–N should be shorter (e.g., 20 calendar days, as is the case on current Form ATS) or longer (e.g., 45 calendar days)? Please support your arguments. Do you believe it would place an undue burden on the NMS Stock ATS? If so, why, and how much advance notice, if any, would be reasonable? Please support your arguments. 68. Are the enumerated scenarios each particularly likely to constitute a material change, such that the Commission and the public should be provided with 30 calendar days advance notice pursuant to proposed Rule 304(a)(2)(i)(A)? If yes, why? If not, why not? Are there any other scenarios generally likely to constitute a material change? If so, why, and what are those PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 scenarios? Please support your arguments. 69. Do you believe that the Commission should propose separate tiers of material changes (e.g., based on the significance or number of changes) to the operations of the NMS Stock ATS or disclosures on Form ATS–N and that a different materiality analysis should be applied depending on the tier of change to the operations of the NMS Stock ATS or disclosures on Form ATS– N? Why or why not? Please support your arguments. 70. Do you believe that any types of material changes to an NMS Stock ATS should be eligible to be implemented immediately upon filing? If so, what are such scenarios (regardless of facts and circumstances)? Please support your arguments. 71. Do you believe that certain changes to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that would be subject to disclosure on Form ATS–N should always be considered material changes? Why or why not? If so, please explain in detail those changes to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that would be subject to disclosure on Form ATS–N that should always be considered material changes. 72. Do you believe that certain changes to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates on Form ATS–N, such as order types, should be subject to Commission approval? Why or why not? If so, please identify such changes and support your argument. 73. Should the Commission require public notice and comment for determinations of ineffectiveness of Form ATS Amendments? Why or why not? Please support your arguments. 74. Do you believe that the Commission should make public on its Web site upon filing a Form ATS–N Amendment for a material change, as proposed? Why or why not? Please support your arguments. Do you believe that there should be a delay in when the Form ATS–N Amendment for a material change is made public? Why or why not? Please support your arguments. 75. Do you believe that making an NMS Stock ATS’s Form ATS–N Amendment public upon filing would affect competition? Why or why not? Please support your arguments. If so, how? E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules b. Proposed Rule 304(a)(2)(i)(B): Periodic Amendments Proposed Rule 304(a)(2)(i)(B) would require an NMS Stock ATS to amend an effective Form ATS–N within 30 calendar days after the end of each calendar quarter to correct any other information that has become inaccurate for any reason and has not been previously reported to the Commission as a Form ATS–N Amendment.310 The proposed rule would enable NMS Stock ATSs to update information from the preceding quarter that does not constitute a material change in the NMS Stock ATS’s Form ATS–N filing.311 The Commission preliminarily believes that providing a mechanism for NMS Stock ATSs to disclose changes to their operations or to update information that does not constitute a material change within 30 calendar days after the end of each calendar quarter would tailor the reporting burden on NMS Stock ATSs to the degree of significance of the change in a manner that does not compromise the Commission’s oversight of NMS Stock ATSs or its ability to protect investors and the public interest. The Commission preliminarily believes that allowing NMS Stock ATSs to implement such changes immediately would allow Stock ATSs to make periodic changes to their operations without delay, while at the same time provide disclosure about those changes to market participants and the Commission within an appropriate time frame. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Request for Comment 76. Should the Commission require NMS Stock ATSs to file a Form ATS– N Amendment for periodic changes at the end of each calendar quarter? Why or why not? Please support your arguments. 77. Do you believe that the Commission should require an NMS Stock ATS to file a Form ATS–N Amendment before implementing a periodic change? Why or why not? If so, what period of time should an NMS Stock ATS be required to wait before implementing a periodic change? Please explain in detail. 78. Do you believe that 30 calendar days after the end of each calendar quarter is a reasonable amount of time for NMS Stock ATSs to correct 310 The Commission notes that this requirement would be substantively identical to the current requirement under Rule 301(b)(2)(iii) of Regulation ATS. See 17 CFR 242.301(b)(2)(iii). 311 That Form ATS–N Amendment, filed pursuant to proposed Rule 304(a)(2)(i)(B), would become public upon filing. See infra Section IV.D (explaining proposed public disclosure requirements for Form ATS–N filings under proposed Rule 304(b)(2)). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 information that does not constitute a material change? If so, why? If not, why not, and what amount of time would be reasonable? Please support your arguments. Do you believe there are any processes the Commission should consider for correcting information on a Form ATS–N that does not constitute a material change? If so, what are such processes? Please explain in detail. 79. Do you believe that certain changes to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that would be subject to disclosure on Form ATS–N should always be considered periodic changes? Why or why not? If so, please explain in detail those changes to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that should always be considered periodic changes. Do you believe that the Commission should make public on its Web site upon filing a Form ATS–N Amendment for a periodic change? Why or why not? Please support your arguments. Do you believe that there should be a delay in when the Form ATS–N Amendment for a periodic change is made public? Why or why not? Please support your arguments. c. Proposed Rule 304(a)(2)(i)(C): Amendment To Correct Information on Previously Filed Form ATS–N Proposed Rule 304(a)(2)(i)(C) would require an NMS Stock ATS to amend an effective Form ATS–N promptly to correct information in any previous disclosure on Form ATS–N after discovery that any information filed in a Form ATS–N or Form ATS–N Amendment was inaccurate or incomplete when filed.312 For example, if an NMS Stock ATS discovers that information that it previously disclosed on Form ATS–N was incorrect, such as an address or contact information, or that information it previously disclosed was incomplete, such as where the NMS Stock ATS failed to fully describe the characteristics of an order type, it would be required to promptly amend its Form ATS–N. Although the Commission recognizes that a change disclosed on a Form ATS–N Amendment that is reported pursuant to proposed Rule 304(a)(2)(i)(C) would likely be already 312 The Commission notes that this requirement would be substantively identical to Rule 301(b)(2)(iv) of Regulation ATS that an ATS ‘‘promptly file an amendment on Form ATS correcting information previously reported on Form ATS after discovery that any information filed’’ in a Form ATS initial operation report or amendment ‘‘was inaccurate when filed.’’ See 17 CFR 242.301(b)(2)(iv). PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 81029 implemented by the NMS Stock ATS, the Commission believes that it would benefit market participants to receive accurate and complete information about the NMS Stock ATS so they can use the information in deciding where to route their orders.313 Request for Comment 80. Do you believe that making amendments ‘‘promptly’’ is a reasonable requirement for NMS Stock ATSs to correct information that was inaccurate or incomplete when filed? If so, why? If not, why not, and what amount of time would be reasonable? Please support your arguments. 81. Do you believe there are any other processes the Commission should consider for correcting information on Form ATS–N that was inaccurate at the time it was filed? If so, what are such processes? Please explain in detail. 82. Do you believe that the Commission’s proposal to provide an NMS Stock ATS the opportunity to correct information that was inaccurate or incomplete when filed creates an unreasonable risk to market participants that an NMS Stock ATS might fail to provide accurate, current, and complete information on Form ATS–N when filing the form? Why or why not? Please support your arguments. d. Proposed Rule 304(a)(2)(ii): Commission Review of Form ATS–N Amendments The Commission is proposing Rule 304(a)(2)(ii) to provide that the Commission will, by order, if it finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors, declare ineffective any Form ATS–N Amendment filed pursuant to Rule 304(a)(2)(i)(A) through (C) no later than 30 calendar days from filing with the Commission.314 The Commission could, for example, declare ineffective a Form ATS–N Amendment if one or more disclosures on the amended Form ATS–N are materially deficient with respect to their accuracy, currency, completeness, or fair presentation. The Commission is concerned that an NMS Stock ATS whose Form ATS–N filing was declared effective could file a Form 313 That Form ATS–N Amendment, filed pursuant to proposed Rule 304(a)(2)(i)(C), would become public upon filing. See infra Section IV.D (explaining proposed public disclosure requirements for Form ATS–N filings under proposed Rule 304(b)(2)). 314 A filed Form ATS–N Amendment that contains technical deficiencies, such as missing pages or one in which the entity does not respond to all questions, including all sub-questions, would not be complete and would be returned to the NMS Stock ATS. See also 17 CFR 240.0–3. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81030 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules ATS–N Amendment that contains materially deficient disclosures. The Commission is also concerned that market participants could use this information in connection with their evaluation of an NMS Stock ATS and potentially be confused or misinformed about the operations of an NMS Stock ATS. The Commission preliminarily believes that a filed Form ATS–N should contain detailed disclosures that are accurate, current, and complete and therefore is proposing a mechanism for it to declare amendments ineffective as appropriate.315 The Commission could also declare ineffective a Form ATS–N Amendment if it finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors, because the amendment describes a change that, under a ‘‘red flag’’ review, would not comply with the federal securities laws or the rules or regulations thereunder, including Regulation ATS. The Commission preliminarily believes that it would be hindered in protecting investors and maintaining fair and orderly markets if an NMS Stock ATS were allowed to implement or continue the use of a service, functionality, or procedure that does not comply with the federal securities laws or the rules or regulations thereunder, including Regulation ATS. Under proposed Rule 304(a)(2)(ii), the Commission could declare a Form ATS–N Amendment ineffective within 30 calendar days from filing with the Commission. During its review of a Form ATS–N Amendment, the Commission and its staff may provide comments to the NMS Stock ATS, and may request that the NMS Stock ATS supplement information in the Form ATS–N Amendment or revise its disclosures on the Form ATS–N Amendment. Like the Commission’s review of a Form ATS–N initially filed by an entity with the Commission,316 the Commission notes that its review of a Form ATS–N Amendment would focus on the disclosures made on the Form ATS–N. The Commission would not be precluded from later determining that an NMS Stock ATS had violated the federal securities laws or the rules and regulations thereunder. The Commission preliminarily believes that the 30 calendar day review period would provide the Commission with adequate time to review the Form ATS–N Amendment, discuss the changes with the broker-dealer operator as explained above and decide whether 315 See 316 See proposed Rule 304(c)(1). supra Section IV.C. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 to declare the Form ATS–N Amendment ineffective. Under proposed Rule 304(a)(2)(ii), if the Commission declares a Form ATS–N Amendment ineffective, the NMS Stock ATS would be prohibited from operating pursuant to the ineffective Form ATS–N Amendment. As discussed above, under proposed Rule 304(a)(2)(i), an NMS Stock ATS must amend its Form ATS–N at least 30 days before implementing a material change to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that are subject to disclosure on Form ATS–N, or within 30 calendar days after the end of each calendar quarter to correct any other information that has become inaccurate for any reason and has not been previously reported to the Commission as a Form ATS–N Amendment. The Commission preliminarily believes the proposed rule strikes a proper balance between, on the one hand, providing an NMS Stock ATS with the flexibility to implement a change to its operations without unnecessary delay, and on the other hand, giving the Commission time to adequately review Form ATS–N Amendments and carry out its oversight functions and responsibilities.317 Under proposed Rule 304(a)(1)(iv), an NMS Stock ATS that had filed a Form ATS–N Amendment that has been declared ineffective would be able to subsequently file a new Form ATS–N Amendment. This would allow an NMS Stock ATS to attempt to address any disclosure deficiencies or compliance issues that caused a Form ATS–N Amendment to be declared ineffective. Request for Comment 83. Should the Commission adopt the proposal to declare ineffective any Form ATS–N Amendment if it finds that such action is necessary or appropriate in the 317 The Commission also preliminarily believes that the proposed process that would permit the Commission to declare Form ATS–N Amendments ineffective, even if the change disclosed in the Form ATS–N Amendments has already been implemented, would be consistent with better aligning the Commission’s oversight of NMS Stock ATSs with its oversight of national securities exchanges. The Commission notes, for example, that pursuant to Section 19(b)(3)(C) of the Exchange Act, the Commission, at any time within the 60-day period beginning on the date of filing of a proposed rule change filed by a national securities exchange, ‘‘summarily may temporarily suspend the change in the rules of the [SRO] made thereby, if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of [the Act].’’ 15 U.S.C. 78s(b)(3)(C). As a result, the Commission may suspend a national securities exchange’s proposed rule change, even if the change was eligible to be effective upon filing with the Commission. PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 public interest, and is consistent with the protection of investors? Why or why not? Please support your arguments. 84. Do you believe that the Commission should affirmatively declare material amendments to Form ATS–N effective? Why or why not? If so, do you believe the Commission should declare material changes to Form ATS– N effective before the NMS Stock ATS implements the material change? Why or why not? Please support your arguments. 85. Do you believe that the Commission should provide a longer time period for the Commission to review material amendments to Form ATS–N (e.g., 45 calendar days) and a shorter period of time for the NMS Stock ATS to be able to implement the material change (e.g., 10, 20, or 30 calendar days)? Why or why not? Please support your arguments. Do you believe that a longer Commission review period coupled with a shorter advance notice period would balance the burdens on an NMS Stock ATS that would be required to provide advance notice of a material change to the operations of the NMS Stock ATS with the time necessary for the Commission to review a Form ATS–N material amendment? Why or why not? Please support your arguments. Do you believe a longer Commission review period coupled with a shorter advance notice period would lead to practical challenges (e.g., confusion among market participants or difficulty to NMS Stock ATSs to unwind a change)? Please support your arguments. 86. Do you believe that a Form ATS–N Amendment should become effective by operation of rule if the Commission does not affirmatively declare it ineffective? Why or why not? Please support your arguments. 87. Do you believe that the proposed 30 calendar days from filing with the Commission is a reasonable time period for the Commission to declare a Form ATS–N Amendment ineffective? Do you believe it would place an undue burden on the NMS Stock ATS that filed the Form ATS–N Amendment? If so, why, and what would be a reasonable amount of time? Please support your arguments. Do you believe that a longer period of time (e.g., 45 days) for the Commission to declare a Form ATS–N Amendment ineffective would be reasonable? Why or why not? Please support your arguments. Do you believe that a longer period of time would place an undue burden on the NMS Stock ATS that filed the Form ATS–N Amendment? Why or why not? Please support your arguments. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 88. Do you believe the Commission should adopt a process to extend its review period for a Form ATS–N Amendment similar to the processes being proposed under proposed Rule 304(a)(1)(ii) for initial Form ATS–N filings? Why or why not? Please support your arguments. If so, how long should the extension of the review period be (e.g., 10, 15, 20, or 30 calendar days) and should the process apply to material amendments, periodic amendments, amendments to correct information in any previous Form ATS– N filing that was inaccurate or incomplete when filed, or all categories of Form ATS–N Amendments? Should the process differ depending on the category of amendment? Please be specific. 89. Should the Commission adopt the proposal that a Form ATS–N Amendment should become effective without the Commission issuing an order declaring effective the relevant Form ATS–N Amendment? Do you believe that the lack of a Commission order declaring a Form ATS–N Amendment ineffective within 30 calendar days from filing would provide an NMS Stock ATS sufficient notice that a Form ATS–N Amendment has become effective? Why or why not? Please support your arguments. 90. Do you believe that a determination of ineffectiveness of a Form ATS–N Amendment should be subject to notice and hearing, as is the case with initial determinations about Form ATS–N? Why or why not? Please support your arguments. 7. Proposed Rule 304(a)(3): Notice of Cessation Proposed Rule 304(a)(3) would require an NMS Stock ATS to notice its cessation of operations on Form ATS–N at least 10 business days before the date the NMS Stock ATS ceases to operate as an NMS Stock ATS.318 The notice of cessation would cause the Form ATS–N to become ineffective on the date designated by the NMS Stock ATS. Requiring an NMS Stock ATS to file a Form ATS–N notice of cessation at least 10 business days before the date the NMS Stock ATS ceases operations would provide notice to the public and the Commission that the NMS Stock ATS intends to cease operations. By making the notices of cessation public, as discussed herein,319 the Commission preliminarily believes that all market 318 The Commission would post a notice of cessation upon completing its review for accuracy and completion. 319 See infra Section V (discussing public disclosure of filings on Form ATS–N, including cessation of operation reports). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 participants that had routed orders to the NMS Stock ATS would be able to make arrangements to select alternative routing destinations for their orders. Regulation ATS currently requires an ATS to ‘‘promptly file a cessation of operations report on Form ATS’’ upon ceasing to operate.320 Proposed Rule 304(a)(3) would require an NMS Stock ATS to disclose on Form ATS–N the date it will cease operating at least 10 business days before doing so. The Commission preliminarily believes that the proposal to require NMS Stock ATSs to provide notice at least 10 business days before the date an NMS Stock ATS ceases to operate is a reasonable period for the NMS Stock ATS to provide market participants and the Commission with notice that it intends to cease operations, as market participants would have adequate time to find and select other routing destinations for their orders. Request for Comment 91. Should the Commission require an NMS Stock ATS to give notice that it intends to cease operations 10 business days or more before ceasing operations as an NMS Stock ATS? If so, why and how much advance notice is appropriate? If not, why not? Please support your arguments. 92. Should the Commission allow an NMS Stock ATS to notice its cessation of operations after it has ceased operations, as is currently the requirement under Regulation ATS, or at the same time that it ceases operations? If so, why and how long after the NMS Stock ATS has ceased operations? If not, why not? Please support your arguments. 93. Should the Commission create a process to revoke the exemption from Rule 3a1–1(a)(2) if the NMS Stock ATS reports no volume for two consecutive quarters, four consecutive quarters, eight consecutive quarters, or over some other time period? Why or why not? Are there any other circumstances under which the Commission should revoke the exemption if the NMS Stock ATS appears to be inactive? Please support your arguments. 8. Proposed Rule 304(a)(4): Suspension, Limitation, or Revocation of the Exemption From the Definition of Exchange To rely on an exemption from the Exchange Act or the rules and regulations thereunder granted by the Commission, the person seeking the exemption must comply with the conditions to the exemption established 320 17 PO 00000 CFR 242.301(b)(2)(v). Frm 00035 Fmt 4701 Sfmt 4702 81031 by the Commission. A person that fails to comply with those conditions would therefore fall outside of the scope of the exemption.321 In adopting Exchange Act Rule 3a1–1(a)(2) and Regulation ATS, the Commission established conditions under which an ATS would be exempt from the definition of ‘‘exchange,’’ and therefore would not be required to register as a national securities exchange. Rule 3a1–1(a)(2) provides that a system that meets the criteria of Rule 3b-16 is exempt from the definition of ‘‘exchange’’ on condition that the system complies with Regulation ATS. As discussed above, the Commission is proposing to expand the set of conditions that an NMS Stock ATS would need to satisfy to qualify for the exemption provided under Rule 3a1– 1(a)(2). The Commission is proposing to amend Regulation ATS to include proposed Rule 304(a)(4), to provide a process for the Commission to suspend for a period not exceeding twelve months,322 limit, or revoke an NMS Stock ATS’s exemption from the definition of the term exchange pursuant to Rule 3a1–1(a)(2) under certain circumstances. Regulation ATS currently does not provide a process for the Commission to suspend, limit, or revoke the exemption under which an ATS operates other than pursuant to the Commission’s general enforcement authority.323 The Commission is proposing Rule 304(a)(4)(i), which would provide that the Commission will, by order, if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors, suspend for 321 See proposed Rule 304(a)(4)(iv). proposed limitation on the time frame for suspension is consistent with federal securities law provisions pursuant to which the Commission may suspend the activities or registration of a regulated entity. See, e.g., Section 15(b)(4) (15 U.S.C. 78o(b)(4)) and 15B(c)(2) (15 U.S.C. 78o–4(c)(2)). 323 See generally Exchange Act Section 21C (15 U.S.C 78u–3). Use of the proposed process whereby the Commission could suspend, limit, or revoke an NMS Stock ATS’s Rule 3a1–1(a)(2) exemption would not preclude the Commission from using its general enforcement authority, or other specific enforcement authority that may be applicable such as, for example, pursuant to Section 15(b)(4) and 15(c) (15 U.S.C. 78o(b)(4); 15 U.S.C. 78o(c)). Rather, it would provide an additional means of helping to ensure that NMS Stock ATSs that no longer qualify for the Rule 3a1–1(a)(2) exemption are unable to take advantage of it. For example, if an NMS Stock ATS failed to file a Form ATS–N Amendment to disclose material changes to the operation of the NMS Stock ATS, the Commission could invoke the process to suspend, limit or revoke the NMS Stock ATS’s exemption, but would not be precluded from bringing an action against the broker-dealer operator of the NMS Stock ATS for failing to comply with Rule 304(a)(2), or violating the antifraud provisions of the federal securities laws. 322 The E:\FR\FM\28DEP3.SGM 28DEP3 81032 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 a period not exceeding twelve months, limit, or revoke an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ pursuant to Rule 3a1– 1(a)(2).324 Proposed Rule 304(a)(4)(ii) would make clear that if an NMS Stock ATS’s exemption is suspended or revoked pursuant to proposed Rule 304(a)(4)(i), the NMS Stock ATS would be prohibited from operating pursuant to the exemption from the definition of ‘‘exchange’’ provided under Rule 3a1– 1(a)(2); if an NMS Stock ATS’s exemption is limited pursuant to proposed Rule 304(a)(4)(i), the NMS Stock ATS would be prohibited from operating in a manner inconsistent with the terms and conditions of the Commission order. The Commission preliminarily believes that it is appropriate to provide a process by which the Commission may, by order, suspend, limit, or revoke an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ if the NMS Stock ATS is operating in a manner such that the exemption from the definition of ‘‘exchange’’ for the NMS Stock ATS is not necessary or appropriate in the public interest, or consistent with the protection of investors. For example, in making a determination as to whether suspension, limitation, or revocation of an NMS Stock ATS’s exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors, the Commission would take into account whether the entity no longer meets the definition of NMS Stock ATS under Rule 300(a)(k), does not comply with the conditions to the exemption (in that it fails to comply with any part of Regulation ATS, including proposed Rule 304), or otherwise violates any provision of federal securities laws. The Commission preliminarily believes, for example, that it would be appropriate to provide for the suspension, limitation, or revocation of an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ pursuant to Rule 3a1–1(a)(2) if the Commission finds that an NMS Stock ATS no longer meets the definition of ‘‘NMS Stock ATS.’’ 325 If a system does not meet the functional test of an ‘‘exchange’’ under Rule 3b-16, it would not be eligible for 324 See proposed Rule 304(a)(4)(i). Commission preliminarily believes that a determination as to whether to suspend, limit, or revoke an NMS Stock ATS’s exemption would depend on the particular facts and circumstances; however, the Commission also preliminarily believes that revocation would be the appropriate course of action if the Commission finds that an entity no longer meets the definition of NMS Stock ATS or otherwise satisfies the criteria of the functional test under Rule 3b–16. 325 The VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 the exemption from the definition of ‘‘exchange’’ pursuant to Rule 3a1– 1(a)(2) as it is not an ‘‘exchange’’ in the first instance.326 If an NMS Stock ATS no longer meets the criteria of Rule 3b16—or meets the criteria of Rule 3b-16 but no longer effects transactions in NMS stocks—or otherwise does not meet the definition of an alternative trading system, it would not continue to be eligible for the exemption in Rule 3a1–1(a)(2) even if it had met the definition of an NMS Stock ATS at the time that the Commission declared its Form ATS–N effective. Permitting a system to operate that does not otherwise meet the definition of an NMS Stock ATS would deny investors appropriate regulatory protection and could also be misleading to investors. The Commission also preliminarily believes that it would be appropriate to provide for the suspension, limitation, or revocation of an NMS Stock ATS’s exemption from the definition of exchange pursuant to Rule 3a1–1(a)(2) if, for example, the Commission finds that an NMS Stock ATS fails to comply with any part of Regulation ATS, including proposed Rule 304. As discussed in the Regulation ATS Adopting Release, instead of imposing requirements applicable to national securities exchanges, the Commission adopted enhanced regulation for ATSs that would provide more protections for investors who used the systems.327 To the extent that an NMS Stock ATS fails to comply with the conditions set forth in Regulation ATS, investors would no longer be protected by the conditions of Regulation ATS or the protections afforded by the provisions of the Exchange Act and the rules thereunder that apply to national securities exchanges. For example, pursuant to proposed Rule 304(a)(4)(i), the Commission would suspend, limit, or revoke an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors, because the NMS Stock ATS is no longer a registered broker-dealer, which is a requirement of Regulation ATS.328 The Commission would also suspend, limit, or revoke an NMS Stock ATS’s exemption if the Commission finds, after notice and opportunity for hearing, that such action is necessary or 326 See supra Section IV.A. (discussing the definition of NMS Stock ATS and the availability of the Rule 3a1–1(a)(2) exemption). 327 See Regulation ATS Adopting Release, supra note 7, at 70857. 328 See 17 CFR 242.301(b)(1). PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 appropriate in the public interest, and is consistent with the protection of investors, because, for example, the ATS’s Form ATS–N contains inaccurate or incomplete responses. Proposed Form ATS–N would be a public reporting document that is designed to provide the Commission and market participants with information about the operations of the NMS Stock ATS and the circumstances under which the activities of the broker-dealer operator of the NMS Stock ATS and its affiliates may give rise to potential conflicts of interest. The Commission preliminarily believes that market participants would likely use the information provided on Form ATS–N to make decisions about where to route orders. The Commission is concerned that information provided on Form ATS–N that is inaccurate or incomplete could misinform or mislead market participants about the operations of the NMS Stock ATS or the activities of the broker-dealer operator, including how their orders may be handled and executed, and impact their decisions about where they should route their orders. To prevent an NMS Stock ATS from potentially misinforming or misleading market participants about the operations of the system, proposed Rule 304(a)(4) would provide a process for the Commission to suspend, limit, or revoke the NMS Stock ATS’s Rule 3a1– 1(a)(2) exemption. Additionally, the Commission preliminarily believes that it would be appropriate to provide for the suspension, limitation, or revocation of an NMS Stock ATS’s exemption from the definition of exchange pursuant to Rule 3a1–1(a)(2) if, for example, the Commission finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors, because that NMS Stock ATS has violated or is violating any provision of the federal securities laws. The Commission is concerned that market participants may be harmed by an NMS Stock ATS that is, for example, providing false or misleading information to market participants, and preliminarily believes that such an NMS Stock ATS should not be able to continue to operate pursuant to an exemption provided by the Commission. Pursuant to proposed Rule 304(a)(4)(ii), an NMS Stock ATS whose exemption had been suspended or revoked would be prohibited from operating pursuant to the Rule 3a1– 1(a)(2) exemption; and if an NMS Stock ATS were to continue to engage in Rule 3b–16 activity in NMS stocks without the exemption, it would be an E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 unregistered exchange because it would no longer qualify for the exemption from the exchange definition.329 If an NMS Stock ATS’s exemption was limited pursuant to proposed Rule 304(a)(4)(iv), the NMS Stock ATS would be prohibited from operating in a manner otherwise inconsistent with the terms and conditions of the Commission order, and if it did operate in a manner inconsistent with the terms and conditions of the order, would risk operating as an unregistered national securities exchange. The exemption provided under Rule 3a1–1(a)(2) is conditional upon initial and ongoing compliance with Regulation ATS. The proposed process for suspending, limiting, or revoking an NMS Stock ATS’s exemption, in the event the Commission finds, for example, that there is a failure to adhere to the conditions of the exemption and that suspending, limiting, or revoking the exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors, is designed to protect investors in the case of potential non-compliance by an NMS Stock ATS with the conditions with which the NMS Stock ATS must adhere in order to continue to qualify for an exemption from the statutory definition of ‘‘exchange.’’ The Commission also preliminarily believes that providing a process by which the Commission can determine to suspend, limit, or revoke an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ would provide appropriate flexibility to address the specific facts and circumstances of an NMS Stock ATS’s failure to comply with Regulation ATS or the nature of the violation of federal securities laws, and the possible harm to investors as a result of the noncompliance or violation. For example, the Commission preliminarily believes that providing a process by which the Commission could limit the exemption provided in Rule 3a1–1(a)(2) would provide flexibility to address specific 329 If the Commission revoked the exemption of an NMS Stock ATS and the NMS Stock ATS wished to continue operations, the entity could do so only if it was registered as a national securities exchange pursuant to Section 6 of the Exchange Act or was exempted by the Commission from such registration based on the limited volume of transactions effected on such exchange, or seeks another exemption. See 17 CFR 242.301(a)(1)-(2). The NMS Stock ATS would not be prohibited from filing a new Form ATS–N, pursuant to proposed Rule 304(a)(1). An NMS Stock ATS that has had its exemption suspended or limited may, depending on the facts and circumstances, be able to file a Form ATS–N Amendment or revise its operations to come into compliance with the conditions of the exemption or the provision of any other federal securities law that may have been the basis of the Commission’s findings. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 disclosures or activities that are the cause of the non-compliance with Regulation ATS or that violate federal securities laws. For illustration, if the Commission found that an NMS Stock ATS implemented a material change to its operations, but failed to disclose the material change on its Form ATS–N, the Commission could determine to allow the NMS Stock ATS to continue to operate as disclosed on its Form ATS–N, but prohibit the NMS Stock ATS from engaging in the undisclosed activity until the NMS Stock ATS properly amends its Form ATS–N in accordance with proposed Rule 304(a)(2). If the Commission found that an NMS Stock ATS offered an order type that resulted in violations of the Commission’s rules restricting the acceptance and ranking of orders in impermissible sub-penny increments, the Commission could allow the NMS Stock ATS to continue to operate but prohibit the NMS Stock ATS from offering the order type, if it found that doing so was necessary or appropriate in the public interest, and consistent with the protection of investors. The Commission preliminarily believes that, depending on the facts and circumstances, it may be more appropriate in the public interest, and consistent with the protection of investors, to limit the scope of an NMS Stock ATS’s exemption, instead of revoking or suspending the exemption and causing the NMS Stock ATS to cease operations. In comparison, the Commission preliminarily believes it would be more appropriate to revoke the exemption of an NMS Stock ATS that no longer meets the definition of NMS Stock ATS or is no longer a registered broker-dealer, as these conditions are fundamental to the exemption. Additionally, the Commission preliminarily believes that it would be necessary or appropriate in the public interest, and consistent with the protection of investors, to revoke the exemption of an NMS Stock ATS if, for example, the ATS is found to be violating the antifraud provisions of the federal securities laws. Nonetheless, the entry of an order revoking an NMS Stock ATS’s exemption would not prohibit the broker-dealer operator of the NMS Stock ATS from continuing its other broker-dealer operations. The Commission is also proposing that prior to issuing an order suspending, limiting, or revoking an NMS Stock ATS’s exemption pursuant to proposed Rule 304(a)(4)(i), the Commission would provide notice and opportunity for hearing to the NMS Stock ATS, and make the findings PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 81033 specified in proposed Rule 304(a)(4)(i) described above, that, in the Commission’s opinion, the suspension, limitation or revocation is necessary or appropriate in the public interest, and is consistent with the protection of investors. The Commission preliminarily believes that the proposed process of providing an NMS Stock ATS with notice and opportunity for hearing provides the NMS Stock ATS with adequate opportunity to respond before the Commission determines that the NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ is no longer appropriate in the public interest or consistent with the protection of investors. The Commission also preliminarily believes that the possibility that the Commission may suspend, limit, or revoke an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ would not be unduly burdensome because an NMS Stock ATS would be given advance notice and have an opportunity to respond, and, depending on the facts and circumstances, revise its operations or disclosures on Form ATS–N to bring its operations or disclosures into compliance with Regulation ATS or federal securities laws. The Commission preliminarily believes that proposed Rule 304(a)(4) would provide the Commission with an appropriate tool, which is subject to notice and hearing safeguards, to protect the investing public and the public interest from an NMS Stock ATS that fails to comply with Regulation ATS or otherwise violates any provision of the federal securities laws. Request for Comment 94. Do you believe the proposed process for the Commission to suspend, limit, or revoke an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ is necessary or appropriate to protect investors and other market participants and maintain fair and orderly markets? Why or why not? Please support your arguments. 95. What criteria should the Commission use in deciding whether to suspend, limit, or revoke an NMS Stock ATS’s exemption as proposed? Are there alternative actions or processes the Commission should consider for suspending, limiting, or revoking the exemption? Please support your arguments and provide details. 96. Should the Commission adopt the proposal to provide flexibility as to whether to suspend, limit, or revoke an NMS Stock ATS’s exemption depending on the facts and circumstances and possible harm to investors? If so, why? If not, what other criteria, if any, should E:\FR\FM\28DEP3.SGM 28DEP3 81034 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 the Commission use in deciding whether to suspend, limit, or revoke the exemption? Please support your arguments. 97. Do you believe there should be a maximum time frame following notice and opportunity for hearing within which the Commission should be required to act? If so, why, and what would be the appropriate time frame? If not, why not? Please support your arguments. 98. Do you believe that 12 months is the appropriate limit on the amount of time by which the Commission could suspend an NMS Stock ATS’s exemption? If so, why? If not, why not, and what would be the appropriate time frame? Please support your arguments. 99. Do you believe that the Commission’s proposal to declare ineffective a Form ATS–N Amendment if it finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors, is appropriate as a supplement to the proposal that the Commission suspend, limit, or revoke an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ under proposed Rule 304(a)(4)? Why or why not? Please support your arguments. 100. Do you believe there are other processes by which the Commission should enforce the conditions to the Rule 3a1–1(a)(2) exemption? If so, what are they and why would they be preferable to the proposed process? D. Rule 304(b): Public Disclosure of Form ATS–N and Related Commission Orders The Commission is proposing to make public certain Form ATS–N reports filed by NMS Stock ATSs.330 Commission orders related to the effectiveness of Form ATS–N will also be publicly posted on the Commission’s Web site. As discussed above, there currently is limited information available to the public about the operations of ATSs that trade NMS stocks and the activities of their broker-dealer operators and the broker-dealer operators’ affiliates.331 Furthermore, as discussed further below, market participants may not be informed about potential conflicts of interest that arise as a result of the other business activities of the broker-dealer operator of the NMS Stock ATS, or its affiliates, such as trading NMS stocks on the NMS Stock ATS or operating multiple trading centers, including multiple ATSs.332 The only information the Commission currently makes publicly available regarding ATSs is a list, which is updated monthly, of ATSs with a Form ATS on file with the Commission.333 Therefore, the Commission is proposing Rule 304(b) to mandate greater public disclosure of NMS Stock ATS operations through the publication of Form ATS–N and to provide for the posting of Commission orders on the Commission’s Web site related to the effectiveness of Form ATS–N. First, the Commission is proposing Rule 304(b)(1) to provide that every Form ATS–N filed pursuant to Rule 304 shall constitute a ‘‘report’’ within the meaning of Sections 11A, 17(a), 18(a), and 32(a) and any other applicable provisions of the Exchange Act. Because proposed Form ATS–N is a report that is required to be filed under the Exchange Act, it would be unlawful for any person to willfully or knowingly make, or cause to be made, a false or misleading statement with respect to any material fact in Form ATS–N.334 The Commission notes that proposed Rule 304(b)(1) is nearly identical to current Rule 301(b)(2)(vi),335 which provides that every notice or amendment filed pursuant to Rule 301(b)(2), including Form ATS, shall constitute a ‘‘report’’ within the meaning of Sections 11A, 17(a), 18(a), and 32(a), and any other applicable provisions of the Exchange Act.336 Under proposed Rule 304(b)(2), the Commission would make public via posting on the Commission’s Web site, each: (i) Order of effectiveness of a Form ATS–N; (ii) order of ineffectiveness of a Form ATS–N; (iii) effective Form ATS–N; (iv) filed Form ATS–N Amendment; (v) order of ineffectiveness of a Form ATS–N Amendment; (vi) notice of cessation; and (vii) order suspending, limiting, or revoking the exemption from the definition of an ‘‘exchange’’ pursuant to Exchange Act Rule 3a1–1(a)(2). Proposed Rule 304(b)(3) would require each NMS Stock ATS to make public via posting on its Web site a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2). Once the Commission has declared a Form ATS–N effective, the Commission preliminarily believes that making Form ATS–N public would provide market 332 See 330 See proposed Rule 304(b)(1) (providing that every Form ATS–N filed pursuant to Rule 304 shall constitute a ‘‘report’’ within the meaning of Sections 11A, 17(a), 18(a), and 32(a) and any other applicable provisions of the Exchange Act). 331 See supra Section III.C. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 infra Section VII. Alternative Trading System (‘‘ATS’’) List, https://www.sec.gov/foia/docs/atslist.htm. 334 See 15 U.S.C. 78ff(a). 335 17 CFR 242.301(b)(2)(vi). 336 15 U.S.C. 78k–1, 78q(a), 78r(a), and 78ff(a). See 17 CFR 242.301(b)(2)(vi). participants with important information about the operations of the NMS Stock ATS and its broker-dealer operator and the broker-dealer operator’s affiliates. As discussed further below, proposed Form ATS–N would provide information about the broker-dealer operator and the activities of the broker-dealer operator and its affiliates in connection with the NMS Stock ATS, including: Their operation of trading centers and other NMS Stock ATSs; products and services offered to subscribers; arrangements with unaffiliated trading centers; trading activities on the NMS Stock ATS; smart order router (or similar functionality) and algorithms used to send or receive orders or other trading interest to or from the ATS; personnel and third parties used to operate the NMS Stock ATS; differences in the availability of ATS services, functionalities, or procedures; and safeguards and procedures to protect subscribers’ confidential trading information.337 Proposed Form ATS–N would also provide market participants with important information about the manner of operations of the NMS Stock ATS, including: subscribers; hours of operation; types of orders; connectivity, order entry, and co-location procedures; segmentation of order flow and notice about segmentation; display of order and other trading interest; trading services, including matching methodologies, order interaction rules, and order handling, and execution procedures; procedures governing suspension of trading and trading during a system disruption or malfunction; opening, re-opening, closing, and after hours procedures; outbound routing services; fees; market data; trade reporting; clearance and settlement; order display and execution access; fair access; and market quality statistics published or provided to one or more subscribers.338 Accordingly, the Commission proposes to make public— via the public posting of Form ATS–N on the Commission’s Web site— information that it preliminarily believes should be easily accessible to all market participants so that market participants may better evaluate how to achieve their investing or trading objectives. The Commission would not post on its Web site a filed Form ATS–N before the Commission declares that Form ATS–N effective. Under the proposal, an NMS Stock ATS that was not in 333 See PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 337 See infra Section VII (discussing proposed disclosure requirements related to broker-dealer operators under Form ATS–N). 338 See infra Section VIII (discussing proposed operational disclosure requirements of Form ATS–N). E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules operation as of the effective date of proposed Rule 304 may not commence operations as an NMS Stock ATS until the Commission issues an order declaring its Form ATS–N effective.339 Additionally, if the Commission declares ineffective a Form ATS–N filed by a legacy NMS Stock ATS, that ATS would be prohibited from operating as an NMS Stock ATS going forward.340 Furthermore, while the Commission is reviewing a Form ATS–N prior to declaring it effective or ineffective, Commission staff would likely engage in discussions with the entity regarding its disclosures and could request that the entity revise or augment its disclosures to provide market participants with greater clarity regarding the entity’s operations. Accordingly, the Commission preliminarily believes that it would be premature to provide market participants with information regarding an initial Form ATS–N filing until after it is declared effective. The proposal to make public each Form ATS–N Amendment upon filing with the Commission is to provide market participants with immediate transparency into the operations of an NMS Stock ATS, which would be operational and to which market participants might currently enter—or consider entering—orders for execution. The Commission preliminarily believes that making public Form ATS–N Amendments would benefit market participants by allowing them to obtain current information regarding changes to the operation of an NMS Stock ATS and its relationship with its brokerdealer operator and the broker-dealer operator’s affiliates; if it would benefit their investment or trading strategies, market participants would also be able to continually evaluate that NMS Stock ATS as a potential destination to route their orders. The Commission preliminarily believes that, while Form ATS–N Amendments would be publicly posted before the Commission has completed its review, it would be useful to market participants to have immediate access to the disclosures contained in an amendment so market participants may, for example, assess and prepare for upcoming material changes on an NMS Stock ATS or more quickly understand any operational changes that have occurred over the previous quarter on the NMS Stock ATS. The Commission also proposes to make the public aware of which Form ATS–N Amendments filed by NMS 339 See proposed Rule 304(a)(1)(iv). Nothing would preclude the NMS Stock ATS from later submitting a new or revised Form ATS–N for consideration by the Commission. 340 Id. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Stock ATSs posted on the Commission’s Web site are pending Commission review and could still be declared ineffective. The Commission believes that publicly posting filed Form ATS–N Amendments would strike the right balance of enabling market participants to better understand upcoming or recent changes to an operational NMS Stock ATS in a timely manner, while informing market participants that the Form ATS–N Amendment is pending Commission review and could still be declared ineffective.341 The Commission also preliminarily believes that making public each properly filed Form ATS–N notice of cessation would provide the public with notice that the NMS Stock ATS will cease operations and that the organization, association, or group of persons no longer operates pursuant to the exemption provided under Exchange Act Rule 3a1–1(a)(2). The notice of cessation would provide market participants with the date that the NMS Stock ATS will cease operations, as designated by the NMS Stock ATS. Market participants would be able to use this information to make arrangements to select alternative routing destinations for their orders. Furthermore, the Commission understands that many broker-dealer operators maintain Web sites for their NMS Stock ATSs. The Commission preliminarily believes that market participants would find it helpful for an NMS Stock ATS to make market participants aware that certain of the NMS Stock ATS’s Form ATS–N filings are publicly posted on the Commission’s Web site. Therefore, to the extent that an NMS Stock ATS has a public Web site, the Commission is proposing that Rule 304(b)(3) require each NMS Stock ATS that has a Web site to post on the NMS Stock ATS’s Web site a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2), which includes the NMS Stock ATS’s Form ATS–N filings. The Commission preliminarily believes that this requirement would make it easier for market participants to review an NMS Stock ATS’s Form ATS–N filings by providing an additional means for market participants to locate Form ATS–N filings that are posted on the Commission’s Web site. The Commission preliminarily believes that publicly posting Form 341 Market participants would also be made aware if the Commission declares a Form ATS–N Amendment ineffective, because the Commission would also post each order of ineffectiveness of a Form ATS–N Amendment. See proposed Rule 304(b)(2)(E). PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 81035 ATS–N filings on the timelines described above is important because most market participants do not have access to information that permits them to adequately compare and contrast how some NMS Stock ATSs would handle their orders against how a given national securities exchange or other NMS Stock ATS would handle their orders. Currently, a Form ATS filed with the Commission by an NMS Stock ATS is ‘‘deemed confidential when filed’’ under Rule 301(b)(2)(vii) of Regulation ATS,342 whereas a national securities exchange is required to both (i) make available to the public its entire rule book and (ii) publicly file all proposed rule changes pursuant to Section 19(b) of the Exchange Act.343 The Commission preliminary believes 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.344 Unless an NMS Stock ATS voluntarily publicizes how those functionalities operate and affect the handling of subscriber orders, there is no publicly available information for market participants to use in order to compare and contrast the trading platform of an NMS Stock ATS with that of a national securities exchange. Accordingly, through Form ATS–N, the Commission proposes to require disclosures that would provide information that market participants could use to compare and contrast the important order handling features, and other important functionalities, of an NMS Stock ATS with those of other NMS Stock ATSs or national securities exchanges. The Commission therefore proposes to make those disclosures public so that market participants would have access to important information when evaluating trading venues. Additionally, the Commission preliminarily believes that, given changes with respect to NMS Stock ATSs since the adoption of Regulation ATS,345 the reasons given in the past for maintaining the confidentiality of Form ATS filings are no longer justified for NMS Stock ATSs in light of the benefits of operational transparency for NMS Stock ATSs that are discussed above. First, when the Commission adopted Regulation ATS, it chose, at that time, to deem Form ATS confidential because ‘‘[i]nformation required on Form ATS 342 See 17 CFR 240.301(b)(2)(vii). 15 U.S.C. 78s(b). 344 See supra Section III.B. 345 See generally supra Section III. 343 See E:\FR\FM\28DEP3.SGM 28DEP3 81036 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 may be proprietary and disclosure of such information could place alternative trading systems in a disadvantageous competitive position.’’ 346 As noted above, the Commission preliminarily believes that NMS Stock ATSs have generally evolved to the point that their trading functionalities often resemble those of national securities exchanges.347 The Commission preliminarily believes that much of the type and level of information that would have to be publicly disclosed by an NMS Stock ATS pursuant to this proposal is very similar to information that national securities exchanges must publicly disclose. For instance, proposed Form ATS–N would require an NMS Stock ATS to disclose, among other things, information about available order types and modifiers, hours of operations, connectivity, order entry, co-location, order display, matching methodologies, and order interaction procedures, all of which must be publicly disclosed by national securities exchanges. Accordingly, the Commission preliminarily believes that, in the current market environment, the disclosures mandated by Form ATS–N would not place NMS Stock ATSs at a competitive disadvantage with respect to national securities exchanges.348 Second, when the Commission adopted Regulation ATS, it sought to ‘‘encourage candid and complete filings in order to make informed decisions and track market changes,’’ and believed that keeping the reports filed on Form ATS confidential would ‘‘provide[] respondents with the necessary comfort to make full and complete filings.’’ 349 Based on Commission experience, however, many Form ATS filings currently provide only rudimentary and summary information about the manner of operation of NMS Stock ATSs, which often requires the Commission and its staff to ask the ATSs follow-up questions, and results in ATSs filing follow-up amendments, to fully disclose how they operate. Thus, the Commission preliminarily believes that maintaining the confidentiality of Form ATS filings with regard to NMS Stock ATSs has not resulted uniformly in ATSs ‘‘mak[ing] full and complete filings.’’ Request for Comment 101. Do you believe market participants currently have access to information about the operations of 346 See Regulation ATS Adopting Release, supra note 7, at 70864. 347 See supra Section III.B. 348 See infra Section XIII.C.2. 349 See Regulation ATS Adopting Release, supra note 7, at 70864. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 NMS Stock ATSs and the activities of their broker-dealer operators and the broker-dealer operators’ affiliates, either through private disclosures from NMS Stock ATSs, from NMS Stock ATSs that voluntarily make their Forms ATS public, or from NMS Stock ATSs that issue frequently asked questions about their operations, including changes to their operations, that is sufficient to help market participants select the markets to which to route and execute their orders? Why or why not? Please support your arguments. 102. Do you believe the Commission should adopt the proposal to make public certain Form ATS–N filings by NMS Stock ATSs? Why or why not? Please support your arguments. 103. Do you believe the Commission should adopt the proposal to require an NMS Stock ATS to post on the NMS Stock ATS’s Web site a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2)? Why or why not? Please support your arguments. 104. Do you believe the Commission should require each NMS Stock ATS to directly post its Form ATS–N filings on the NMS Stock ATS’s Web site? If so, why, and which Form ATS–N filings? If not, why not? Please support your arguments. 105. Do you believe the Commission should require each NMS Stock ATS to directly post Commission orders related to the effectiveness or ineffectiveness of the NMS Stock ATS’s Form ATS–N, Form ATS–N Amendments, or both on the Web site of the NMS Stock ATS? If so, why, and which orders should NMS Stock ATSs be required to post? If not, why not? Please support your arguments. 106. Do you believe that the Commission should make public on its Web site the Form ATS–N of an NMS Stock ATS that was not in operation as of the effective date of proposed Rule 304 during the Commission’s review period and prior to declaring the Form ATS–N effective of ineffective? Why or why not? Please support your arguments. 107. Do you believe that the Commission should make public on its Web site a Form ATS–N that it has declared ineffective? Why or why not? Please support your arguments. 108. Do you believe that the Commission should make public on its Web site a Form ATS–N filed by a legacy NMS Stock ATS during the Commission’s review period and prior to its declaring the Form ATS–N effective or ineffective? Why or why not? Please support your arguments? PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 109. Do you believe that the Commission should adopt the proposal to make public on its Web site all Form ATS–N Amendments during the Commission’s review period and prior to its determination as to whether a Form ATS–N Amendment should be declared ineffective? If so, why? If not, why not? Please support your arguments. 110. Do you believe that the Commission should adopt the proposal whereby the Commission would continue to make public on its Web site a Form ATS–N Amendment that it has declared ineffective? Why or why not? Please support your arguments. 111. Do you believe the Commission’s current practice of making publicly available a list of ATSs with a Form ATS on file with the Commission puts market participants on sufficient notice of the regulatory status of NMS Stock ATSs with which they may do business? Why or why not? Please support your arguments. 112. Does the Commission’s current practice of making publicly available a list of ATSs with a Form ATS on file with the Commission create the potential for market participants to misunderstand the operations of the market? If so, how? If not, why not? Please support your arguments. 113. Do you believe that market participants currently have sufficient information regarding the activities of an NMS Stock ATS’s broker-dealer operator and its affiliates as they relate to the ATS, including changes to such activities, to evaluate conflicts of interest that may arise out of the position that the broker-dealer occupies as the operating entity of the NMS Stock ATS? Why or why not? Please support your arguments. 114. Do you believe the Commission’s proposal to make public certain Form ATS–N filings would better enable market participants to evaluate conflicts of interest that may arise out of the position that the broker-dealer occupies as the operating entity of the NMS Stock ATS? Why or why not? Please support your arguments. 115. Do you believe that making public Form ATS–N filings would place NMS Stock ATSs at a competitive disadvantage with respect to other trading centers, including national securities exchanges? Why or why not? Please support your arguments. 116. Do you believe that making public Form ATS–N filings would incentivize NMS Stock ATSs to make more accurate, current, and complete disclosures? Why or why not? Please support your arguments. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 117. Do you believe the Commission should continue to make public a Form ATS–N or Form ATS–N Amendments where the Commission has suspended, revoked, or limited the NMS Stock ATS’s exemption pursuant to Rule 304(a)(4)? Why or why not? Please support your arguments. 118. Do you believe that responding to questions on proposed Form ATS–N would require an NMS Stock ATS to disclose proprietary information that could place the NMS Stock ATS or its broker-dealer operator’s other business activities at a competitive disadvantage? If so, please identify the question on the Form ATS–N and specify what information in response to that question would result in the disclosure of proprietary information and describe why the disclosure could create a competitive disadvantage for the NMS Stock ATS or its broker-dealer operator’s other business activities. 119. In light of the information that national securities exchanges, which compete with NMS Stock ATSs, are required to disclose regarding their operations, should NMS Stock ATSs continue to be eligible for the exemption from the definition of exchange without having to disclose such information? Why or why not? Please explain in detail. E. Rule 304(c)(1) and (2): Proposed Form ATS–N Requirements Proposed Rule 304(c)(1) would require NMS Stock ATSs to respond to each item on Form ATS–N, as applicable, in detail and disclose information that is accurate, current, and complete. The Commission preliminarily believes that market participants would use information disclosed on proposed Form ATS–N to evaluate whether a particular NMS Stock ATS would be a desirable venue to which to route their orders. In addition, the Commission intends to use the information disclosed on the Form ATS–N to exercise oversight over and monitor developments of NMS Stock ATSs. Given these potential uses, the Commission preliminarily believes that it is important that the Form ATS–N contain detailed disclosures that are accurate, current, and complete. The Commission notes that Regulation ATS requires NMS Stock ATSs to be registered as broker-dealers with the Commission, which entails becoming a member of FINRA and fully complying with the broker-dealer regulatory regime. FINRA Rule 3130 requires each member to designate and specifically identify to FINRA one or more principals to serve as a chief compliance officer and each member to VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 have its chief executive officer certify annually that the member has in place processes to establish, maintain, review, test and modify written compliance policies and written supervisory procedures reasonably designed to achieve compliance with applicable FINRA rules, MSRB rules and federal securities laws and regulations, and that the chief executive officer(s) has conducted one or more meetings with the chief compliance officer(s) in the preceding 12 months to discuss such processes.350 The Commission requests comment on whether the certification required under FINRA Rule 3130 will help ensure that the broker-dealer operator of the NMS Stock ATS complies with proposed Rule 304, including proposed Rule 304(c)(1), which would require the accurate, current, and complete disclosures on Form ATS–N. Request for Comment 120. Do you believe that the certification required under FINRA Rule 3130 will help ensure an NMS Stock ATS’s compliance with proposed Rule 350 See FINRA Rule 3130(b). FINRA Rule 3120(c) sets forth the following: The certification shall state the following: The undersigned is/are the chief executive officer(s) (or equivalent officer(s)) of (name of member corporation/partnership/sole proprietorship) (the ‘‘Member’’). As required by FINRA Rule 3130(b), the undersigned make(s) the following certification: 1. The Member has in place processes to: (A) establish, maintain and review policies and procedures reasonably designed to achieve compliance with applicable FINRA rules, MSRB rules and federal securities laws and regulations; (B) modify such policies and procedures as business, regulatory and legislative changes and events dictate; and (C) test the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with FINRA rules, MSRB rules and federal securities laws and regulations. 2. The undersigned chief executive officer(s) (or equivalent officer(s)) has/have conducted one or more meetings with the chief compliance officer(s) in the preceding 12 months, the subject of which satisfy the obligations set forth in FINRA Rule 3130. 3. The Member’s processes, with respect to paragraph 1 above, are evidenced in a report reviewed by the chief executive officer(s) (or equivalent officer(s)), chief compliance officer(s), and such other officers as the Member may deem necessary to make this certification. The final report has been submitted to the Member’s board of directors and audit committee or will be submitted to the Member’s board of directors and audit committee (or equivalent bodies) at the earlier of their next scheduled meetings or within 45 days of the date of execution of this certification. 4. The undersigned chief executive officer(s) (or equivalent officer(s)) has/have consulted with the chief compliance officer(s) and other officers as applicable (referenced in paragraph 3 above) and such other employees, outside consultants, lawyers and accountants, to the extent deemed appropriate, in order to attest to the statements made in this certification. PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 81037 304, including the requirement that disclosures on Form ATS–N are accurate, current, and complete? Why or why not? Please support your arguments. Proposed Rule 304(c)(2) would provide that any report required to be filed with the Commission under proposed Rule 304 of Regulation ATS must be filed electronically on Form ATS–N, and include all information as prescribed in proposed Form ATS–N and the instructions thereto. The Commission’s proposal contemplates the use of the electronic form filing system (‘‘EFFS’’) to file a completed Form ATS–N. Based on the widespread use and availability of the Internet, the Commission preliminarily believes that filing Form ATS–N in an electronic format would be less burdensome and a more efficient filing process for NMS Stock ATSs and the Commission, as it is likely to be less expensive and cumbersome than mailing paper forms to the Commission. The proposed Form ATS–N would require an electronic signature to help ensure the authenticity of the filing. The Commission preliminarily believes these proposed requirements would expedite communications between the Commission and its staff and the brokerdealer operator concerning the NMS Stock ATS and help to ensure that only personnel authorized by the NMS Stock ATS are filing required materials. This proposed requirement is intended to provide a uniform manner in which the Commission would receive—and the broker-dealer operator would file—the Form ATS–N made pursuant to proposed Rule 304 of Regulation ATS. Also, NMS Stock ATSs would be able to review how other filers that were allowed to become effective responded to the same questions on Form ATS–N for guidance on how to respond. Additionally, the consistent framework would make it easier and more efficient for the Commission and market participants reviewing the disclosures to promptly review, analyze, and respond, as necessary, to the information proposed to be provided.351 Further, the Commission also is proposing that documents filed through the EFFS system must be in a textsearchable format without the use of optical character recognition. The Commission believes that proposing to require documents to be filed in a textsearchable format would allow the Commission and its staff and market 351 This proposed requirement is consistent with electronic-reporting standards set forth in Form SCI. See SCI Adopting Release, supra note 17, at 72357 (discussing electronic filing requirements of Form SCI). E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81038 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules participants to efficiently review and analyze information provided on proposed Form ATS–N. In particular, a text-searchable format would allow the Commission and its staff to better gather, analyze, and use data filed as exhibits, whereas a non-text-searchable format filing would require significantly more steps and labor to review and analyze data. The Commission is proposing that proposed Form ATS–N be filed with the Commission in a structured format. The Commission preliminarily believes that proposing Form ATS–N to be filed with the Commission in a structured format could allow the Commission and market participants to better search and analyze information about NMS Stock ATSs. The Commission is proposing that Parts I (Name) and II (Broker-Dealer Operator Registration and Contact Information) of proposed Form ATS–N would be provided as fillable forms on the Commission’s EFFS system. The Commission is proposing that Part III (Activities of the Broker-Dealer Operator and Affiliates) of proposed Form ATS– N would be filed in a structured format whereby the filer would provide checkbox responses to certain questions and narrative responses that are blocktext tagged by Item. The Commission is proposing that Part IV (The NMS Stock ATS Manner of Operations) of proposed Form ATS–N would also be filed in a structured format in that the filer would block-text tag narrative responses by Item. The Commission is proposing that Part V (Contact Information, Signature Block, and Consent to Service) of proposed Form ATS–N would be provided as fillable forms on the Commission’s EFFS system. The Commission notes that there are a variety of methods by which information can be collected and structured for review and analysis. For example, some or all of the information provided on Form ATS–N could be structured according to a particular standard that already exists, or a new taxonomy that the Commission creates, or as a single machine-readable PDF. Given the Commission’s proposal that information on Form ATS–N be filed in a structured format, the Commission seeks comment on the manner in which proposed Form ATS–N could be structured to better enable the Commission and market participants to collect and analyze the data. or a more efficient filing process for NMS Stock ATSs compared to delivering the Form ATS–N by mail on paper? Alternatively, would the submission of proposed Form ATS–N via electronic mail to one or more Commission email addresses be a more appropriate way for NMS Stock ATSs to file Form ATS–N with the Commission? Are there other alternative methods that would be preferable? If so, please describe. Is the proposal to require an electronic signature appropriate? If not, why not? Please support your arguments. 122. Should the Commission adopt the proposal that proposed Form ATS– N should be filed with the Commission in a structured format? Why or why not? If so, what standards of structuring should be used for information to be provided on proposed Form ATS–N? Please explain. If not, what format should proposed Form ATS–N take? Please identify the format and explain. 123. Are there any specific aspects of proposed Form ATS–N that should or should not be provided in a structured format? Please identify those aspects of proposed Form ATS–N that should or should not be provided in a structured format and explain why those aspects of the form should or should not be structured. 124. Should the Commission adopt the proposal to require documents to be filed in a text-searchable format on proposed Form ATS–N? Why or why not? Please support your arguments. Request for Comment 121. Do you believe that the electronic filing requirement of proposed Rule 304(c)(2) is appropriate? Do you believe that the electronic filing of Form ATS–N would be less burdensome and/ 352 For a Form ATS–N Amendment, the NMS Stock ATS would also be required to attach as Exhibit 3A and/or Exhibit 4A a redline(s), showing changes to Part III and/or Part IV of proposed Form ATS–N, respectively, in order to point out the amendment(s) to its prior Form ATS–N filing. The Commission preliminarily believes that requiring NMS Stock ATSs to attach redlines to their Form VerDate Sep<11>2014 15:06 Dec 24, 2015 Jkt 238001 V. Proposed Form ATS–N: Submission Type and Part I of Form ATS–N Proposed Form ATS–N would require that an entity identify the type of filing by marking the appropriate checkbox. The Form ATS–N filing may either be a Form ATS–N, a Form ATS–N Amendment, or a notice of cessation. In addition, proposed Form ATS–N would require the NMS Stock ATS to indicate whether a Form ATS–N Amendment is being submitted as a material amendment, periodic amendment, or correcting amendment. The Commission is also proposing that, for an Form ATS–N Amendment, the NMS Stock ATS provide a brief narrative description of the amendment so market participants can quickly understand the nature of the Form ATS–N Amendment.352 For notices of cessation, PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 proposed Form ATS–N would require the date that the NMS Stock ATS will cease to operate. A Form ATS–N filer may also withdraw a previously filed Form ATS–N.353 Part I of proposed Form ATS–N would require the name of the brokerdealer operator and the NMS Stock ATS. Rule 301(b)(1) requires that an ATS, including an NMS Stock ATS, register as a broker-dealer under Section 15 of the Exchange Act.354 Today, while some broker-dealers are registered with the Commission for the sole purpose of operating as an ATS, most broker-dealer operators of ATSs engage in brokerage and/or dealing activities in addition to operating an NMS Stock ATS. In some cases, broker-dealers operate multiple NMS Stock ATSs.355 To identify the registered broker-dealer for an NMS Stock ATS and to assist the Commission in collecting and organizing its filings, proposed Form ATS–N would require the name of the registered broker-dealer for the NMS Stock ATS (i.e., the brokerdealer operator), as it is stated on Form BD, in Part I, Item 1 of proposed Form ATS–N. The name of the registered broker-dealer for the NMS Stock ATS would also assist the Commission in ensuring that the NMS Stock ATS has appropriately registered as a brokerdealer as part of its exemption from exchange registration under Exchange Act Rule 3a1–1(a)(2). To the extent that a ‘‘DBA’’ (doing business as) is used to identify the NMS Stock ATS to the public or the Commission, or if a registered broker-dealer operates multiple NMS Stock ATSs, proposed Form ATS–N would require the full name of the NMS Stock ATS under which business is conducted, if any, in Part I, Item 2 of proposed Form ATS– N. Part I, Item 3 of proposed Form ATS–N would require the NMS Stock ATS to provide its Market Participant Identifier (‘‘MPID’’) for the NMS Stock ATS.356 The Commission preliminarily ATS–N Amendments would better enable market participants and the Commission to review Form ATS–N Amendments in a more efficient manner. 353 Instruction B to proposed Form ATS–N would provide that if an NMS Stock ATS determines to withdraw a Form ATS–N, it must select the appropriate checkbox and provide the correct file number to withdraw the submission. 354 17 CFR 242.301(b)(1); 15 U.S.C. 78o. 355 A broker-dealer operator would be required to file a separate Form ATS–N for each NMS Stock ATS operated by the broker-dealer. See Instruction A of proposed Form ATS–N. 356 An MPID, or other mechanism or mnemonic, is used to identify a market participant for the purposes of electronically accessing a national securities exchange or an ATS. See, e.g., Securities Exchange Act Release No. 63241 (November 3, 2010), 75 FR 69792 (November 15, 2010). ATSs are required to use a unique MPID for the ATS when reporting trade information to FINRA. See FINRA ATS Reporting Approval, supra note 122. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 believes that providing the name of the NMS Stock ATS or DBA and its MPID would provide clarity to the public and Commission about the identity under which the business of the NMS Stock ATS is conducted. Proposed Form ATS– N would also require an ATS to identify whether it is currently operating pursuant to a previously filed initial operation report on Form ATS. Request for Comment 125. Do you believe that Part I of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required? If not, how should Part I of proposed Form ATS–N be revised to provide additional clarity? Please explain in detail and support your arguments. 126. Do you believe there is other information that market participants might find relevant or useful with regard to the disclosures in Part I? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 127. Do you believe that the brokerdealer operator should be required to identify the type of Form ATS–N filing (i.e., Form ATS–N, Form ATS–N Amendment, notice of cessation, or withdrawal) by marking the appropriate checkbox, and for notices of cessation, provide the date that the NMS Stock ATS will cease to operate? Why or why not? Please support your arguments. 128. Do you believe that the brokerdealer operator should be required to provide a brief summary of a Form ATS–N Amendment? Why or why not? Please support your arguments. 129. Do you believe that a brokerdealer operator should be allowed to withdraw a previously filed Form ATS–N? Why or why not? Please support your arguments. If so, when should a broker-dealer operator be permitted to withdraw a previously filed Form ATS–N? Please explain. 130. Do you believe that the brokerdealer operator should be required to disclose the date on which it commenced, or intends to commence, operation of the NMS Stock ATS in Part I of Form ATS–N? Why or why not? Please support your arguments. 131. Do you believe that the Commission should require the MPID of the NMS Stock ATS as a required disclosure on proposed Form ATS–N? Why or why not? Please support your arguments. 132. What are the potential costs and benefits of disclosing the information required by Part I of proposed Form ATS–N? Would the proposed VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 disclosures in Part I of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information? Why or why not? Please support your arguments. VI. Part II of Proposed Form ATS–N: Broker-Dealer Operator Registration Information Part II of proposed Form ATS–N would require certain general information regarding the broker-dealer operator and the NMS Stock ATS. With respect to the broker-dealer operator, Part II of proposed Form ATS–N would require registration information including: its SEC File Number, Central Registration Depository (‘‘CRD’’) Number, effective date of the brokerdealer operator’s registration with the Commission, the name of the national securities association with which it is a member, and the effective date of broker-dealer operator’s membership with the national securities association (e.g., FINRA). The Commission proposes to require this information to assess whether the NMS Stock ATS has complied with the requirement to register as a broker-dealer pursuant to Rule 301(b)(1) of Regulation ATS. This information also would expedite the Commission’s communications with the broker-dealer operator’s self-regulatory organization as needed. Additionally, Part II of proposed Form ATS–N would require certain information regarding the legal status of the broker-dealer operator. Specifically, proposed Form ATS–N would require that the broker-dealer operator provide its legal status (e.g., corporation, partnership, sole proprietorship) and except in the case of a sole proprietorship, the date of formation and state or country in which it is formed. The Commission is proposing to require the information related to the broker-dealer operator’s legal status to help ensure that the broker-dealer operator has appropriately filed as a legal entity (except in the case of sole proprietorships). Proposed Form ATS–N would also require the address of the physical location of the NMS Stock ATS matching system and, if it is different from the physical location, the mailing address of the NMS Stock ATS. If the broker-dealer operator is a sole proprietorship and an address of the NMS Stock ATS is a private residence, the Commission would not make that information available on the Commission’s Web site due to concerns about the confidentiality of personally identifiable information. Furthermore, Part II would require the NMS Stock ATS to provide a URL address for the PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 81039 Web site of the NMS Stock ATS, and in the signature block in Part V of proposed Form ATS–N, the representative of the broker-dealer operator would also be required to provide his or her business contact information, including the person’s name and title, telephone number, and email address.357 This information would facilitate communication with the broker-dealer operator and the NMS Stock ATS during the Commission’s review of a Form ATS–N and later as necessary as part of the Commission’s ongoing monitoring of the NMS Stock ATS. To the extent the broker-dealer operator’s contact information that is provided in Part II is made publicly available, that information would also facilitate communication between subscribers and the broker-dealer operator. Part II of proposed Form ATS–N would also require an NMS Stock ATS to attach, as Exhibit 1, a copy of any materials currently provided to subscribers or other persons, related to the operations of the NMS Stock ATS or the disclosures on Form ATS–N.358 The Commission understands that some ATSs may provide to subscribers, or other persons, marketing material or other material containing important information about the ATS’s operations in FIX protocol procedures, rules of engagement/user manuals, or frequently asked questions. These documents may include information regarding, among other things, the order matching procedures, priority rules, order types, and order entry and execution procedures of the ATS, and in some instances, such documents may contain important information about an NMS Stock ATS that may not be specified in the required disclosures under proposed Form ATS–N. The Commission notes that the purpose of proposed Form 357 The Commission would also keep the contact information of the broker-dealer operator’s representative confidential, subject to applicable law. Consistent with the requirements of proposed Form ATS–N, the signature block in Part V would also require the NMS Stock ATS to consent that service of any civil action brought by, or notice of any proceeding before, the Commission or a SRO in connection with the ATS’s activities may be given by registered or certified mail or email to the contact employee at the primary street address or email address, or mailing address if different, given in Part I. The signatory would further represent that the information and statements contained on the submitted Form ATS–N, including exhibits, schedules, attached documents, and any other information filed, are current, true, and complete. 358 For currently operating NMS Stock ATSs that file a Form ATS–N, each ATS would only be required to provide the materials it currently provides to subscribers or other persons and would not be required to attach materials provided to subscribers or other person in the past. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81040 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules ATS–N is to provide operational transparency with regard to the NMS Stock ATS. To the extent that the NMS Stock ATS discloses information on standardized materials provided to certain subscribers, whether an individual or on group basis, the Commission preliminarily believes the NMS Stock ATS should make this information available to all subscribers, and therefore the Commission is proposing to require these materials be filed as an attachment to Exhibit 1 to proposed Form ATS–N. The Commission further notes that this requirement is similar to the requirement of subpart (f) of Exhibit F on existing Form ATS.359 Proposed Form ATS–N also would require that the broker-dealer operator attach, as Exhibits 2A and 2B (or provide a link to the relevant URL address where the required documents can be found), a copy of the most recently filed Schedule A of the brokerdealer operator’s Form BD disclosing information related to direct owners and executive officers, and a copy of the most recently filed Schedule B of the broker-dealer operator’s Form BD disclosing information related to indirect owners, respectively. The proposed Form ATS–N would require information from the broker-dealer operator’s Schedule A and Schedule B of Form BD to help market participants understand the persons and entities that directly and indirectly own the brokerdealer operator. The Commission is requiring that NMS Stock ATSs provide names of the direct and indirect owners of the broker-dealer operator on Form ATS–N, even though the same information is provided on Form BD, because information about the ownership of the broker-dealer operator will enable market participants to understand better any potential conflicts of interest that may arise therefrom, which is one of the central purposes of proposed Form ATS–N. Also, providing this information on Form ATS–N would facilitate the Commission’s, as well as market participants’, analysis of the ownership and any potential for conflicts arising therefrom by providing this information all on one form. Moreover, the Commission preliminarily believes it is appropriate for NMS Stock ATSs to provide this information using a URL address for these documents in lieu of attaching the actual documents to their Form ATS–N filings. 359 Subpart (f) of Form ATS requires a copy of the ATS’s subscriber manual and any other materials provided to subscribers. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Request for Comment 133. Do you believe that Part II of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required? If not, how should Part II of proposed Form ATS–N be revised to provide additional clarity? Please explain in detail. 134. Do you believe there is other information that market participants might find relevant or useful with regard to the disclosures in Part II? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 135. Do you believe that the Commission should require the effective date of broker-dealer registration with the Commission as a required disclosure on proposed Form ATS–N? Why or why not? Please support your arguments. 136. Do you believe that the Commission should require the SEC File number of the broker-dealer operator as a required disclosure on proposed Form ATS–N? Why or why not? Please support your arguments. 137. Do you believe that the Commission should require the CRD number of the broker-dealer operator as a required disclosure on proposed Form ATS–N? Why or why not? Please support your arguments. 138. Do you believe that the Commission should require the address of the physical location of the NMS Stock ATS’s matching system as a required disclosure on proposed Form ATS–N? Why or why not? Please support your arguments. 139. Do you believe that the Commission should require the mailing address of the NMS Stock ATS as a required disclosure on proposed Form ATS–N? Why or why not? Please support your arguments. 140. Do you believe that the Commission should require the Web site URL of the NMS Stock ATS as a required disclosure on proposed Form ATS–N? Why or why not? Please support your arguments. 141. Do you believe that the Commission should require NMS Stock ATSs to disclose materials provided to subscribers or other persons related to the operations of the NMS Stock ATS on proposed Form ATS–N? Why or why not? Please support your arguments. Do you believe such materials should be provided to the Commission as an Exhibit? Why or why not? Please support your arguments. Do you believe that the NMS Stock ATS should be able to provide a URL where these documents can be found in lieu of PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 providing the documents as an Exhibit? Why or why not? Please support your arguments. 142. Do you believe it is appropriate for the Commission to not make public the address of the NMS Stock ATS that is a sole proprietorship? Why or why not? Please support your arguments. 143. Do you believe it is appropriate for the Commission to not make public the contact information of the brokerdealer operator’s representative? Why or why not? Please support your arguments. 144. Do you believe that there is any information, that would be required to be disclosed in Part II of proposed Form ATS–N that the Commission should not require to be disclosed due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 145. What are the potential costs and benefits of disclosing the information required by Part II of proposed Form ATS–N? Would the proposed disclosures in Part II of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information? Why or why not? Please support your arguments. 146. Do you believe there are there certain types of materials provided to subscribers that would be responsive to Exhibit 1 that should or should not be disclosed on Form ATS–N? If so, what types of materials and why? Do you believe an NMS Stock ATS should provide in response to Exhibit 1 the materials the NMS Stock ATS provides to subscribers such as FIX protocol procedures, rules of engagement/user manuals, frequently asked questions, or marketing materials? Why or why not? Please support your arguments. 147. Do you believe the Commission should require NMS Stock ATSs to provide on Form ATS–N information on Exhibits 2A and 2B, in light of the fact that the information is already provided on Form BD? 148. Do you believe the Commission should require the NMS Stock ATS to provide disclosure about its governance structure and compliance programs and controls to comply with Regulation ATS? Why or why not? If so, what aspects of the NMS Stock ATSs’ governance structure and compliance programs and controls to comply with Regulation ATS should the NMS Stock ATS be required to disclose? Please support your arguments. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules VII. Part III of Proposed Form ATS–N: Activities of the Broker-Dealer Operator and Its Affiliates A. The Relationship Between the Broker-Dealer Operator’s Operation of the NMS Stock ATS and Its Other Operations mstockstill on DSK4VPTVN1PROD with PROPOSALS3 1. Background The Commission preliminarily believes 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 brokerdealer operator as well as the relationship and interactions between the NMS Stock ATS and the affiliates of its broker-dealer operator. As previously noted, Rule 301(b)(1) of Regulation ATS requires that an ATS, including an NMS Stock ATS, register as broker-dealer under Section 15 of the Exchange Act (the ‘‘broker dealer operator’’).360 The broker-dealer operator of the ATS trading platform is legally responsible for all operational aspects of the ATS and for ensuring that the ATS operates in compliance with applicable federal securities laws and the rules and regulations thereunder, including Regulation ATS. The broker-dealer operator, and in some cases, its affiliates,361 controls access to the ATS and provides the technology and systems that support the trading on the ATS.362 Based on Commission experience, the broker-dealer operator, or in some cases, its affiliates, directs the personnel that service the ATS or otherwise manages service providers that may perform certain functions of the ATS. The broker-dealer operator, or in some cases, its affiliates, also determines, among other things: (1) What securities will trade on the ATS; (2) who may become subscribers that will participate on the ATS; (3) whether there will be segmented categories of order flow in the ATS, and if so, how the order flow will be segmented; (4) order matching methodologies and priority rules; (5) the rules governing the interaction and execution of orders; and 360 17 CFR 242.301(b)(1); 15 U.S.C. 78o. Additionally, as a registered entity with the Commission, a broker-dealer operating an ATS is subject to applicable federal securities laws, as well as other requirements, including the rules of any SRO of which it is a member. 361 The Commission is proposing to define ‘‘affiliate’’ for purposes of Form ATS–N as described and discussed further below. See infra note 378 and accompanying text. See also Instruction G of proposed Form ATS–N. 362 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. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 (6) the display, if any, of orders and trading interest. Additionally, the broker-dealer operator, or in some cases, its affiliates, determines the means by which orders are entered on and subscribers access 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. The broker-dealer operator, or in some cases, its affiliates, also controls the market data that the ATS uses to prioritize, match, and execute orders and the transmission of and access to confidential order and execution information sent to and from the ATS.363 Based on Commission experience, the operations of the NMS Stock ATS and the other operations of the broker-dealer operator are usually closely intertwined as the broker-dealer operator generally leverages its information technology, systems, personnel, and market data, and those of its affiliates, to operate the ATS. The Commission is also aware that most ATSs that currently transact in NMS stocks are operated by brokerdealers that engage in significant brokerage and dealing activities in addition to their operation of an ATS(s).364 These multi-service brokerdealers may offer their customers a variety of brokerage services, often with or through their affiliates, including 363 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. 364 The Commission notes that, based on Form BD disclosures from June of 2015, all but 7 of the 36 broker-dealer operators whose ATSs trade NMS stocks disclose business activities other than operating an ATS. The other business activities disclosed by broker-dealer operators (and the number of such broker-dealer operators providing such disclosure) include: Retailing corporate equity securities over-the-counter (22); put and call broker or dealer or option writer (18); exchange commission business other than floor activities (18); private placements of securities (17); selling corporate debt securities (17); government securities broker (15); trading securities for own account (15); municipal securities broker (13); exchange member engaged in floor activities (13); non-exchange member arranging for transactions in listed securities by exchange member (12); underwriter or selling group participant (corporate securities other than mutual funds) (13); selling interests in mortgages or other receivables (12); making interdealer markets in corporate securities over-thecounter (11); government securities dealer (11); municipal securities dealer (11); solicitor of time deposits in a financial institution (7); investment advisory services (7). This data does not include the business activities of affiliates of the broker-dealer operators. Of the 10 ATSs that traded the most NMS stock measured by total shares executed during the second quarter of 2015, 6 disclose on Form BD that they engage in proprietary trading and making inter-dealer markets in corporate securities OTC, and 7 disclose retailing corporate equities OTC. See FINRA’s ATS Transparency Data Quarterly Statistics, 2nd Quarter of 2015, https:// www.finra.org/industry/ats/ats-transparency-dataquarterly-statistics. PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 81041 algorithmic trading strategy software, agency sales desk support, and automated smart order routing services. Multi-service broker-dealers that also operate an NMS Stock ATS may use the ATS as a complement to the brokerdealer’s other service lines and may use the ATS as an opportunity to execute orders ‘‘in house’’ before seeking contraside interest at other execution venues. For instance, a broker-dealer operator, or its affiliate, may operate, among other things, an OTC market making desk or proprietary trading desks in addition to operating an NMS Stock ATS.365 A multi-service broker-dealer may also execute orders in NMS stocks internally (and not within its respective NMS Stock ATS(s)) 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(s) or another external trading center.366 Consequently, non-ATS trading centers operated by the brokerdealer operator of an ATS (i.e., internal executions by the broker-dealer outside of an ATS), or its affiliates, often compete with the ATS as a trading venue for the execution of transactions in NMS stocks. 2. Potential Conflicts of Interest for the Broker-Dealer Operator or Its Affiliates Due to the frequent overlap between the operations of the broker-dealer operator or its affiliates outlined above and the operations of ATSs that trade NMS stocks, the Commission preliminarily believes that the interests of the broker-dealer operator or its affiliates sometimes compete with the interests of an ATS’s subscribers, or customers of the ATS’s subscribers, for executions on the ATS. Accordingly, the Commission preliminarily believes that these competing interests, at times, may give rise to potential conflicts of interest for broker-dealer operators of NMS Stock ATSs or their affiliates. Furthermore, the Commission preliminarily believes that the frequent overlap between the operation of ATSs that trade NMS stocks and the other operations of broker-dealer operators or their affiliates gives rise to the potential for information leakage of subscribers’ confidential trading information to other 365 These non-ATS, OTC activities in NMS stocks may include operating as an OTC market maker, block positioner, or operating an internal brokerdealer system. See 2010 Equity Market Structure Release, supra note 124 at 3599–3600. See also infra note 387 and accompanying text. Additionally, an affiliate of the broker-dealer operator of an NMS Stock ATS may also operate non-ATS trading centers. 366 17 CFR 242.600(b)(78). E:\FR\FM\28DEP3.SGM 28DEP3 81042 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 business units of the broker-dealer operator or its affiliates.367 When evaluating an NMS Stock ATS as a possible trading venue, a market participant would likely want to know about the various activities in which a broker-dealer operator and its affiliates engage that may give rise to conflicts of interests. For example, as noted above, the broker-dealer operator of an NMS Stock ATS may operate multiple trading centers, which operate as competing trading venues for the execution of trades in NMS stocks. Many brokerdealer operators or their affiliates trade proprietarily on the NMS Stock ATS. If a broker-dealer operator that operates an NMS Stock ATS is also able to trade on that NMS Stock ATS, there may be an incentive for the broker-dealer operator to operate its NMS Stock ATS in a manner that favors the trading activity of the broker-dealer operator’s business units or affiliates. A broker-dealer operator of an NMS Stock ATS may provide its other business units or affiliates, who may be subscribers to the NMS Stock ATS, with access to certain services of the NMS Stock ATS that are not provided to other subscribers, which may result in trading advantages to those business units or affiliates.368 The Commission preliminarily believes that market participants that subscribe and route orders to NMS Stock ATSs would want to know how a broker-dealer operator of an NMS Stock ATS treats subscriber orders versus orders of its business units or its affiliates. The Commission preliminarily believes that customers of the broker-dealer operator, who may also be subscribers to the NMS Stock ATS, would also want to better understand the circumstances in which the broker-dealer operator may send their orders to its NMS Stock ATS, internalize their orders outside of the NMS Stock ATS, or route to another trading venue. Concerns regarding potential conflicts of interests involving trading venues that execute securities transactions are 367 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 7, at 70879. 368 Such benefits or other advantages could include the NMS Stock ATS providing itself or its affiliates with faster access to the NMS Stock ATS or priority in executions over other subscribers. Unlike registered national securities exchanges, ATSs are not required to have rules that are designed not to permit unfair discrimination; however, the advantages that a broker-dealer operator may provide to itself or its affiliates may not be fully disclosed to subscribers to an ATS. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 not novel.369 In the context of national securities exchanges, the Commission has expressed concern that the affiliation of a registered national securities exchange with one of its members raises potential conflicts of interest, and the potential for unfair competitive advantage.370 Because the Commission reviews the rules of registered national securities exchanges, a process which requires, among other things, that to approve certain rule changes the Commission find that the exchange’s proposed rule changes are consistent with the Exchange Act,371 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.372 369 See, e.g., Securities Exchange Act Release Nos. 50700, 69 FR 71256, 71257 (December 8, 2004) (discussing the inherent conflicts of interest between a self-regulatory organization’s regulatory obligations and the interests of its members, its market operations, its listed issuers, and, in the case of a demutualized SRO, its shareholders); 50699, 69 FR 71126 (December 8, 2004) (proposing rules that the Commission believed would help insulate the regulatory activities of an exchange or national securities association from the conflicts of interest that otherwise may arise by virtue of its market operations); 63107, 75 FR 65882 (October 26, 2010) (proposing Regulation MC under the Exchange Act to mitigate conflicts of interest regarding ownership interests and voting rights with respect to securitybased swap clearing agencies, security-based swap execution facilities, and security-based swap exchanges pursuant to the Dodd Frank Act, Pub. L. 111–203, Section 765). 370 See, e.g., Securities Exchange Act Release Nos. 66808 (April 13, 2012) 77 FR 23294 (April 18, 2012) (SR–BATS–2012–013) (order approving a proposed rule change by BATS Exchange, Inc. (‘‘BATS Exchange’’) relating to its ability to receive inbound routes of equities orders through BATS Trading, Inc., BATS Exchange’s routing broker-dealer, from BATS–Y Exchange, Inc.) at 23295 n.16 and accompanying text; 59281 (January 22, 2009), 74 FR 5014 (January 28, 2009) (SR–NYSE–2008–120) (order approving a joint venture between NYSE and BIDS Holdings L.P.) (‘‘NYSE/BIDS Order’’); 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR– NASDAQ–2006–006) (order approving Nasdaq’s proposal to adopt Nasdaq Rule 2140, restricting affiliations between Nasdaq and its members) (‘‘Nasdaq Affiliation Order’’); and 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR–NYSE– 2005–77) (order approving the combination of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc.) (‘‘NYSE/Arca Order’’). 371 See 15 U.S.C. 78s(b). 372 For example, registered national securities exchanges have rules that prevent the national securities exchange from being affiliated with a member of the exchange, or with an affiliate of a member of the exchange, absent Commission approval. See, e.g., NYSE Rule 2B, which provides, in part, that: ‘‘Without prior SEC approval, the [New York Stock Exchange LLC (‘‘NYSE’’)] or any entity with which it is affiliated shall not, directly or indirectly, acquire or maintain an ownership interest in a member organization. In addition, a member organization shall not be or become an affiliate of the [NYSE], or an affiliate of any affiliate of the [NYSE] . . . .’’ See also Nasdaq Rule 2160, and BZX Rule 2.10. In cases where the Commission has approved exceptions to this prohibition, there PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 In the context of a national securities exchange’s affiliation with one of its members, the Commission’s concerns stem from, among other things, the potential for unfair competitive advantages that the affiliated member could have by virtue of informational or operational advantages or the ability to receive preferential treatment.373 These same concerns are present in the context of trading by the broker-dealer operator, or its affiliates, on the ATS that the broker-dealer operator operates. For example, the potential exists for the broker-dealer operator of an NMS Stock ATS to place its commercial interests, or those of its affiliates, before those of subscribers that route orders to the NMS Stock ATS directly or indirectly through the broker-dealer operator of the NMS Stock ATS or its affiliates. Some of the settled enforcement actions against ATSs that trade NMS stocks highlight this potential.374 Therefore, as have been limitations and conditions on the activities of the exchange and its affiliated member designed to address concerns about potential conflicts of interest and unfair competitive advantage. See, e.g., Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10–182) (In the Matter of the Application of BATS Exchange, Inc. for Registration as a National Securities Exchange; Findings, Opinion, and Order of the Commission), at 49502 n.90–94 and accompanying text (approving the affiliation between BATS Exchange and its affiliated member BATS Trading in connection with the provision of routing services by BATS Trading for BATS Exchange and subject to certain limitations and conditions). 373 See, e.g., Nasdaq Affiliation Order, supra note 370, at 42151. The Commission’s concern with respect to a national securities exchange’s affiliation with one of its members also stemmed from the possible conflicts of interest that could arise between a national securities exchange’s selfregulatory obligations and its commercial interest. See id. Because ATSs are not SROs, and therefore do not have self-regulatory obligations, this particular concern is not present in the context of ATSs. 374 See, e.g., In the Matter of ITG Inc. and Alternet Securities Inc., Securities Exchange Act Release No. 75672 (Aug. 12, 2015), https://www.sec.gov/ litigation/admin/2015/33-9887.pdf (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order) (‘‘ITG Settlement’’); In the Matter of UBS Securities LLC, Securities Exchange Act Release No. 74060 (Jan. 15, 2015), https://www.sec.gov/litigation/ admin/2015/33-9697.pdf (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order) (‘‘UBS Settlement’’); In the Matter of Lavaflow, Inc., Securities Exchange Act Release No. 72673 (Jul. 25, 2014), https:// www.sec.gov/litigation/admin/2014/34-72673.pdf (order instituting administrative and cease-anddesist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order) (‘‘LavaFlow Settlement’’); In the Matter of Liquidnet, Inc., Securities Exchange Act Release No. 72339 (Jun. 6, 2014), https://www.sec.gov/litigation/ admin/2014/33-9596.pdf (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order) (‘‘Liquidnet E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 explained further below, the Commission proposes to require NMS Stock ATSs to disclose information about certain aspects of the activities of the NMS Stock ATS’s broker-dealer operator, and its affiliates, in connection with the NMS Stock ATS, to help market participants assess potential conflicts of interest that may adversely impact their trading on the NMS Stock ATS. Finally, due to the overlap between the operation of NMS Stock ATSs and the other operations of broker-dealer operators, the Commission is concerned that market participants have limited information about how the operations of the broker-dealer operator’s business units or its affiliates may give rise to information leakage of subscribers’ confidential trading information among those business units or affiliates. For instance, if a proprietary trading desk of the broker-dealer operator is able to enter orders or other trading interest to the NMS Stock ATS, that trading desk may have means to see the incoming order flow of unaffiliated subscribers to the NMS Stock ATS. Furthermore, as demonstrated by several enforcement actions, a broker-dealer operator may at times provide some subscribers— including its business units or those of its affiliates—access to certain trading information that it does not provide to others.375 Accordingly, the Commission preliminarily believes that the disclosure of certain information about the activities of the broker-dealer operator and its affiliates with respect to the NMS Stock ATS would enable market participants to better assess whether the potential for information leakage exists. The Commission preliminarily believes that such Settlement’’); In the Matter of eBX, LLC, Securities Exchange Act Release No. 67969 (Oct. 3, 2012), https://www.sec.gov/litigation/admin/2012/3467969.pdf (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order) (‘‘LeveL Settlement’’); In the Matter of Pipeline Trading Systems LLC, Fred J. Federspiel, and Alfred R. Berkeley III, Securities Exchange Act Release No. 9271 (Oct. 24, 2011) (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order), https://www.sec.gov/ litigation/admin/2011/33-9271.pdf (‘‘Pipeline Settlement’’); In the Matter of INET ATS, Inc., Securities Exchange Act Release No. 53631 (Apr. 12, 2006), https://www.sec.gov/litigation/admin/ 2006/34-53631.pdf (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-anddesist order); and In the Matter of BRUT, LLC, Securities Exchange Act Release No. 48718 (Oct. 30, 2003), https://www.sec.gov/litigation/admin/3448718.htm (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order). 375 See id. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 disclosures would help a market participant independently evaluate whether submitting order flow to a particular NMS Stock ATS aligns with its business interests and would help it achieve its investing or trading objectives. B. Disclosures Required Under Part III of Proposed Form ATS–N Part III of proposed Form ATS–N would require that broker-dealer operators of NMS Stock ATSs include, as applicable, disclosures that pertain to the broker-dealer operator and its affiliates of an NMS Stock ATS. The Commission preliminarily believes that these proposed disclosure requirements would help ensure that market participants and the Commission are adequately informed about: (1) The operation of the NMS Stock ATS— regardless of the corporate structure of the NMS Stock ATS and that of its broker-dealer operator, or any arrangements the broker-dealer operator may have made, whether contractual or otherwise, pertaining to the operation of its NMS Stock ATS; and (2) any potential conflicts of interest the brokerdealer operator may have with respect to the operation of its NMS Stock ATS. The Commission has also considered other alternatives to address the potential conflicts of interest between NMS Stock ATSs and their brokerdealer operators.376 For example, the Commission could require an NMS Stock ATS to operate as a ‘‘stand-alone’’ entity having no affiliation with any broker-dealer that seeks to execute proprietary or agency orders in the NMS Stock ATS. This alternative would eliminate any potential conflicts of interest by requiring a broker-dealer that operates an NMS Stock ATS to have only a single business function— operating the NMS Stock ATS—and eliminating any other functions, such as trading on a proprietary basis or routing customer orders. As another alternative, and short of requiring NMS Stock ATSs to operate on a stand-alone basis, the Commission could continue to permit broker-dealer operators to continue to act as a broker-dealer operator of an NMS Stock ATS and engage in non-ATS functions while imposing new requirements designed to limit potential conflicts. The Commission preliminarily believes that the above alternatives could be significantly more intrusive and substantially affect or limit the current operations of ATSs that trade 376 See infra Section XIII.D.7 for a further discussion of alternatives to address potential conflicts of interest. PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 81043 NMS stocks relative to requiring additional disclosures about the operations of the broker-dealer operator and its affiliates, and therefore is not proposing such alternatives at this time. The Commission is instead proposing that NMS Stock ATSs and their brokerdealer operators provide additional disclosures, both to the Commission and the public, about how they interact. Request for Comment 149. Do you believe that it is necessary to have some understanding of the broader activities of the brokerdealer operator and its affiliates in order to understand and evaluate the operation of an NMS Stock ATS? Why or why not? Please support your arguments. 150. Do you believe that conflicts of interest could arise from a brokerdealer’s operation of an NMS Stock ATS? Why or why not? If so, please explain what these conflicts of interest are. Do you believe that potential conflicts of interest should be disclosed to the public? Why or why not? Please support your arguments. 151. Do you believe that certain conflicts of interest arising out of the broker-dealer’s operation of the NMS Stock ATS should be prohibited? Why or why not? Please support your arguments. 152. Do you believe that the Commission should adopt an alternative approach, either those described above or any other alternative, such as a prohibition, regarding potential conflicts of interest arising from a broker-dealer’s operation of an NMS Stock ATS? Why or why not? Please support your arguments. If so, what approach should the Commission adopt? Please be specific. 153. Do you believe that the Commission should require information barriers between the ATS and non-ATS business units of the broker-dealer operator? Why or why not? Please support your arguments. 154. Do you believe that the Commission should require an NMS Stock ATS to operate as a ‘‘stand-alone’’ entity and have no affiliation with any broker-dealer that seeks to execute proprietary or agency orders in the ATS? Why or why not? Please support your arguments. Do you believe that the proposed disclosures on Form ATS–N would help broker-dealers better assess whether the routing of their customers’ orders to a particular NMS Stock ATS fulfills the broker-dealer’s duty of best E:\FR\FM\28DEP3.SGM 28DEP3 81044 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules execution? 377 Why or why not? Please support your arguments. 155. Do you believe that the proposed disclosures on Form ATS–N would help customers of broker-dealers to better evaluate whether their broker-dealer is fulfilling its duty of best-execution with respect to orders routed to NMS Stock ATSs? Why or why not? Please support your arguments. 1. Proposed Definitions of ‘‘Affiliate’’ and ‘‘Control’’ mstockstill on DSK4VPTVN1PROD with PROPOSALS3 For the purposes of the proposed disclosures regarding affiliates of the broker-dealer operator, the Commission is proposing to define the term ‘‘affiliate’’ to mean ‘‘with respect to a specified person, any person that directly, or indirectly, controls, is under common control with, or is controlled by, the specified person.’’ 378 This proposed definition is consistent with the definition of an ‘‘affiliate’’ for the purposes of Form 1 disclosures,379 and relates closely to the definition of a similar term under Regulation ATS.380 The Commission also proposes to amend the existing definition of the term ‘‘control’’ under Regulation ATS to add the phrase ‘‘the broker-dealer of’’ before the two instances of the phrase ‘‘an alternative trading system’’ and before the phrase ‘‘the alternative trading system’’ in subsections (2) and (3) of the definition.381 As proposed to be amended, ‘‘control’’ would mean ‘‘the power, directly or indirectly, to direct the management or policies of the broker-dealer of an alternative trading system, whether through the ownership of securities, by contract, or otherwise. A person is presumed to control the broker-dealer of an alternative trading system, if that person (1) is a director, general partner, or officer exercising executive responsibility (or having similar status or performing similar functions); (2) directly or indirectly has the right to vote 25% or more of a class of voting securities or has the power to sell or direct the sale of 25% or more of a class of voting securities of the brokerdealer of the alternative trading system; or (3) in the case of a partnership, has contributed, or has the right to receive, upon dissolution, 25% or more of the capital of the broker-dealer of the 377 See supra notes 36–40 and accompanying text (relating to the duty of best execution). 378 See Instruction G to proposed Form ATS–N. 379 See Instruction B to Form 1; 17 CFR 249.1. 380 See 17 CFR 242.300(c) (defining affiliate of a subscriber as any person that, directly or indirectly, controls, is under common control with, or is controlled by, the subscriber, including any employee). 381 17 CFR 242.300(f). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 alternative trading system.’’ 382 The purpose of these amendments to the definition of control under Regulation ATS is to make clear that, because an ATS must register as a broker-dealer, control of the broker-dealer of the ATS is control of the ATS, and that the broker-dealer (also referred to as the broker-dealer operator) is legally responsible for all operational aspects of the ATS and for ensuring that the ATS complies with applicable federal securities laws and the rules and regulations thereunder, including Regulation ATS. The proposed disclosures of affiliate activities under Part III of proposed Form ATS–N are designed to provide market participants and the Commission with a comprehensive understanding of the potential conflicts of interest that may arise from the broker-dealer operator’s other business activities and its operation of the NMS Stock ATS. Under the proposed definition of ‘‘affiliate’’ and amended definition of ‘‘control,’’ any affiliate of the brokerdealer operator of the NMS Stock ATS would be an affiliate of the NMS Stock ATS.383 The Commission preliminarily believes that the proposed definition of an ‘‘affiliate’’ and amended definition of ‘‘control’’ would cover entities that have a close relationship with the brokerdealer operator and whose activities could raise potential conflicts of interest, or could otherwise be relevant to market participants in evaluating an NMS Stock ATS. Extending the proposed disclosures to affiliates of the broker-dealer operator could also reduce the potential for an entity to structure its organization in a way that would not provide complete disclosure of information in response to Part III of proposed Form ATS–N. The Commission notes that the proposed disclosures related to affiliates extends to persons that control, are controlled by, or are under common control with the broker-dealer operator, and, as a result, parallels the disclosures related to ‘‘control affiliates’’ that are required in Form BD, to which broker-dealer operators are already subject.384 382 See id. and Instruction G to proposed Form ATS–N. 383 The instructions in proposed Form ATS–N would require an NMS Stock ATS to provide the identity of affiliates and business units of the broker-dealer operator, provide the name under which each affiliate or business unit conducts business (e.g., the formal name under which a proprietary trading desk of the broker-dealer operator conducts business) and the applicable CRD number and MPID(s) under which the affiliate or business unit conducts business. 384 See Form BD at 2 (defining ‘‘control affiliate’’). PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 Request for Comment 156. Should the Commission adopt the proposal to define ‘‘affiliate’’ for purposes of proposed Form ATS–N as, with respect to a specified person, any person that, directly or indirectly, controls, is under common control with, or is controlled by, the specified person? Why or why not? Please support your arguments. Do you believe that the Commission should adopt a more limited or expansive definition of an ‘‘affiliate’’? Why or why not? Please support your arguments. What advantages or disadvantages might result from a more limited or expansive definition of an affiliate? Please support your arguments. 157. Do you believe that the Commission should use the definition of an ‘‘affiliated person’’ as defined in the Exchange Act for purposes of proposed Rule 304? 385 Why or why not? Please support your arguments. If so, do you believe that the Commission should require disclosures about the activities of affiliated persons of the NMS Stock ATS, and/or affiliated persons of an affiliated person of an NMS Stock ATS? Why or why not? Please support your arguments. 158. Do you believe that the proposed amendments to the definition of ‘‘control’’ under Regulation ATS are appropriate in this context? Do you believe the Commission should adopt a more limited or expansive definition of ‘‘control’’? Why or why not? Please support your arguments. 159. Do you believe the voting interest or partnership interest thresholds for ‘‘control’’ of an entity (i.e., 25% or more) should be higher or lower for purposes of Rule 304? For example, should the voting interest or partnership interest threshold for control of an entity to be presumed be 5%, 10%, 15%, 30%, or 50% for purposes of Rule 304? If so, what is the appropriate percentage threshold and why would such alternate percentage threshold be more appropriate? Please support your arguments. 385 Under the Exchange Act, an ‘‘affiliated person’’ of another person means: Any person directly or indirectly owning, controlling, or holding with power to vote, 5 percent or more of the outstanding voting securities of such other person; any person 5 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such other person; any person directly or indirectly controlling, controlled by, or under common control with, such other person; any officer, director, partner, copartner, or employee of such other person; if such other person is an investment company, any investment adviser thereof or any member of an advisory board thereof; and if such other person is an unincorporated investment company not having a board of directors, the depositor thereof. 15 U.S.C. 78c(a)(19); 15 U.S.C. 80a–2(a)(3). E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules 160. Do you believe that the definition of ‘‘control’’ should deem an affiliate of the broker-dealer of the NMS Stock ATS to be an affiliate of the NMS Stock ATS, such that the ATS would be subject to all of the proposed disclosures relating these entities? Should the definition of ‘‘control’’ be amended? If so, how should it be amended? Please support your arguments. 161. Do you believe that the information required to be filed on proposed Form ATS–N about affiliates of the NMS Stock ATS would provide useful information to market participants? Why or why not? Please support your arguments. 162. Do you believe that the Commission should require that the MPID and/or CRD number for affiliates and business units of the broker-dealer operator be disclosed on proposed Form ATS–N? Would such disclosure help market participants identify the brokerdealer operator’s affiliates and business units? Why or why not? Please support your arguments. 2. Non-ATS Trading Centers of the Broker-Dealer Operator mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Part III, Item 1 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether the brokerdealer operator or any of its affiliates operate or control any non-ATS trading center(s) 386 that is an OTC market maker or executes orders in NMS stocks internally by trading as principal or crossing orders as agent (‘‘non-ATS trading centers’’),387 and if so, to (1) 386 A trading center is defined under Regulation NMS as a national securities exchange or national securities association that operates an SRO trading facility, an alternative trading system, 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). The Commission preliminarily believes that the last two components of the definition of a trading center (i.e., an OTC market maker and any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent) are the trading centers for which conflicts of interests of the broker-dealer operator and its affiliates are relevant, as such trading centers operate as competing venues for the execution of NMS stock over-the-counter. 387 References to non-ATS trading centers, as used herein, encompass all executions that occur off of an exchange and outside of an ATS, including when a broker-dealer is acting as an OTC marketmaker, block positioner (i.e., any broker-dealer in the business of executing, as principal or agent, block size trades for its customers), or operation of an internal broker-dealer system. See 17 CFR 242.600(b)(52) (defining ‘‘OTC market maker’’ as any dealer that holds itself out as being willing to buy and sell to its customers, or others, in the United States, an NMS stock for its own account on a regular or continuous basis otherwise than on a national securities exchange in amounts of less than block size); 17 CFR 242.600(b)(9) (defining ‘‘block size’’ as an order of at least 10,000 shares or for a quantity of stock having a market value of at least VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 identify the non-ATS trading center(s); and (2) describe any interaction or coordination between the identified non-ATS trading center(s) and the NMS Stock ATS including: (i) Circumstances under which subscriber orders or other trading interest (such as quotes, indications of interest (‘‘IOI’’), conditional orders or messages (hereinafter collectively referred to as ‘‘trading interest’’)) sent to the NMS Stock ATS are displayed or otherwise made known to the identified non-ATS trading center(s) identified in Item 1(a) before entering the NMS Stock ATS; (ii) circumstances under which subscriber orders or other trading interest received by the broker-dealer operator or its affiliates may execute, in whole or in part, in the identified non-ATS trading center identified in Item 1(a) before entering the NMS Stock ATS; and (iii) circumstances under which subscriber orders or other trading interest are removed from the NMS Stock ATS and sent to the identified non-ATS trading center(s).388 The Commission is aware that many broker-dealer operators of ATSs that currently trade NMS stocks facilitate the execution of NMS stock outside of their ATSs.389 As discussed above, a brokerdealer operator is permitted to engage in broker or dealer activities independent of its operation of an ATS, such as operating proprietary trading desks; the proposed rules do not eliminate or otherwise restrict such activities. The Commission, however, is proposing to require the public disclosure on proposed Form ATS–N of such activities as they relate to the NMS Stock ATS. As noted above, the Commission preliminarily believes that circumstances could arise whereby a broker-dealer operator of an NMS Stock ATS may place the interests of its or its affiliates’ non-ATS trading center ahead of the interests of the operations of the NMS Stock ATS and its subscribers. The $200,000); and 17 CFR 240.17a–3(a)(16)(ii)(A) (defining ‘‘internal broker-dealer system’’ as any facility, other than a national securities exchange, an exchange exempt from registration based on limited volume, or an alternative trading system as defined in Regulation ATS that provides a mechanism, automated in full or in part, for collecting, receiving, disseminating, or displaying system orders and facilitating agreement to the basic terms of a purchase or sale of a security between a customer and the sponsor, or between two customers of the sponsor, through use of the internal broker-dealer system or through the broker or dealer sponsor of such system). See also 2010 Equity Market Structure Release, supra note 124, at 3599–3600. 388 See Part III, Item 1 of proposed Form ATS–N. 389 See, e.g., Laura Tuttle, Over-the-Counter Trading: Description of Non-ATS OTC Trading in National Market System Stocks (March 2014), https://www.sec.gov/dera/staff-papers/white-papers/ otc-trading-white-paper-03-2014.pdf. PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 81045 Commission recognizes the sensitive nature of the confidential trading information of subscribers to an ATS and the potential for its misuse. The Commission preliminarily believes that non-ATS trading centers of a brokerdealer operator of an NMS Stock ATS or its affiliates may have incentives, and the opportunity to access, NMS Stock ATS subscriber orders received by the broker-dealer operator, which may result in information leakage. Furthermore, the Commission preliminarily believes that subscribers to NMS Stock ATSs currently have limited information about the various non-ATS trading centers operated by an NMS Stock ATS broker-dealer operator, or its affiliates, and the extent to which the operations of these non-ATS trading centers may interact with subscriber orders or other trading interest sent to the NMS Stock ATS. Orders or other trading interest sent by subscribers to the NMS Stock ATS may pass through the broker-dealer operator’s systems or functionality before being entered into the NMS Stock ATS. Such systems and functionalities, which could include a common gateway function, algorithm, or smart order router, may be used to support the broker-dealer operator’s other business units, including any nonATS trading centers. The broker-dealer operator typically controls the logic contained in these systems or functionality that determines where an order that the broker-dealer receives will be handled or sent. The Commission preliminarily believes that it would be helpful for NMS Stock ATS subscribers to know the extent to which subscriber orders received by the broker-dealer operator may interact, or be handled in any coordinated manner, with a non-ATS trading center of that broker-dealer operator or its affiliates.390 390 As noted above, the Commission is aware that most of the broker-dealer operators of ATSs that currently trade NMS stocks also facilitate the execution of NMS stocks in non-ATS trading centers outside of the NMS Stock ATS. See supra note 364 and accompanying text. In October of 2013, the Commission and its staff estimated that about 16.99% of total dollar volume (18.75% of share volume) of NMS stocks is executed over-thecounter (‘‘OTC’’) without the involvement of an ATS. In contrast, the Commission and its staff estimated that ATSs comprise 11.31% of total dollar volume (12.04% of share volume). See Tuttle: ATS Trading in NMS Stocks, supra note 126, at 2. Given that a greater percentage of OTC executions in NMS stock occur outside of ATSs rather than inside of ATSs, the Commission preliminarily believes that some disclosure of the presence of these non-ATS trading centers is appropriate. Accordingly, to the extent that an NMS Stock ATS subscriber’s orders may execute, be displayed, or otherwise made known in a non-ATS trading center operated by or affiliated with the broker-dealer operator, the Commission preliminarily believes that disclosure of such possibility would be E:\FR\FM\28DEP3.SGM Continued 28DEP3 81046 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 In addition, Form ATS–N would require the disclosure of circumstances under which subscriber orders or other trading interest received by the broker-dealer operator may execute, in whole or in part, in a non-ATS trading center(s) operated by the broker-dealer operator or its affiliates before entering the NMS Stock ATS; the circumstances under which subscriber orders or other trading interest would be displayed or otherwise made known to the systems or personnel operating the non-ATS trading center(s); and the circumstances under which subscriber orders or other trading interest are removed from the NMS Stock ATS and sent to the nonATS trading center(s) for execution. To the extent that the broker-dealer operator or its affiliates operate a nonATS trading center(s), but NMS Stock ATS subscribers’ orders could not execute, route, or otherwise be shared with that non-ATS trading center(s), the NMS Stock ATS could note this fact in Part III, Item 1 of proposed Form ATS– N. The disclosures in Part III, Item 1 of proposed Form ATS–N are designed to reduce information asymmetries between subscribers and the brokerdealer operator regarding the operation of the NMS Stock ATS and competing venues for the execution of NMS stock transactions (i.e., non-ATS trading centers) that the broker-dealer operator operates and the circumstances in which the broker-dealer operator may handle or choose to execute subscriber orders outside of the NMS Stock ATS that might otherwise have been sent to the NMS Stock ATS. Request for Comment 163. Do you believe the Commission should require the disclosure of the information on Part III, Item 1 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 164. Do you believe Part III, Item 1 of proposed Form ATS–N captures the information regarding non-ATS trading centers operated or controlled by the broker-dealer operator or any of its affiliates that is most relevant to understanding the operations of the NMS Stock ATS? Why or why not? Please support your arguments. 165. Do you believe there is other information that market participants might find relevant or useful regarding non-ATS trading centers operated or controlled by the broker-dealer operator or any of its affiliates? If so, describe relevant to market participants in deciding whether to subscribe or route orders to a particular NMS Stock ATS. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 166. Do you believe that Part III, Item 1 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required? If not, how should Part III, Item 1 of proposed Form ATS–N be revised to provide additional clarity? Please explain in detail. 167. Do you believe that the non-ATS trading centers operated by the brokerdealer operator or its affiliates could raise potential conflicts of interest? Why or why not? If so, do you believe that such potential conflicts of interest should be disclosed? Please support your arguments. 168. Part III, Item 1 of proposed Form ATS–N would require disclosure about the non-ATS trading center activities of affiliates of the broker-dealer operator. Do you believe that disclosure about the activities of the broker-dealer operator’s affiliates in this context is necessary? Why or why not? Should disclosure of non-ATS trading center activities extend to more remote affiliates under a revised definition of ‘‘affiliate’’? 391 Should disclosure of non-ATS trading center activities apply to a more limited set of affiliates? Why or why not? Please support your arguments. 169. What are the potential costs and benefits of disclosing the information required by Part III, Item 1 of proposed Form ATS–N? Do you believe the proposed disclosures in Part III, Item 1 have the potential to impact innovation? Why or why not? Do you believe that the proposed disclosures in Part III, Item 1 of proposed Form ATS–N would require broker-dealer operators of NMS Stock ATSs to reveal too much (or not enough) information about their structure and operations? Why or why not? Please support your arguments. 170. Do you believe there is other information that market participants might find relevant or useful regarding the disclosure of non-ATS trading centers operated by the broker-dealer operator or its affiliates? If so, describe such information and explain whether or not such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 171. Do you believe there is any information regarding the non-ATS trading centers of the broker-dealer operator or its affiliates that should not be required to be disclosed on proposed 391 See, 3. Multiple NMS Stock ATS Operations of the Broker-Dealer Operator Part III, Item 2 of proposed Form ATS–N would require an NMS Stock ATS to state whether the broker-dealer operator, or any of its affiliates, operates one or more NMS Stock ATSs other than the NMS Stock ATS named on the Form ATS–N, and, if so, to (1) Identify the NMS Stock ATS(s) and provide its MPID(s); and (2) describe any interaction or coordination between the identified NMS Stock ATS(s) and the NMS Stock ATS named on the Form ATS–N including: (i) The circumstances under which subscriber orders or other trading interest received by the brokerdealer operator or its affiliates to be sent to the NMS Stock ATS named on the Form ATS–N may be sent to any identified NMS Stock ATS(s); (ii) circumstances under which subscriber orders or other trading interest to be sent to the NMS Stock ATS named on the Form ATS–N are displayed or otherwise made known in any other identified NMS Stock ATS(s); and (iii) the circumstances under which subscriber orders or other trading interest received by the NMS Stock ATS named on the Form ATS–N may be removed and sent to any other identified NMS Stock ATS(s).392 The Commission is aware that some broker-dealer operators operate multiple ATSs that trade NMS stocks and that subscriber orders or other trading interest received by such broker-dealer operators could be routed between those NMS Stock ATSs. The Commission preliminarily believes that—similar to the potential conflicts of interest that may arise or information leakage that may occur when a broker-dealer operator, or its affiliate, operates or controls a non-ATS trading center— circumstances might arise whereby a broker-dealer that operates multiple NMS Stock ATSs may place its interests ahead of the interests of subscribers of e.g., supra note 385 and accompanying 392 See text. PO 00000 Form ATS–N due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 172. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 1 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 1? Frm 00050 Fmt 4701 Sfmt 4702 E:\FR\FM\28DEP3.SGM Part III, Item 2 of proposed Form ATS–N. 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 one or more of its NMS Stock ATSs.393 To the extent that the broker-dealer operator or its affiliates operate multiple NMS Stock ATSs, but the subscribers’ orders of the NMS Stock ATS named in the Form ATS–N filing could not execute, route, be displayed, or otherwise made known to the NMS Stock ATS(s) identified in Item 2(a) of proposed Form ATS–N, the NMS Stock ATS could note this fact in Part III, Item 2 of proposed Form ATS–N. Therefore, under Part III, Item 2 of proposed Form ATS–N, a broker-dealer operator that operates multiple NMS Stock ATSs would be required to disclose how these trading venues interact with one another, if at all. To the extent that a broker-dealer operator could allocate subscriber orders it receives among the various NMS Stock ATSs that it or its affiliates operate, the broker-dealer operator would be required to describe how it determines such allocation in response to Item 2. For example, a broker-dealer operator may send all subscriber orders that it receives first to one of its NMS Stock ATSs, and if there is no execution after a certain period of time, the orders may then be routed directly to a second NMS Stock ATS operated by the broker-dealer operator or its affiliates, or may be returned to the broker-dealer operator (or its SOR or similar functionality), and may then be routed to a non-affiliated NMS Stock ATS for execution. Similarly, an NMS Stock ATS would be required to describe the circumstances under which subscriber orders on the NMS Stock ATS might be removed from the NMS Stock ATS and routed to another NMS Stock ATS that is operated by that broker-dealer operator or its affiliates.394 The Commission preliminarily believes that subscribers to NMS Stock ATSs currently have limited information about the extent to which the operations of other ATSs operated by the same broker-dealer operator, or its affiliates, may interact with their orders sent to the NMS Stock ATS. Specifically, because subscriber orders received by a broker-dealer operator could be sent to multiple NMS Stock ATSs operated by that broker-dealer operator, the Commission preliminarily supra note 368. is the case with the proposed disclosures under Part III, Item 1 of proposed Form ATS–N in regard to non-ATS trading centers, Part III, Item 2 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether any affiliates of the broker-dealer operator operates an NMS Stock ATS. This disclosure is designed to elicit certain information about the relationship of related NMS Stock ATSs, regardless of the organizational structure of the broker-dealer operator and its affiliates. believes that subscribers should be provided with a better understanding of how their orders may interact, if at all, with multiple NMS Stock ATSs operated by the same broker-dealer operator or its affiliates. The proposed disclosures in Part III, Item 2 of proposed Form ATS–N are designed to help subscribers evaluate potential conflicts of interest for the broker-dealer operator or the potential for information leakage in connection with multiple NMS Stock ATSs that the broker-dealer operator, or its affiliates, operates.395 Accordingly, the Commission preliminary believes that the disclosures required under Part III, Item 2 of proposed Form ATS–N would provide market participants with better information about how orders would be handled by a broker-dealer operator that operates multiple NMS Stock ATSs and the potential conflicts of interest and potential for information leakage that might arise as a result of such a business structure. Request for Comment 173. Do you believe the Commission should require the disclosure of the information on Part III, Item 2 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 174. Do you believe Part III, Item 2 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding any other NMS Stock ATSs (other than the one named on the Form ATS–N) operated or controlled by the broker-dealer operator or any of its affiliates? Why or why not? Please support your arguments. 175. Do you believe that Part III, Item 2 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required? If not, how should Part III, Item 2 of proposed Form ATS–N be revised to provide additional clarity? Please explain. 176. Do you believe that the operation of multiple NMS Stock ATSs by the broker-dealer operator or its affiliates could raise potential conflicts of interest? Why or why not? If so, do you believe that such potential conflicts of 393 See 394 As VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 395 The Commission notes that a broker-dealer operator may have valid business reasons for operating multiple NMS Stock ATSs, and the Commission is not proposing to limit the ability for a broker-dealer operator to operate multiple NMS Stock ATSs. For example, the broker-dealer operator may establish several NMS Stock ATSs so that each NMS Stock ATS offers subscribers specific trading services (block order executions) or other particular trading functionalities (e.g., an auction mechanism or a limit order book). PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 81047 interest should be disclosed? Please support your arguments. 177. Do you believe that the information that would be solicited by Part III, Item 2 of proposed Form ATS– N would be useful to market participants in deciding whether the participate on an NMS Stock ATS? Why or why not? Please support your arguments. 178. Part III, Item 2 of proposed Form ATS–N would require disclosure of whether the affiliates of the brokerdealer operator operate an NMS Stock ATS (other than the NMS Stock ATS filing the Form ATS–N). Do you believe that disclosure about affiliates of the broker-dealer operator in this context is necessary? Why or why not? Should disclosure of affiliates that operate another NMS Stock ATS be extended to more remote affiliates under a revised definition of ‘‘affiliate’’? 396 Should disclosure apply to a more limited set of affiliates? Why or why not? Please support your arguments. 179. What are the potential costs and benefits of disclosing the information required by Part III, Item 2 of proposed Form ATS–N? Do you believe the disclosures in Part III, Item 2 of proposed Form ATS–N would have the potential to impact innovation? Why or why not? Would the proposed disclosures in Part III, Item 2 of proposed Form ATS–N require brokerdealer operators of NMS Stock ATSs to reveal too much (or not enough) information about their structure and operations? Why or why not? Please support your arguments. 180. Do you believe there is other information that market participants might find relevant or useful regarding the operation of multiple NMS Stock ATSs by a broker-dealer operator or its affiliate? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 181. Do you believe that the Commission should require NMS Stock ATSs to disclose the names of any nonNMS stock ATSs that are operated by its broker-dealer operator or one of its broker-dealer operator’s affiliates? Why or why not? If so, what information should the NMS Stock ATS be required to disclose about such non-NMS stock ATSs? Please support your arguments. 182. Do you believe there is any information regarding the multiple NMS Stock ATS operations of a broker-dealer operator that the NMS Stock ATS 396 See, e.g., supra note 385 and accompanying text. E:\FR\FM\28DEP3.SGM 28DEP3 81048 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 should not be required to disclose on proposed Form ATS–N due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please explain. 183. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 2 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 2? 4. Products or Services Offered to Subscribers by the Broker-Dealer Operator Part III, Item 3 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether the brokerdealer operator, or any of its affiliates, offer subscribers of the NMS Stock ATS any products or services used in connection with trading on the NMS Stock ATS (e.g., algorithmic trading products, market data feeds). If so, the NMS Stock ATS would be required to describe the products and services and identify the types of subscribers (e.g., retail, institutional, professional) to which such services or products are offered, and if the terms and conditions of the services or products are not the same for all subscribers, describe any differences.397 Based on the Commission’s experience, broker-dealer operators of NMS Stock ATSs may, directly or indirectly through an affiliate, offer products or services to subscribers in addition to the trading services of the NMS Stock ATS. For example, a brokerdealer operator may offer subscribers the use of an order management system to allow them to connect to or send orders or other trading interest to the NMS Stock ATS. Some broker-dealer operators may also offer subscribers the use of algorithmic trading strategies, which are computer assisted trading tools that, for instance, may be used by or on behalf of institutional investors to execute orders that are typically too large to be executed all at once without excessive price impact, and divide the orders into many small orders that are fed into the marketplace over time.398 In some cases, a broker-dealer operator offering products or services in 397 See Part III, Item 3 of proposed Form ATS–N. Staff of the Division of Trading and Markets, Commission, ‘‘Equity Market Structure Literature Review, Part II: High Frequency Trading,’’ at 5 (March 18, 2014), https:// www.sec.gov/marketstructure/research/hft_lit_ review_march_2014.pdf. 398 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 connection with a subscriber’s use of the NMS Stock ATS may result in the subscribers receiving more favorable terms from the broker-dealer operator with respect to their use of the NMS Stock ATS. For example, if a subscriber purchases a service offered by the broker-dealer operator of an NMS Stock ATS, the broker-dealer operator might also provide that subscriber more favorable terms for their use of the NMS Stock ATS than other subscribers who do not purchase the service. Such favorable terms could include fee discounts or access to a faster connection line to the NMS Stock ATS. Additionally, a broker-dealer operator of an NMS Stock ATS may only offer certain products and services to certain subscribers or may offer products and services on different terms to different categories of subscribers. The Commission preliminarily believes that market participants would want to know, when assessing an NMS Stock ATS as a potential trading venue, the range of services or products that the broker-dealer operator or its affiliates may offer subscribers of the NMS Stock ATS because such services or products may have an impact on the subscribers’ access to, or trading on, the NMS Stock ATS. Request for Comment 184. Do you believe the Commission should require the disclosure of the information on Part III, Item 3 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 185. Do you believe Part III, Item 3 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding other products or services offered to subscribers used in connection with trading on the NMS Stock ATS by the broker-dealer operator or any of its affiliates? Why or why not? Please support your arguments. 186. Do you believe that Part III, Item 3 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required? If not, how should Part III, Item 3 of proposed Form ATS–N be revised to provide additional clarity? Please explain in detail. 187. Do you believe there is other information that market participants might find relevant or useful regarding other products and services offered to subscribers by broker-dealer operators or their affiliates? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 Form ATS–N. Please support your arguments. 188. Do you believe that the Commission should expand the proposed disclosures in Part III, Item 3 of proposed Form ATS–N to products or services offered by the broker-dealer operator or its affiliates that are offered to subscribers, but not necessarily offered in connection with transacting on the NMS Stock ATS? Why or why not? Please explain. Do you believe there is other information that market participants might find useful regarding the products or services offered to subscribers by the broker-dealer operator or its affiliates? If so, what information should be added to the disclosure requirements? Please explain. 189. What are the potential costs and benefits of disclosing the information required by Part III, Item 3 of proposed Form ATS–N? Do you believe the disclosures in Part III, Item 3 of proposed Form ATS–N would have the potential to impact innovation? Why or why not? Would the proposed disclosures in Part III, Item 3 of proposed Form ATS–N require brokerdealer operators of NMS Stock ATSs to reveal too much (or not enough) information about their structure and operations? Why or why not? Please support your arguments. 190. Do you believe there is any information regarding the products or services offered to subscribers by the broker-dealer operator that the NMS Stock ATS should not be required to disclose on proposed Form ATS–N due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 191. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 3 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 3? 5. Broker-Dealer Operator Arrangements With Unaffiliated Trading Centers Part III, Item 4 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether the brokerdealer operator or any of its affiliates have any formal or informal arrangement with an unaffiliated person(s), or affiliate(s) of such person, that operates a trading center 399 regarding access to the NMS Stock ATS, 399 See E:\FR\FM\28DEP3.SGM supra note 386 (defining trading center). 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules including preferential routing arrangements. If so, the NMS Stock ATSs would be required to identify the person(s) and the trading center(s) and to describe the terms of the arrangement(s).400 Part III, Item 4 of proposed Form ATS–N is designed to inform subscribers and the Commission about arrangements that may impact a subscriber’s experience on the NMS Stock ATS and allow market participants to evaluate potential conflicts of interest of the broker-dealer operator. For example, Part III, Item 4 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether its broker-dealer operator has any arrangement with another unaffiliated NMS Stock ATS pursuant to which the NMS Stock ATS would route orders or other trading interest to the unaffiliated NMS Stock ATS for possible execution prior to routing to any other destination. Similarly, Part III, Item 4 of proposed Form ATS–N would require disclosure of an arrangement pursuant to which any subscriber orders routed out of the unaffiliated NMS Stock ATS would be routed first to the NMS Stock ATS before any other trading center, and would also require disclosure of the terms of the arrangement, for example, whether the NMS Stock ATS was providing monetary compensation or some other brokerage service to the unaffiliated NMS Stock ATS in exchange for the order flow.401 The Commission preliminarily believes that market participants would consider information about any arrangements between a broker-dealer operator of an NMS Stock ATS and other trading centers relevant to their evaluation of an NMS Stock ATS as a potential trading venue. The disclosure of such arrangements could reveal potential conflicts of interest of the broker-dealer operator or could identify potential sources of information leakage. For example, a potential conflict of interest could arise where an NMS Stock ATS has a preferred routing arrangement with an unaffiliated nonATS trading center that provides that all orders sent to the NMS Stock ATS would first be routed to the unaffiliated non-ATS trading center before entering the NMS Stock ATS in exchange for monetary compensation. Such an 400 See Part III, Item 4 of proposed Form ATS–N. 401 The Commission notes that a broker-dealer operator may have valid business reasons for it or its affiliates to have formal or informal arrangements with an unaffiliated person(s), or affiliate(s) of such person, that operates a trading center regarding access to the NMS Stock ATS. The Commission is not proposing to limit the ability for a broker-dealer operator to have such arrangements. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 arrangement could also pose a risk of information leakage in that the non-ATS trading center would know that those orders that it does not execute would be routed to the NMS Stock ATS.402 Part III, Item 4 of proposed Form ATS–N would also require disclosure of mutual access arrangements between an NMS Stock ATS and other trading centers whereby, for example, a broker-dealer operator or its affiliates may offer access to its NMS Stock ATS in exchange for access to the NMS Stock ATS of another broker-dealer operator. The Commission notes that an NMS Stock ATS would not be prohibited from establishing arrangements with other trading centers, provided that such arrangements comply with other applicable laws and rules, including applicable federal securities laws and Regulation ATS. However, the Commission preliminarily believes that market participants could benefit from disclosures about such arrangements and would use such information when determining whether to subscribe, or route orders, to a particular NMS Stock ATS. Additionally, the Commission preliminarily believes that disclosure of such arrangements would help the Commission perform its oversight functions by enabling it to better evaluate an NMS Stock ATS’s compliance with the requirements of Regulation ATS, such as Rule 301(b)(10). Request for Comment 192. Do you believe the Commission should require the disclosure of the information on Part III, Item 4 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 193. Do you believe Part III, Item 4 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding any formal or informal arrangement by the brokerdealer operator or any of its affiliates with an unaffiliated person(s), or affiliate(s) of such person, that operates a trading center 403 regarding access to the NMS Stock ATS, including preferential routing arrangements? Why or why not? Please support your arguments. 402 Alternatively, if an arrangement between the NMS Stock ATS and unaffiliated trading center provided that any subscriber orders routed out of the NMS Stock ATS would be first routed to the unaffiliated non-ATS trading center, the NMS Stock ATS may have an incentive to remove subscribers’ orders from the NMS Stock ATS and allow the unaffiliated non-ATS trading center the opportunity to execute those orders. 403 See supra note 386 (defining trading center). PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 81049 194. Do you believe that Part III, Item 4 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required relating to access arrangements and preferred routing arrangements with other unaffiliated trading centers? If not, how should Part III, Item 4 of proposed Form ATS–N be revised to provide additional clarity? Please explain. 195. What are the potential costs and benefits of disclosing the information required by Part III, Item 4 of proposed Form ATS–N? Do you believe the disclosures in Part III, Item 4 of proposed Form ATS–N would have the potential to impact innovation? Why or why not? Would the proposed disclosures in Part III, Item 4 of proposed Form ATS–N require brokerdealer operators of NMS Stock ATSs to reveal too much (or not enough) information about their structure and operations? Why or why not? Please support your arguments. 196. Do you believe that the Commission should include access arrangements of affiliates of the brokerdealer operator in Part III, Item 4 of proposed Form ATS–N? Why or why not? Please support your arguments. Conversely, should disclosures of arrangements with other trading centers by affiliates be extended to more remote affiliates under a revised definition of ‘‘affiliate’’? 404 Should disclosure apply to a more limited set of affiliates? Why or why not? Please support your arguments. 197. Do you believe that the Commission should expand the proposed disclosure requirements to other arrangements beyond access and preferred routing that the broker-dealer operator or its affiliates might have with other trading centers? If so, what other arrangements do you believe should be disclosed? Please explain in detail. 198. Do you believe that the Commission should limit or expand in any way the proposed disclosure requirements to require disclosure of arrangements regarding access by the broker-dealer operator or its affiliates to both other trading centers and affiliates of those other trading centers? Why or why not? Please support your arguments. 199. Do you believe there is other information that market participants might find relevant or useful regarding the broker-dealer operator or its affiliates’ arrangements with other trading centers? If so, describe such information and explain whether, and if so why, such information should be 404 See, e.g., supra note 385 and accompanying text. E:\FR\FM\28DEP3.SGM 28DEP3 81050 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules required to be provided under proposed Form ATS–N. Please support your arguments. 200. Do you believe there is any information regarding the broker-dealer operator or its affiliates’ arrangements with other trading centers that the NMS Stock ATS should not be required to disclose on proposed Form ATS–N due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 201. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 4 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 4? mstockstill on DSK4VPTVN1PROD with PROPOSALS3 6. Trading on the NMS Stock ATS by the Broker-Dealer Operator and Its Affiliates Part III, Item 5 of proposed Form ATS–N would require certain disclosures related to the trading activity of the broker-dealer operator or its affiliates on the NMS Stock ATS. Specifically, Part III, Item 5 of proposed Form ATS–N would require the NMS Stock ATS to disclose whether the broker-dealer operator, or any of its affiliates, enters orders or other trading interest on the NMS Stock ATS. If so, the NMS Stock ATS would be required to: (1) Identify each affiliate and business unit of the broker-dealer operator that may enter orders or other trading interest on the NMS Stock ATS; (2) describe the circumstances and capacity (e.g., proprietary, agency) in which each identified affiliate and business unit enters orders or other trading interest on the NMS Stock ATS; (3) describe the means by which each identified affiliate and business unit enters orders or other trading interest on the NMS Stock ATS (e.g., directly through a FIX connection to the NMS Stock ATS, or indirectly, by way of the broker-dealer operator’s SOR (or similar functionality), algorithm, intermediate application, or sales desk); and (4) describe any means by which a subscriber can be excluded from interacting or trading with orders or other trading interest of the brokerdealer operator or its affiliates on the NMS Stock ATS.405 405 The Commission notes that a broker-dealer operator may have valid business reasons for it or its affiliates to trade on the NMS Stock ATS. The Commission is not proposing to limit the ability for VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 As noted above, Part III, Item 5(a) of proposed Form ATS–N would require the NMS Stock ATS to identify each affiliate and business unit (e.g., a sales desk or proprietary trading unit) and affiliate of the broker-dealer operator that can enter orders or other trading interest on the NMS Stock ATS. The Commission preliminarily believes that disclosure of whether a broker-dealer operator of an NMS Stock ATS or its affiliates may trade on that NMS Stock ATS would be important to subscribers with respect to the potential conflicts of interest that may arise from the unique position the broker-dealer operator occupies in relation to the NMS Stock ATS. If the person that operates and controls a trading center is also able to trade on that trading center, there may be an incentive to design the operations of the trading center to favor the trading activity of the operator of the trading center or affiliates of the operator.406 The operator of a trading center that also trades on the trading center it operates would likely have informational advantages over others trading on the trading center such as a better understanding of the manner in which the system operates or who is trading on the trading center. In the most egregious case, the operator of the trading center might use the confidential trading information of other traders to advantage its own trading on that trading center, which, in context of an ATS, would violate Rule 301(b)(10). Accordingly, the Commission believes that subscribers would benefit from knowing whether and how a brokerdealer operator or its affiliates trade on the NMS Stock ATS to which they may route orders or become a subscriber. Such information would allow market participants to evaluate the extent of the potential conflicts of interest posed by the broker-dealer operator or its affiliates’ participation on the NMS Stock ATS and to inquire further about such trading activity if they choose. Part III, Item 5(b) of proposed Form ATS–N would require an NMS Stock ATS to disclose the circumstances and capacity in which the broker-dealer operator’s business units or affiliates may trade on the NMS Stock ATS, such as whether they are trading on a proprietary basis (i.e., for their own accounts) or agency basis or both. This disclosure is meant to provide insight as to the nature of the trading of the broker-dealer operator and/or its affiliates. The Commission preliminarily believes that market participants would a broker-dealer operator to trade on any such NMS Stock ATS. 406 See supra note 370 and accompanying text. PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 find this information useful in evaluating NMS Stock ATSs because they may perceive agency trading by the broker-dealer operator or its affiliates as posing less of a conflict of interest as compared to proprietary trading. For example, market participants may perceive a lesser potential for a conflict of interest if the broker-dealer operator discloses that the broker-dealer operator or its affiliates trade on its own NMS Stock ATS only in an agency capacity with its customers’ orders as opposed to trading on the NMS Stock ATS in a principal capacity on a proprietary basis—where the broker-dealer operator or its affiliates may have increased incentives to use their informational advantage in operating the NMS Stock ATS to advance their trading opportunities.407 Alternatively, market participants could conclude that the broker-dealer operator’s agency trading on its own NMS Stock ATS could nevertheless pose an unacceptable conflict of interest as the broker-dealer operator may be able to advantage its customers’ orders to the disadvantage of subscribers to the NMS Stock ATS. The Commission proposes to provide market participants with information regarding the nature of the trading activity of the broker-dealer operator and its affiliates on the NMS Stock ATS so that subscribers (and potential subscribers) can evaluate potential conflicts of interest that may arise from that trading activity. Part III, Item 5(c) of proposed Form ATS–N would require an NMS Stock ATS to describe the means by which the business units of the broker-dealer operator and its affiliates enter orders or other trading interest into the NMS Stock ATS. Item 5(d) would require a description of any means by which a subscriber can be excluded from interacting or trading with orders or other trading interest of the brokerdealer operator or its affiliates. Some NMS Stock ATSs that currently transact in NMS stocks may provide both direct and indirect means for subscribers to enter orders or other trading interest to the ATS. Based on its experience, the Commission understands that subscribers to some NMS Stock ATSs may enter orders or other trading interest directly to the ATS using, for example, a direct FIX connection,408 while other subscribers may enter 407 See supra note 368. the extent that a subscriber to the NMS Stock ATS directly sends an order to the NMS Stock ATS by way of FIX protocol, the NMS Stock ATS should identify and describe any intermediate functionality that the subscriber order may pass through on its way to the NMS Stock ATS as part of the FIX process. 408 To E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules orders or other trading interest indirectly to the ATS using, for example, an algorithm, the broker-dealer operator’s smart order router,409 or the broker-dealer operator’s sales desks. As such, there are a variety of means by which business units of the brokerdealer operator or its affiliates of the broker-dealer operator may connect to, and enter orders on, an NMS Stock ATS. The Commission preliminarily believes that market participants evaluating NMS Stock ATSs may find this information relevant in assessing any potential advantages that the broker-dealer operator or its affiliates may have over other subscribers to the NMS Stock ATS. For example, an NMS Stock ATS may permit orders or other trading interest of all of its affiliates that trade on the NMS Stock ATS to enter through a means that can be used only by the broker-dealer operator or its affiliates and not by non-affiliated subscribers to the NMS Stock ATS (e.g., bypassing the broker-dealer operator’s SOR). The Commission preliminarily believes that market participants would want to know these circumstances, as the difference in access or order entry could result in certain advantages, such as the speed at which orders could be entered or cancelled. Moreover, the Commission preliminarily believes that based on how a broker-dealer operator’s business units or affiliates access and trade on an NMS Stock ATS—or on other considerations—certain subscribers may not wish to interact with the order flow of the broker-dealer operator or its affiliates. Accordingly, the Commission preliminarily believes that it is important for market participants to have the information to elect whether and how they may avoid trading against orders or other trading interest of the broker-dealer operator or its affiliates on an NMS Stock ATS to achieve their investing or trading objectives. Overall, the Commission preliminarily believes that the disclosures required under Part III, Item 5 of proposed Form ATS–N would be useful to many market participants. The Commission notes that market participants may vary widely in their decision making process in selecting a particular trading center to effect their trades or route their orders, and therefore, the Commission preliminarily believes that some market participants may not be concerned with the potential conflicts of interest posed by the trading activity of the broker dealer operator or its affiliates on the NMS Stock ATS. 409 See infra Section VII.B.7 (discussing the use of smart order routers by broker-dealer operators of NMS Stock ATSs). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 However, absent disclosure of this trading activity of the broker-dealer operator or its affiliates, subscribers and potential subscribers that take such information into account when executing their trading or investment strategies likely would neither be aware of such potential conflicts nor able to assess whether the conflicts might impact those strategies. Consequently, the Commission preliminary believes that it would be useful to market participants for an NMS Stock ATS to be required to disclose the information required in Part III, Item 5 of proposed Form ATS–N. Request for Comment 202. Do you believe the Commission should require the disclosure of the information on Part III, Item 5 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 203. Do you believe Part III, Item 5 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the trading activity of the broker-dealer operator or its affiliates on the NMS Stock ATS? Why or why not? Please support your arguments. 204. Do you believe that Part III, Item 5 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required relating to the broker-dealer operator and its affiliates trading on the NMS Stock ATS? If not, how should Part III, Item 5 of proposed Form ATS–N be revised to provide additional clarity? Please explain. 205. Do you believe proposed disclosures in Part III, Item 5 of proposed Form ATS–N should be applied to the trading activity on the NMS Stock ATS of affiliates of the broker-dealer operator? Why or why not? Should disclosures of affiliates trading on the NMS Stock ATS be extended to more remote affiliates under a revised definition of ‘‘affiliate’’? 410 Should disclosures apply to a more limited set of affiliates? Why or why not? Please support your arguments. 206. Do you believe that the Commission should enhance measures to prevent potential conflicts of interest posed by the broker-dealer operator or its affiliates trading on its own NMS Stock ATS, such as prohibiting proprietary trading by the broker-dealer operator or its affiliates on the NMS Stock ATS? If no, why? If yes, what 410 See, e.g., supra note 385 and accompanying text. PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 81051 measures should the Commission consider? Please explain in detail. 207. What are the potential costs and benefits of disclosing the information required by Part III, Item 5 of proposed Form ATS–N? Do you believe the disclosures in Part III, Item 5 of proposed Form ATS–N would have the potential to impact innovation or discourage broker-dealer operators or their affiliates from trading on their own NMS Stock ATS? Why or why not? Would the proposed disclosures in Part III, Item 5 of proposed Form ATS–N require broker-dealer operators of NMS Stock ATSs to reveal too much (or not enough) information about their structure and operations? Why or why not? Please support your arguments. 208. Do you believe there is other information that market participants might find relevant or useful regarding the trading activity on the NMS Stock ATS by the broker-dealer operator or its affiliates? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 209. Do you believe there is any information regarding the trading activity on the NMS Stock ATS by the broker-dealer operator or its affiliates that the NMS Stock ATS should not be required to disclose on Form ATS–N due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 210. Should the Commission require separate disclosures for different types of trading conducted by the brokerdealer operator on the NMS Stock ATS, such as trading by the broker-dealer operator for the purpose of correcting error trades executed on the ATS, as compared to other types of proprietary trading? Why or why not? Please support your arguments. If so, what types of proprietary trading should be addressed separately and why? What disclosures should the Commission require about these types of proprietary trading and why? Please explain in detail. 211. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 5 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 5? E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81052 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules 7. Broker-Dealer Operator Smart Order Routers (or Similar Functionalities) and Algorithms Part III, Item 6 of proposed Form ATS–N would require the NMS Stock ATS to disclose whether the brokerdealer operator, or any of its affiliates, use a SOR(s) (or similar functionality), an algorithm(s), or both to send or receive subscriber orders or other trading interest to or from the NMS Stock ATS, and if so, to: (1) Identify the SOR(s) (or similar functionality) or algorithm(s) and identify the person(s) that operates the SOR(s) (or similar functionality) or algorithm(s), if other than the broker-dealer operator; 411 and (2) describe the interaction or coordination between the identified SOR(s) (or similar functionality) or algorithm(s) and the NMS Stock ATS, including any information or messages about orders or other trading interest (e.g., IOIs) that the SOR(s) (or similar functionality) or algorithm(s) send or receive to or from the NMS Stock ATS and the circumstances under which such information may be shared with any person. Today, most broker-dealers that operate an NMS Stock ATS use some form of SOR (or similar functionality) in connection with the NMS Stock ATS. A SOR (or similar functionality) can generally be understood as an automated system used to route orders or other trading interest among trading centers, including proprietary non-ATS trading centers operated by the brokerdealer operator, to carry out particular trading instructions or strategies of a broker-dealer. Smart order routers (or similar functionalities) have become an integral part of the business of many multi-service broker-dealers, given the increase in the speed of trading in today’s equity markets and the large number of trading centers, including national securities exchanges, ATSs, and non-ATS trading centers, that have emerged since the adoption of Regulation ATS. In addition to the SOR (or similar functionality), orders or other trading interest may be entered on an NMS Stock ATS through the use of a trading algorithm, which is a computer assisted trading tool that, for instance, may be used by or on behalf of institutional investors to execute orders that are typically too large to be executed all at once without excessive price impact, and divide the orders into many small orders that are fed into the marketplace over time.412 411 See supra note 362. Staff of the Division of Trading and Markets, Commission, ‘‘Equity Market Structure Literature Review, Part II: High Frequency 412 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Broker-dealer operators of NMS Stock ATSs or their affiliates may use SORs (or similar functionality) or algorithms in a variety of ways.413 For example, the broker-dealer operator may use the SOR (or similar functionality) to route orders on behalf of its customers and proprietary trading desks to different trading venues, or the broker-dealer operator may use the SOR as the primary means of routing subscriber orders or other trading interest to or from the NMS Stock ATS. The Commission understands, based on experience, that for some ATSs that currently transact in NMS stocks, the SOR (or similar functionality) or algorithm of the broker-dealer operator or its affiliates is the only means of access (i.e., all orders or other trading interest entered on, or removed from, the ATS, must pass through the SOR (or similar functionality) or algorithm). A broker-dealer operator may also use a SOR (or similar functionality) or algorithm to handle all order flow received by the broker-dealer operator (or its affiliates), including both orders that a subscriber has specifically directed to the NMS Stock ATS and orders that may not be sent to the NMS Stock ATS, as well as the brokerdealer’s own proprietary orders and those of its affiliates. For many orders, the SOR (or similar functionality) or algorithm determines whether to route the order to the NMS Stock ATS, another NMS Stock ATS or non-ATS trading center operated by the brokerdealer operator, another broker-dealer, an unaffiliated NMS Stock ATS, or a national securities exchange. The SOR (or similar functionality) may obtain knowledge of subscriber orders or other trading interest that have been routed to the NMS Stock ATS (and may now be resting on the NMS Stock ATS) and subscriber orders that have been routed out of the NMS Stock ATS. Similarly, the system operating an algorithm used by the broker-dealer operator to enter subscriber orders based on the algorithm’s trading strategy may obtain information about subscriber orders sent to the NMS Stock ATS. The brokerTrading,’’ at 5 (March 18, 2014), https:// www.sec.gov/marketstructure/research/ hft_lit_review_march_2014.pdf. 413 The Commission notes that, similar to legacy NMS Stock ATSs, broker-dealer operators are likely to vary in their organizational structures. Accordingly, the Commission proposes to include affiliates of the broker-dealer operator that may operate a SOR(s) (or similar functionality) or algorithm(s) in Part III, Item 6 of proposed Form ATS–N to ensure that SORs (or similar functionalities) or algorithms used in connection with the NMS Stock ATSs are disclosed regardless of whether the SOR(s) (or similar functionality) or algorithm(s) is operated by an affiliate of the brokerdealer operator. PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 dealer operator (or its affiliates) programs and operates the SOR (or similar functionality) and/or algorithm(s), unless the broker-dealer operator contracts such functions to a third-party vendor, in which case the broker-dealer operator or third-party vendor may have access to information that passes through the SOR(s) (or similar functionality), algorithm(s) or both. The Commission preliminarily believes that the high likelihood that a SOR (or similar functionality) or algorithm could access subscribers’ confidential trading information necessitates disclosure of certain information to subscribers about the use of a SOR (or similar functionality) or algorithm by the broker-dealer operator or its affiliates to route subscriber orders to or out of the NMS Stock ATS. The Commission preliminarily believes that subscribers and the Commission would benefit from increased disclosures about the use of a SOR(s) (or similar functionality) or algorithm(s) by the broker-dealer operator or its affiliates in connection with the NMS Stock ATS because of the potential for information leakage. Existing Form ATS does not specifically inquire about the use of a SOR (or similar functionality) or algorithms in connection with an ATS and based on Commission experience, the Commission is concerned that there is limited information available to subscribers about the interaction between SORs (or similar functionalities) or algorithms and affiliated ATSs that trade NMS stocks, despite the importance of SORs (or similar functionality) or algorithms to the functions and operations of such ATSs. The Commission preliminarily believes that information provided on Form ATS–N would allow market participants to better understand the operation of an NMS Stock ATS and the circumstances that may give rise to potential conflicts of interest and information leakage. Part III, Item 6(a) of proposed Form ATS–N would require an NMS Stock ATS to identify the SOR(s) (or similar functionality) or algorithm(s) and identify the person(s) that operates the SOR (or similar functionality) and algorithm(s). Part III, Item 6(a) of proposed Form ATS–N is designed to provide subscribers with information about who operates the SOR(s) (or similar functionality) or algorithm(s) used in connection with the NMS Stock ATS, which would thereby inform subscribers about who may have access to their confidential trading information or control over the entry and removal of orders or other trading interest to and E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules from the NMS Stock ATS. Information about the persons who operate a SOR(s) (or similar functionality) or algorithm(s) used in connection with the NMS Stock ATS and how the SOR(s) (or similar functionality) or algorithm(s) operates would allow subscribers to assess potential sources of information leakage and conflicts of interest that may arise from the operation of the SOR(s) (or similar functionality) and/or algorithm(s). Part III, Item 6(b) of proposed Form ATS–N would require an NMS Stock ATS to describe the interaction or coordination between the identified SOR(s) (or similar functionality) or algorithm(s) and the NMS Stock ATS, including any information or messages about orders or other trading interest (e.g., IOIs) that the SOR(s) (or similar functionality) or algorithm(s) send or receive to or from the NMS Stock ATS and the circumstances under which such information may be shared with any person. Because the SOR(s) (or similar functionality) or algorithm(s) and NMS Stock ATS are typically operated by the same broker-dealer operator (rather than a third-party vendor), the Commission preliminarily believes subscribers to the NMS Stock ATS are likely to find it important to understand what information about their orders is obtained by a SOR(s) (or similar functionality) or algorithm(s) and the circumstances under which that information may be used by the brokerdealer operator of the NMS Stock ATS, its affiliates, or other persons. The Commission is concerned that without this information, subscribers that send orders to the NMS Stock ATS by way of the broker-dealer operator’s SOR (or similar functionality) or algorithm may not be able to understand the conditions under which information about their confidential trading information may be leaked. The interaction or coordination of the SOR(s) (or similar functionality) or algorithm(s) with the NMS Stock ATS likely varies across NMS Stock ATSs. For instance, a SOR (or similar functionality) or algorithm may check for potential contra-side interest in a particular symbol on the NMS Stock ATS prior to sending the subscriber order or other trading interest into the NMS Stock ATS. Such protocol carried out by the SOR (or similar functionality) or algorithm may send only information about the symbol and side (i.e., buy or sell) of the subscriber’s order or other trading interest, but not the size, price, identity of the subscriber or other information. As another example, an NMS Stock ATS that uses IOIs as part of its platform may use its SOR (or VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 similar functionality) or an algorithm to facilitate the sending of IOIs to relevant persons regarding orders or other trading interest resting on the NMS Stock ATS. The Commission preliminarily believes that the operations and functions of the SOR(s) (or similar functionality) or algorithm(s) in these examples would be relevant to subscribers and helpful in understanding how the NMS Stock ATS operates. The Commission notes that an ATS may consist of various functionalities or mechanisms that operate collectively as a Rule 3b–16 system to bring together the orders for securities of multiple buyers and sellers using nondiscretionary methods.414 Based on Commission experience, most brokerdealer operators that use a SOR(s) (or similar functionality) or algorithm operate the SOR(s) (or similar functionality) or algorithm(s) separate and apart from their ATS. However, to the extent that a SOR (or similar functionality) or algorithm operates jointly with, or performs a function of, the NMS Stock ATS to bring together the orders for securities of multiple buyers and sellers using established nondiscretionary methods, the SOR (or similar functionality) or algorithm may be considered part of the NMS Stock ATS.415 For example, a SOR (or similar functionality) or algorithm that is, based on the facts and circumstances, the exclusive means for subscribers to access and enter orders or other trading interest on NMS Stock ATS for execution would be regarded as part of 414 Under Rule 3b–16 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, nondiscretionary 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. 17 CFR 240.3b–16(a). 415 The Commission noted in adopting Regulation ATS that the Commission ‘‘will attribute the activities of a trading facility to a system if that facility is offered by the system directly or indirectly’’ and ‘‘if an organization arranges for separate entities to provide different pieces of a trading system, which together meet the definition contained in paragraph (a) of Rule 3b–16, the organization responsible for arranging the collective efforts will be deemed to have established a trading facility.’’ See Regulation ATS Adopting Release, supra note 7, at 70852. If the SOR(s) (or similar functionality) or algorithm(s) were operated by an affiliate of the NMS Stock ATS or an entity unaffiliated with the NMS Stock ATS, the SOR(s) (or similar functionality) or algorithm(s) could still be considered a part of the NMS Stock ATS depending on the facts and circumstances. PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 81053 the operations of the NMS Stock ATS because the SOR (or similar functionality) or algorithm would function as the mechanism for orders or other trading interest to be brought together and interact in the NMS Stock ATS. The Commission preliminarily believes that information provided on proposed Form ATS–N about the use of a SOR (or similar functionality) or algorithm under Part III, Item 6 of proposed Form ATS–N would allow the Commission to better understand the operations and scope of the NMS Stock ATS. That is, the proposed disclosures would assist the Commission in determining if a SOR (or similar functionality) or algorithm is facilitating the bringing together of orders for securities of multiple buyers and sellers using established nondiscretionary methods, and would consequently be part of the NMS Stock ATS for the purposes of Regulation ATS. Request for Comment 212. Do you believe the Commission should require the disclosure of the information on Part III, Item 6 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 213. Do you believe Part III, Item 6 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding the use of a SOR or algorithm by the broker-dealer operators, or any of its affiliates, to send or receive subscriber orders or other trading interest to or from the NMS Stock ATS? Why or why not? Please support your arguments. 214. Do you believe that Part III, Item 6 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required relating to the broker-dealer operator and its affiliates’ use of SORs (or similar functionality) and algorithms in connection with the NMS Stock ATS? If not, how should Part III, Item 6 of proposed Form ATS–N be revised to provide additional clarity? Please explain in detail. 215. Do you believe it is appropriate for the Commission to require disclosure about the use of SORs (or similar functionalities) and algorithms by the broker-dealer operator, or its affiliates, to send or receive orders or other trading interest to or from the NMS Stock ATS? Why or why not? Please support your arguments. If so, what level of detail should be disclosed about how SORs (or similar functionalities) and algorithms determine whether to send or receive E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81054 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules orders or other trading interest to the NMS Stock ATS? Please be specific. 216. What are the potential costs and benefits of disclosing the information required by Part III, Item 6 of proposed Form ATS–N? Do you believe the disclosures in Part III, Item 6 of proposed Form ATS–N would have the potential to impact innovation? Why or why not? Would the proposed disclosures in Part III, Item 6 of proposed Form ATS–N require brokerdealer operators of NMS Stock ATSs to reveal too much (or not enough) about their structure and operations? Why or why not? Please support your arguments. 217. Do you believe the proposed disclosures in Part III, Item 6 of proposed Form ATS–N related to the use of SORs (or similar functionality) and algorithms should be applied to affiliates of the broker-dealer operator? Why or why not? Please support your arguments. 218. Do you believe there is other information that market participants might find relevant or useful regarding broker-dealer operators or their affiliates’ SORs (or similar functionalities) and algorithms? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 219. Do you believe there is any information regarding broker-dealer operators or their affiliates’ SORs (or similar functionality) and algorithms that the NMS Stock ATS should not be required to disclose on proposed Form ATS–N due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 220. Do you believe that most subscribers to ATSs that transact in NMS stock access the ATSs through the SOR (or similar functionality) or algorithm of the broker-dealer operator (or its affiliates), or do they connect directly to the ATS through some other means, or both? Please explain in detail. 221. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 6 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 6? 8. Shared Employees of NMS Stock ATS Part III, Item 7 of proposed Form ATS–N would require an NMS Stock VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 ATS to state whether any employee of the broker-dealer operator that services the operations of the NMS Stock ATS also services any other business unit(s) of the broker-dealer operator or any affiliate(s) of the broker-dealer operator (‘‘shared employee’’) and, if so, to (1) identify the business unit(s) and/or the affiliate(s) of the broker-dealer operator to which the shared employee(s) provides services and identify the position(s) or title(s) that the shared employee(s) holds in the business unit(s) and/or affiliate(s) of the brokerdealer operator; and (2) describe the roles and responsibilities of the shared employee(s) at the NMS Stock ATS and the business unit(s) and/or affiliate(s) of the broker-dealer operator.416 Part III, Item 7 of proposed Form ATS–N is designed to provide information to market participants and the Commission about circumstances that might give rise to a potential conflict of interest and potential information leakage involving shared employees of the broker-dealer operator. Responses to Part III, Item 7 of proposed Form ATS–N would require an NMS Stock ATS to describe the roles and responsibilities of the shared employees with the NMS Stock ATS and the other business units of the broker-dealer operator or affiliates. Responses to Part III, Item 7 of proposed Form ATS–N would be required to be sufficiently detailed to provide a comprehensive understanding of the full range of the shared employee’s responsibilities with the NMS Stock ATS and each relevant entity, and include disclosure of responsibilities that could enable the employee to view subscribers’ confidential trading information. The Commission preliminarily believes that market participants would find information about the multiple roles or functions of shared employees disclosed in Part III, Item 7 of proposed Form ATS–N important in evaluating whether to route orders to a particular ATS. For example, to identify and understand potential sources of information leakage, market participants would likely want to know if an employee of the brokerdealer operator that is responsible for the operations of a system supporting the NMS Stock ATS is also responsible for the proprietary trading activity of an affiliate of the broker-dealer operator that trades on the NMS Stock ATS. In this example, market participants might also be interested in understanding conflicts of interest that may result from the shared employee performing multiple roles, as the shared employee could have an incentive to alter the 416 See PO 00000 Part III, Item 7 of proposed Form ATS–N. Frm 00058 Fmt 4701 Sfmt 4702 operations of the NMS Stock ATS to benefit the broker-dealer operator or an affiliate of the NMS Stock ATS.417 The Commission would preliminarily view any personnel that service the trading functions of the NMS Stock ATS, such as those performing information technology, programming, testing, or system design functions as employees that ‘‘service the operations of the NMS Stock ATS.’’ Other employees of the NMS Stock ATS that are otherwise necessary for the trading functions of the NMS Stock ATS would also be included in the disclosure requirement of Part III, Item 7 of proposed Form ATS–N. Clerical employees or those performing solely administrative duties such as the payroll functions for the employees of the NMS Stock ATS would preliminarily not be included within the proposed disclosure. Request for Comment 222. Do you believe the Commission should require the disclosure of the information on Part III, Item 7 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 223. Do you believe Part III, Item 7 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to ‘‘shared employees’’? Why or why not? Please support your arguments. 224. Do you believe that Part III, Item 7 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required relating to shared employees of the broker-dealer operator? If not, how should Part III, Item 7 of proposed Form ATS–N be revised to provide additional clarity? Please explain. 225. Do you believe that it is sufficiently clear who would be considered a ‘‘shared employee’’ under Part III, Item 7 of proposed Form ATS– N? Why or why not? Is the scope of ‘‘shared employees’’ provided under Part III, Item 7 reasonable? Why or why not? Please explain. 226. Do you believe there is any information contained in the proposed disclosures in Part III, Item 7 of proposed Form ATS–N regarding shared employees of the broker-dealer operator that the NMS Stock ATS should not be required to disclose on proposed Form ATS–N due to concerns regarding confidentiality, business reasons, trade 417 The Commission notes that a broker-dealer operator may have valid business reasons for it or its affiliates having shared employees, and the Commission is not proposing to limit the ability for a broker-dealer operator to have such arrangements. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 227. What are the potential costs and benefits of disclosing the information required by Part III, Item 7 of proposed Form ATS–N? Do you believe the disclosures in Part III, Item 7 of proposed Form ATS–N would have the potential to impact innovation or the manner in which NMS Stock ATSs and broker-dealer operators use their employees? Why or why not? Would the proposed disclosures in Part III, Item 7 of proposed Form ATS–N require broker-dealer operators of NMS Stock ATSs to reveal too much (or not enough) information about their structure and operations? Why or why not? Please support your arguments. 228. Do you believe there is other information that market participants might find relevant or useful regarding shared employees of the broker-dealer operator? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 229. Do you believe that the Commission should expand the proposed disclosures in Part III, Item 7 of proposed Form ATS–N to other employees, personnel, or independent contractors of the broker-dealer operator? Why or why not? If so, which employees, personnel, or independent contractors should be included and what information about such persons should be solicited? Please explain. 230. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 7 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 7? 9. Service Providers to the NMS Stock ATS Part III, Item 8 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether any operation, service, or function of the NMS Stock ATS is performed by any person(s) other than the broker-dealer operator of the NMS Stock ATS, and if so to: (1) Identify the person(s) (in the case of a natural person, to identify only the position or title) performing the operation, service, or function and note whether this service provider(s) is an affiliate of the broker-dealer, if applicable; (2) describe the operation, service, or function that the identified VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 person(s) provides and describe the role and responsibilities of that person(s); and (3) state whether the identified person(s), or any of its affiliates, may enter orders or other trading interest on the NMS Stock ATS and, if so, describe the circumstances and means by which such orders or other trading interest are entered on the NMS Stock ATS.418 The Commission notes that Part III, Item 8 of proposed Form ATS–N expands on the disclosure requirements of Exhibit E on current Form ATS, which requires ATSs to disclose the name of any entity other than the ATS that will be involved in the operation of the ATS, including the execution, trading, clearing and settling of transactions on behalf of the ATS; and to provide a description of the role and responsibilities of each entity.419 Part III, Item 8 of proposed Form ATS–N would require more detailed information about service providers to the NMS Stock ATS than is currently required by Form ATS, including whether affiliates of service providers may trade on the NMS Stock ATS.420 Under Part III, Item 8(a) of proposed Form ATS–N, the NMS Stock-ATS must identify any entity that performs any operation, service, or function for the NMS Stock ATS.421 For example, an NMS Stock ATS may engage a thirdparty service provider to provide market data for the NMS Stock ATS to, among other things, calculate reference prices (such as the NBBO). Responses to Part III, Item 8(a) of proposed Form ATS–N would be required to include the name of the company that provides the market data. Part III, Item 8(b) of proposed Form ATS–N would require an NMS Stock ATS to provide, in detail, information about the operations, service, or function of the NMS Stock ATS that is provided by the identified third-party in Part III, Item 8(a) of proposed Form ATS–N and its roles and responsibilities with respect to that operation, service, or function. For 418 See Part III, Item 8 of proposed Form ATS–N. Item 7 of Form ATS (describing the requirements for Exhibit E to Form ATS). 420 The Commission notes that a broker-dealer operator may have valid business reasons for it or its affiliates to have functions of the NMS Stock ATS performed by person(s) other than the brokerdealer operator of the NMS Stock ATS. The Commission is not proposing to limit the ability for a broker-dealer operator to have such arrangements. 421 The Commission is not proposing to require than an NMS Stock ATS provide any personally identifiable information about any natural person in Part III, Item 8(a) of proposed Form ATS–N. Part III, Item 8(a) of proposed Form ATS–N is designed to solicit sufficient information to identify the entity or person providing the service, operation, or function to the NMS Stock ATS, such as the position or title in the case of a natural person acting as a service provider. 419 See PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 81055 example, a broker-dealer operator may engage a third party to host and maintain the trading platform of the NMS Stock ATS. Part III, Item 8(b) of proposed Form ATS–N would require a description of those services and the specific role and responsibilities of the company and its employees. Responses to Part III, Item 8(b) of proposed Form ATS–N would be required to be sufficiently detailed such that market participants and the Commission could understand what functions are performed by a person other than an employee of the broker-dealer operator and what those services include. As guidance for completing this proposed disclosure item, the Commission would view an NMS Stock ATS simply stating that a third-party provides technology or hardware services to the NMS Stock ATS as not sufficiently responsive to the required disclosure. Responses to Part III, Item 8(b) of proposed Form ATS–N, in the example above, would require a detailed description of information technology services, including both hardware and software that may be provided, as well as any programming, ongoing maintenance, monitoring, and other functions the service provider would perform with respect to the NMS Stock ATS. As additional guidance, responses to Item 8 would also be required to include any service provider that provides, for example, such functions as consulting relating to the trading systems or functionality, cyber security, regulatory compliance, and record keeping services or functions of the NMS Stock ATS. Additionally, an NMS Stock ATS would be required to identify and describe the services of any service provider engaged for the purposes of the clearance and settlement of trades for the NMS Stock ATS.422 The Commission intends that the proposed disclosure requirements of Items 8(a) and (b) of Part III of proposed Form ATS–N would apply to any operation, service, or function performed by any person outside of the NMS Stock ATS entity, including affiliates of the broker-dealer operator.423 However, services provided 422 The Commission notes that the examples listed above are not intended to be an exhaustive list of the types of services, and the level of detail about those services, that would be required by Part III, Item 8 of proposed Form ATS–N. The Commission preliminarily believes that the appropriate disclosure would be driven by the particular facts and circumstances of operational structure of the NMS Stock ATS. 423 If, for example, the SOR of an affiliate of the broker-dealer operator is used to route orders to and from the NMS Stock ATS, the SOR would need to be disclosed in Part III, Item 8 of proposed Form E:\FR\FM\28DEP3.SGM Continued 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81056 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules to the NMS Stock ATS by employees of the broker-dealer operator would not need to be disclosed in Part III, Item 8 of proposed Form ATS–N. The activities of such persons, to the extent they are shared employees, would be disclosed pursuant to Part III, Item 7 of proposed Form ATS–N.424 The Commission also notes that it does not intend that the proposed disclosure requirements of Part III, Item 8 of proposed Form ATS–N would extend to operations, services, or functions that are administrative in nature and do not pose a significant risk of information leakage of confidential trading information, such as payroll functions servicing employees of the NMS Stock ATS or email services provided by an outside provider, because the Commission preliminarily believes that information about the services of such third-party services providers and their employees would not be relevant to market participants’ evaluation of an NMS Stock ATS as a trading venue and would not be necessary for the Commission’s oversight functions. Items 8(a) and (b) of Part III of proposed Form ATS–N are designed to provide market participants and the Commission with information about how the NMS Stock ATS operates, potential conflicts of interest, and the potential for information leakage. In particular, the Commission preliminarily believes that this information would inform market participants, as well as the Commission, about what aspects of the NMS Stock ATS’s operations are performed by third-parties that may or may not be under the control of the broker-dealer operator. For example, an NMS Stock ATS whose trading system is operated or supported by a third-party service provider may have business interests that are aligned with those of the service provider. Additionally, depending on the role and responsibilities of the thirdparty service provider, market participants may want to evaluate the robustness of the NMS Stock ATS’s safeguards and procedures to protect confidential subscriber information. Lastly, Part III, Item 8(c) of proposed Form ATS–N would require an NMS Stock ATS to state whether any person identified in Part III, Item 8(a) of proposed Form ATS–N or any of its ATS–N and would likely also need to be disclosed in Part III, Item 6 of proposed Form ATS–N, which relates to SORs used by the broker-dealer operator or its affiliates. 424 See supra Section VII.B.8 (discussing proposed requirements for disclosure pertaining to NMS Stock ATS employees that are shared employees with other business units of the brokerdealer operator or its affiliates). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 affiliates may enter orders or other trading interest on the NMS Stock ATS and if so, to describe the circumstances and means by which such orders or other trading interests are entered on the NMS Stock ATS. The purpose of these disclosures is to provide market participants and the Commission with information about the potential for conflicts of interest that may result from a service provider, or its affiliates, trading on the NMS Stock ATS and the potential for information leakage. For example, the Commission preliminarily believes that a subscriber or potential subscriber likely would want to know whether a person that is not an employee of the broker-dealer operator, but is contracted to service the trading platform that contains the NMS Stock ATS’s book of orders, could enter orders or other trading interest on the NMS Stock ATS. Similarly, the Commission preliminarily believes that a subscriber or a potential subscriber would also want to know whether an affiliate of the service provider could enter orders or other trading interest on the NMS Stock ATS as well and whether its means of access differ from other subscribers. Under both of these scenarios, a potential conflict of interest could result if the service provider has business interests that compete with the trading interests of other subscribers to the NMS Stock ATS. Request for Comment 231. Do you believe the Commission should require the disclosure of the information on Part III, Item 8 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 232. Do you believe Part III, Item 8 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding any operation, service, or function of the NMS Stock ATS performed by any person other than the broker-dealer operator? Why or why not? Please support your arguments. 233. Do you believe that Part III, Item 8 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required relating to service providers of the NMS Stock ATS? If not, how should Part III, Item 8 of proposed Form ATS–N be revised to provide additional clarity? Please explain. 234. What are the potential costs and benefits of disclosing the information required by Part III, Item 8 of proposed Form ATS–N? Do you believe the disclosures in Part III, Item 8 of proposed Form ATS–N would have the PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 potential to impact innovation or discourage arrangements with other service providers? Why or why not? Would the proposed disclosures in Part III, Item 8 of proposed Form ATS–N require broker-dealer operators of NMS Stock ATSs to reveal too much (or not enough) information about their structure and operations? Why or why not? Please support your arguments. 235. Do you believe that any of the information in the proposed disclosure requirements of Part III, Item 8 of proposed Form ATS–N regarding service providers to the NMS Stock ATS should not be required to be disclosed on proposed Form ATS–N due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 236. Do you believe the Commission should adopt a more limited or expansive definition of ‘‘affiliate’’ for purposes of this disclosure item? Why or why not? Please support your arguments. 237. Do you believe there is other information that market participants might find relevant or useful regarding any operation, service, or function of the NMS Stock ATS performed by any person other than the broker-dealer operator? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 238. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 8 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 8? 10. Differences in Availability of Services, Functionality, or Procedures Part III, Item 9 of proposed Form ATS–N would require an NMS Stock ATS to identify and describe any service, functionality, or procedure of the NMS Stock ATS that is available or applies to the broker-dealer operator or its affiliates, that is not available or does not apply to a subscriber(s) to the NMS Stock ATS. The purpose of this disclosure is to alert market participants to the existence of system, functionality, or trading features that the broker-dealer operator or its affiliates may have that E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 other subscribers do not.425 For example, an NMS Stock ATS may employ different procedures governing how orders entered on the NMS Stock ATS by the broker-dealer operator’s business units or affiliates are segmented than it does for other subscribers. The Commission preliminarily believes that the disclosure of those differences in procedures would allow market participants to evaluate whether such differences might put them at a disadvantage when competing against the broker-dealer operator or its affiliates for an execution on the NMS Stock ATS and thus, better enable market participants to decide whether submitting order flow to that NMS Stock ATS aligns with their trading or investment objectives. The Commission notes that a significant difference between national securities exchanges and NMS Stock ATSs is the extent to which each trading center allows access to its services by its users. Section 6(b)(2) of the Exchange Act generally requires registered national securities exchanges to allow any qualified and registered brokerdealer to become a member of the exchange—a key element in assuring fair access to national securities exchange services.426 In contrast, the access requirements that apply to ATSs are much more limited. Because NMS Stock ATSs are exempt from the definition of an ‘‘exchange’’ so long as they comply with Regulation ATS, and thus, are not required to register as a national securities exchange pursuant to Sections 5 and 6 of the Exchange Act, NMS Stock ATSs are not required to provide fair access unless they reach a 5% trading volume threshold in a stock, which almost all NMS Stock ATSs currently do not.427 As a result, access to the services of NMS Stock ATSs is determined primarily by private negotiation, and such access to services can differ among persons that subscribe to the NMS Stock ATS. While the Commission is not proposing to change the fair access requirements applicable to NMS Stock ATSs in this proposal, the Commission is proposing to require, among other things, disclosures on Form ATS–N that identify and describe differences among 425 The Commission notes that it is similarly proposing to require NMS Stock ATSs to disclose differences in the treatment of subscribers on the NMS Stock ATS in a number of proposed disclosure requirements. See, e.g., proposed Items 1(a) and 1(b) of Part IV of proposed Form ATS–N. 426 15 U.S.C. 78f(b)(2). 427 See 17 CFR 242.301(b)(5). See also supra notes 92–95 and accompanying text (discussing the fair access requirements of Regulation ATS). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 subscribers (or other persons) in the services, procedures or functionalities that an NMS Stock ATS provides, as well as disclosures that identify and describe any services, functionalities, or procedures of an NMS Stock ATS that are available to the broker-dealer operator’s affiliates, but are not available to subscribers. The Commission preliminarily believes that the disclosure of these differences would allow market participants to evaluate whether such differences might put them at a disadvantage when trading on a particular NMS Stock ATS and thus, better enable market participants to decide whether submitting order flow to that NMS Stock ATS aligns with their trading or investment objectives. The Commission notes that ATSs may treat subscribers differently with respect to the services offered by the ATS unless prohibited by applicable federal securities laws or the rules and regulations thereunder. For example, an ATS with at least 5% of the average daily volume for any covered security during four of the preceding six months is required to comply with fair access requirements under Rule 301(b)(5) of Regulation ATS,428 which, among other things, requires an ATS to establish written standards for granting access to trading on its system and not unreasonably prohibiting or limiting any person with respect to access to services offered by the ATS by applying the written standards in an unfair or discriminatory manner. Thus, for example, an ATS that discloses a service to one class of subscribers (or makes the associated functionality available to only one class of subscribers) could not, if it were subject to the fair access requirements, discriminate in this manner unless it had fair and nondiscriminatory reasons for doing so. The Commission further notes that, even if an ATS is not subject to the fair access requirements, inaccurate or misleading disclosures about an ATS’s operations could result in violations of the antifraud provisions of the federal securities laws.429 Request for Comment 239. Do you believe the Commission should require the disclosure of the 428 See id. e.g., UBS Settlement at 14, ITG Settlement at 15, Pipeline Settlement at 16, and Liquidnet Settlement at 14, supra note 374 (all noting violations of Section 17(a)(2) of the Securities Act, which prohibits, directly or indirectly, in the offer or sale of securities, obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.) 15 U.S.C. 77q(a)(2). 429 See, PO 00000 Frm 00061 Fmt 4701 Sfmt 4702 81057 information on Part III, Item 9 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 240. Do you believe Part III, Item 9 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to any service, functionality, or procedure of the NMS Stock ATS that is available or applies to the broker-dealer operator or its affiliates, that is not available or does not apply to a subscriber(s) to the NMS Stock ATS? Why or why not? Please support your arguments. 241. Do you believe there is other information that market participants might find relevant or useful regarding any service, functionality, or procedure of the NMS Stock ATS that is available or applies to the broker-dealer operator or its affiliates, that is not available or does not apply to a subscriber(s) to the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 242. Do you believe that Part III, Item 9 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required relating to the differences in services provided to the broker-dealer operator or its affiliates trading on the NMS Stock ATS? If not, how should Part III, Item 9 of proposed Form ATS–N be revised to provide additional clarity? Please explain. 243. Do you believe that the proposed disclosures in Part III, Item 9 of proposed Form ATS–N that are intended to cover differences in services, functionalities, or procedures should be applied to affiliates of the broker-dealer operator? Why or why not? Conversely, should such disclosures be extended to more remote affiliates under a revised definition of ‘‘affiliate’’? 430 Should disclosure apply to a more limited set of affiliates? Why or why not? Please support your arguments. 244. What are the potential costs and benefits of disclosing the information required by Part III, Item 9 of proposed Form ATS–N? Do you believe the disclosures in Part III, Item 9 of proposed Form ATS–N would have the potential to impact innovation? Why or why not? Would the proposed disclosures in Part III, Item 9 of proposed Form ATS–N require brokerdealer operators of NMS Stock ATSs to 430 See, e.g., supra note 385 and accompanying text. E:\FR\FM\28DEP3.SGM 28DEP3 81058 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules reveal too much (or not enough) information about their structure and operations? Why or why not? Please support your arguments. 245. Do you believe there is any information regarding differences in services, functionalities, or procedures of the NMS Stock ATS that are available to the broker-dealer operator or its affiliates and not other subscribers that should not be required disclosures on Form ATS–N due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 246. Do you believe that the Commission should propose amendments to Rule 301(b)(5) of Regulation ATS to lower the trading volume threshold in Regulation ATS that triggers the fair access requirement from its current 5%? If so, what is the appropriate threshold? Please support your arguments. 247. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 9 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 9? mstockstill on DSK4VPTVN1PROD with PROPOSALS3 11. Confidential Treatment of Trading Information Part III, Item 10 of proposed Form ATS–N is based on the requirements of Rule 301(b)(10) of Regulation ATS,431 and would require an NMS Stock ATS to describe the written safeguards and written procedures to protect the confidential trading information of subscribers to the NMS Stock ATS. It would also require an NMS Stock ATS to: (a) Describe the means by which a subscriber can consent or withdraw consent to the disclosure of confidential trading information to any persons (including the broker-dealer operator and any of its affiliates); (b) identify the positions or titles of any persons that have access to the confidential trading information, describe the confidential trading information to which the persons have access, and describe the circumstances under which the persons can access confidential trading information; (c) describe the written standards controlling employees of the NMS Stock ATS trading for the employees’ accounts; and (d) describe the written oversight procedures to ensure that the safeguards and 431 17 CFR 242.301(b)(10). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 procedures described above are implemented and followed. As previously noted,432 the Commission stated when adopting Regulation ATS that Rule 301(b)(10) did not preclude a broker-dealer that operated an ATS from engaging in other broker-dealer functions. However, to prevent the misuse of private subscriber and customer trading information for the benefit of other customers or activities of the broker-dealer operator, the Commission required that ATSs have in place safeguards and procedures to protect that confidential trading information and to separate ATS functions from other broker-dealer functions.433 In adopting Rule 301(b)(10), the Commission stated that the rule was meant to ensure that information, such as the identity of subscribers and their orders, be available only to those employees of the alternative trading system who operate the system or are responsible for its compliance with applicable rules.434 Thus, a broker-dealer operator may not convert confidential trading information of ATS subscribers for use by the nonATS business units operated by the broker-dealer. The protection of subscribers’ confidential trading information remains a bedrock component of the regulation of ATSs, including those that trade NMS stocks, and is essential to ensuring the integrity of ATSs as execution venues. To the extent that subscribers cannot be assured that their confidential trading information will be protected by an ATS, many of the advantages or purposes for which a subscriber may choose to send its orders to an ATS (e.g., trade anonymously and/ or to mitigate the impact of trading large positions) 435 are eliminated. Moreover, if subscribers’ confidential trading information is shared without subscribers’ consent, that information may be used by the recipient of the information to gain a competitive advantage over the subscriber. In cases where the confidential trading information of a subscriber is impermissibly shared with the personnel of the broker-dealer operator or any of its affiliates (i.e., persons who are not responsible for the operation of 432 See infra Sections IX and X (discussing the requirements of Rule 301(b)(10) and proposed amendments to require that safeguards and procedures be written and preserved). 433 See Regulation ATS Adopting Release, supra note 7, at 70879. 434 Id. 435 See id. (stating that many of the ATSs popular at the time Regulation ATS was adopted were anonymous and that many ECNs at that time were popular because they permitted wide dissemination of orders but provided anonymity). PO 00000 Frm 00062 Fmt 4701 Sfmt 4702 the ATS or compliance with applicable rules), such an abuse is compounded by the conflicting interests of the brokerdealer operator. That is, in such a case, the broker-dealer operator has invited subscribers to trade on its ATS and may have abused that relationship to provide itself or its affiliates with a direct competitive advantage over that subscriber. The Commission preliminarily believes that disclosure is necessary in this area so market participants can independently evaluate the robustness of the safeguards and procedures that are employed by the NMS Stock ATS to protect subscriber confidential trading information and decide for themselves whether they wish to do business with a particular NMS Stock ATS. Part III, Item 10(a) of proposed Form ATS–N would require the NMS Stock ATS to describe the means by which a subscriber can consent or withdraw consent to the disclosure of confidential trading information to any persons (including the broker-dealer operator and any of its affiliates). Disclosing the means by which a subscriber can consent or withdraw consent from the sharing of such information would allow subscribers and potential subscribers to understand what information about their orders or other trading interest will be kept confidential and how they can specify the means by which they choose to share confidential information. As the Commission noted in the adoption of Regulation ATS, subscribers should be able to give consent if they so choose to share their confidential trading information.436 ATSs that transact in NMS stocks vary in terms of what types of orders, indications of interests, or other forms of trading interest are confidential on their systems and what specific information about such trading interest may be shared. For example, an ATS might provide that no IOIs submitted by subscribers will be considered confidential, but may provide subscribers with the option to restrict the information in the IOI message to just the symbol and side (i.e., buy or sell). In this example, responses to Item 10(a) would require an NMS Stock ATS to describe the means by which a subscriber or potential subscriber could control some of the information contained in the IOI message by providing consent or withdrawing such consent for the sharing of its confidential trading information.437 436 See Regulation ATS Adopting Release, supra note 7, at 70879. 437 The Commission notes that there may be some NMS Stock ATSs that might not offer any means by E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Part III, Item 10(b) of proposed Form ATS–N, which would require that ATSs identify any person that has access to confidential trading information, the type of information, and the circumstances under which they may access such information, is meant to provide transparency into the potential sources from which confidential trading information might be compromised. As noted above, Regulation ATS requires that access to confidential subscriber information be available only to those employees of the ATS that operate the system or are responsible for the ATS’s compliance with applicable rules.438 The Commission preliminarily believes that requiring ATSs to disclose the list by title or position of all personnel that can access the confidential trading information of subscribers would buttress the existing obligations on ATSs to restrict access only to permitted personnel (i.e., those responsible for its operation or compliance). Part III, Item 10(b) of proposed Form ATS–N would also require the NMS Stock ATS to describe the confidential trading information that may be accessed by permitted persons. For example, employees that operate the NMS Stock ATS may be able to see the size, side, and symbol of an order but not the identity of the subscriber that submitted the order. The Commission preliminarily believes that subscribers and potential subscribers to the NMS Stock ATS likely would find it useful to know the range of confidential trading information that a person may have access to. Item 10(b) would also require the disclosure of the circumstances under which confidential trading information may be accessed by permitted persons. This disclosure requirement is designed to encompass the reasons for which confidential subscriber information might be accessed. For example, an NMS Stock ATS may only permit its designated employees access to confidential subscriber information when it is necessary to break certain trades or to perform system maintenance or repairs. Disclosures in Item 10(b) generally should describe whether the information is available in real-time (i.e., as trading is occurring on the platform) or whether the information relates to historical activity by one or more subscribers.439 which a subscriber could consent to the dissemination of its confidential trading information. An NMS Stock ATS would be required to disclose this fact pursuant to Item 9(a). 438 See Regulation ATS Adopting Release, supra note 7, at 70879; 17 CFR 242.301(b)(10)(i)(A). 439 For example, an NMS Stock ATS that permits access to the confidential trading information of VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Part III, Items 10(c) and (d) of proposed Form ATS–N closely track the existing requirements of Regulation ATS encompassed in Rule 301(b)(10)(i)(B) and (b)(10)(ii) respectively. The Commission preliminarily believes that market participants and the Commission would benefit from a description of the NMS Stock ATS’s standards in ensuring that employees of the NMS Stock ATS cannot trade for their own account using confidential trading information and the procedures adopted by the NMS Stock ATS to ensure its safeguards and procedures are followed. The Commission notes that, pursuant to existing Rule 301(b)(10), the Commission requires ATSs to have in place such standards, policies, and procedures. As discussed in greater detail below, the Commission is proposing to amend Regulation ATS to provide that these standards, policies, and procedures be written.440 By requiring that these standards, policies, and procedures be written and that a description of them be publicly disclosed in Part III, Item 10 of proposed Form ATS–N, NMS Stock ATSs may be encouraged to carefully consider the adequacy of their means of protecting the confidential trading information of subscribers, which may result in more robust protections of such information. Market participants would be able to evaluate the relative robustness of such standards, policies, and procedures based on the disclosures provided in Part III, Item 10 of proposed Form ATS– N, which would in turn allow them to better evaluate the NMS Stock ATS to which they might route orders or become a subscriber. Request for Comment 248. Do you believe the Commission should require the disclosure of the information on Part III, Item 10 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 249. Do you believe Part III, Item 10 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the written safeguards and written procedures to protect the confidential trading information of subscribers to the NMS Stock ATS? Why or why not? Please support your arguments. 250. Do you believe that Part III, Item 10 of proposed Form ATS–N is sufficiently clear with respect to the subscribers for breaking trades generally should specify, if true, that access to that information would only be of previous activity on the NMS Stock ATS for the purpose of breaking a trade. 440 See infra Section IX. PO 00000 Frm 00063 Fmt 4701 Sfmt 4702 81059 disclosures that would be required relating to the NMS Stock ATS’s obligations under Rule 301(b)(10) of Regulation ATS, including a description of the safeguards and procedures of the NMS Stock ATS to protect the confidential trading information of subscribers? If not, how should Part III, Item 10 of proposed Form ATS–N be revised to provide additional clarity? Please explain. 251. Do you believe that any of information in the proposed disclosure requirements of Part III, Item 10 of proposed Form ATS–N, including a description of the NMS Stock ATS’s safeguards and procedures to protect the confidential trading information of subscribers, should not be required to be disclosed on proposed Form ATS–N due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 252. Do you believe that the proposed disclosures in Part III, Item 10(a) of proposed Form ATS–N requiring an NMS Stock ATS to describe the means by which a subscriber can consent or withdraw consent to the disclosure of confidential trading information should be disclosed? Do ATSs that currently transact in NMS stock inform subscribers as to what trading information is considered confidential and/or provide a means for subscribers to give or withdraw consent to the disclosure of such trading information? Please explain. 253. Do you believe that the proposed disclosures in Part III, Item 10(b) of proposed Form ATS–N requiring an NMS Stock ATS to identify the positions or titles of any persons that have access to the confidential trading information of subscribers, what information they may obtain, and the circumstances under which such persons may obtain that information should be disclosed? Why or why not? Please support your arguments. 254. Do you believe there is other information that market participants might find relevant or useful regarding NMS Stock ATSs obligations under Rule 301(b)(10) and the protection of the confidential trading information of subscribers that has not been proposed in Part III, Item 10 of proposed Form ATS–N? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 255. What are the potential costs and benefits of disclosing the information required by Part III, Item 10 of proposed Form ATS–N? Would the proposed E:\FR\FM\28DEP3.SGM 28DEP3 81060 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules disclosures in Part III, Item 10 of proposed Form ATS–N require brokerdealer operators of NMS Stock ATSs to reveal too much (or not enough) information about their structure and operations? Why or why not? Please support your arguments. 256. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part III, Item 10 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part III, Item 10? mstockstill on DSK4VPTVN1PROD with PROPOSALS3 VIII. Part IV of Proposed Form ATS–N: The Manner of Operations of the NMS Stock ATS Given the dispersal of trading volume in NMS stocks among an increasing number of trading centers,441 the decision of where to route orders to obtain best execution for market participants is critically important. Today, NMS Stock ATSs account for a significant source of liquidity for NMS stocks and compete with, and operate functionally similar to, registered national securities exchanges.442 Notwithstanding the importance of NMS Stock ATSs as a source of liquidity in NMS stocks and the increasing operational complexity of NMS Stock ATSs, market participants have limited information about how these markets operate. The Commission is concerned that this lack of operational transparency impedes market participants from adequately discerning how orders interact, match, and execute on NMS Stock ATSs, and may hinder market participants’ ability to obtain, or monitor for, best execution for their orders. The current disclosures on Form ATS are confidential, and even in cases where an ATS voluntarily discloses its Form ATS publicly, ATSs have often been reluctant to provide more than summary disclosures about their operations. As a result, neither the Commission nor market participants currently receive a full picture of the operations of NMS Stock ATSs. The Commission preliminarily believes that the information that would be disclosed on proposed Form ATS–N, and in particular Part IV of the Form, would significantly improve the opportunity for market participants and the Commission to understand the operations of NMS Stock ATSs. Part IV of proposed Form ATS–N would require that the NMS Stock ATS include as Exhibit 4 information about the operations of an NMS Stock ATS. Specifically, Part IV of proposed Form ATS–N would require detailed information about the operations of NMS Stock ATSs, including the following, which are discussed in more detail below: Subscribers; hours of operations; order types; connectivity and order entry; segmentation of order flow; display of orders and trading interest; trading services; procedures governing suspension of trading and trading during system disruptions and malfunctions; opening, reopening, closing and after-hours trading procedures; outbound routing from the NMS Stock ATS; use of market data by the NMS Stock ATS; fees; trade reporting, clearance and settlement procedures; order display and execution access; and fair access standards. The proposed disclosure requirements are designed to assist market participants in assessing an NMS Stock ATS as a trading venue. The Commission preliminarily believes that the information that would be required to be disclosed on proposed Form ATS–N would allow market participants to compare and evaluate NMS Stock ATSs, as well as compare NMS Stock ATSs with national securities exchanges, as the type and level of information required by Part IV of proposed Form ATS–N would be generally similar to the information disclosed by national securities exchanges about their operations. For example, the rules of national securities exchanges, which are publicly available,443 include membership eligibility requirements, hours of operations, the operation of order types, the structure of the market (e.g., auction market, limit order matching book), priority, and opening and closing procedures, among other things. In addition, information provided on proposed Form ATS–N should assist the Commission, and the SRO for the broker-dealer operator, in exercising oversight over the brokerdealer operator.444 A. Subscribers Part IV, Item 1 of proposed Form ATS–N would require an NMS Stock ATS to disclose information regarding 443 See supra note 303. SRO for an ATS has responsibility for overseeing the activities of the broker-dealer operator, which includes the activities of the NMS Stock ATS and surveilling the trading that occurs on the NMS Stock ATS. See Regulation ATS Adopting Release, supra note 7, at 70863. 444 The 441 See supra Section III.A (discussing the various trading venues for NMS stocks and the significance of NMS Stock ATSs as a significant source of liquidity). 442 See id. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00064 Fmt 4701 Sfmt 4702 any eligibility requirements to access the NMS Stock ATS, terms and conditions of use, types of subscribers, arrangements with liquidity providers, and any procedures or standards to limit or deny access to the NMS Stock ATS.445 Part IV, Item 1(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any eligibility requirements to gain access to the services of the NMS Stock ATS. If the eligibility requirements are not the same for all subscribers and persons, an NMS Stock ATS would be required to describe any differences. This item is designed to provide potential subscribers with information about any conditions they would need to satisfy prior to accessing the NMS Stock ATS. Based on Commission experience, the eligibility process and requirements to access an NMS Stock ATS vary, and the requirements may differ depending on whether a potential subscriber is a customer of the broker-dealer operator of the NMS Stock ATS. For instance, some NMS Stock ATSs require that a potential subscriber be a broker-dealer to enter orders on the NMS Stock ATS, while other NMS Stock ATSs do not. Some NMS Stock ATSs may require potential subscribers to submit financial information as a pre-requisite to subscribing to, or maintaining their subscriber status on, the NMS Stock ATS.446 The Commission preliminarily believes that market participants would find it useful to understand an NMS Stock ATS’s eligibility requirements so they may determine whether they may qualify for access to an NMS Stock ATS.447 The Commission preliminarily believes that making such information publicly available would provide efficiencies, as a market participant could source information about, and compare and contrast, the eligibility processes and requirements to access different NMS Stock ATSs. The Commission also preliminary believes that it would be better able to monitor 445 The Commission notes that Exhibit A of current Form ATS requires an ATS to describe its classes of subscribers (for example, broker-dealer, institution, or retail) and any differences in access to the services offered by the ATS to different groups or classes of subscribers. Part IV, Section 1 of proposed Form ATS–N would require similar information, but the proposed requirements of Form ATS–N are designed to solicit more detailed information than that currently solicited by Form ATS. 446 See Regulation ATS Adopting Release, supra note 7, at 70859 (stating that the limitation on ATSs governing the conduct of subscribers does not preclude an ATS from requiring financial information from subscribers). 447 See Liquidnet letter #1, supra note 166 and accompanying text (stating disclosures should include the admission criteria for each ATS). E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 the extent to which NMS Stock ATSs are available to market participants and obtain a thorough understanding of NMS Stock ATS’s eligibility processes and requirements. Request for Comment 257. Do you believe the Commission should require the disclosure of the information on Part IV, Item 1(a) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 258. Do you believe Part IV, Item 1(a) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to eligibility requirements to gain access to the services of the NMS Stock ATS? Why or why not? Please support your arguments. 259. Is it sufficiently clear what information would be required by Part IV, Item 1(a) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 260. Do you believe there is other information that market participants might find relevant or useful regarding the eligibility process or requirements to gain access to the services of the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 261. Do you believe there is any information that would be required by Part IV, Item 1(a) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 262. Do you believe that subscribers and potential subscribers would benefit from knowing the eligibility requirements of the NMS Stock ATS? Why or why not? Please support your arguments. 263. What are the potential costs and benefits of disclosing the information required by Part IV, Item 1(a) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 1(a) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 264. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 1(a) of proposed Form ATS–N other than through VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 1(a)? Part IV, Item 1(b) of proposed Form ATS–N would require an NMS Stock ATS to describe the terms and conditions of any contractual agreements for granting access to the NMS Stock ATS for the purpose of effecting transactions in securities or for submitting, disseminating, or displaying orders on the NMS Stock ATS, and to state whether these contractual agreements are written. Furthermore, if the terms and conditions of any contractual agreements are not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. Based on Commission experience, these contractual agreements may or may not be in writing, and the terms and conditions therein can vary among subscribers to the NMS Stock ATSs. The Commission preliminarily believes that it would be important for all subscribers to have access to all relevant information regarding the terms and conditions for accessing the trading services of the NMS Stock ATS, which today may not always be available to all subscribers. This item would allow subscribers to understand their rights and obligations in connection with their use of the NMS Stock ATS, and allow subscribers and potential subscribers to assess whether other market participants may have access arrangements more favorable than their own. This information is designed to help market participants when evaluating which trading centers they could or would like to access, and on which terms they could seek executions on those trading centers. The Commission preliminarily believes that having such information publicly available would provide efficiencies as market participants could more easily source information about the terms and conditions under which they could trade across NMS Stock ATSs, as well as compare those terms and conditions to those of national securities exchanges. The Commission understands that some NMS Stock ATSs communicate the terms and conditions to access the NMS Stock ATS orally to subscribers, often as part of an onboarding process, and do not provide written contractual agreements. The Commission preliminarily believes that market participants would benefit from knowing whether a written contractual agreement exists that sets forth the terms and conditions for accessing and trading on the NMS Stock ATS. PO 00000 Frm 00065 Fmt 4701 Sfmt 4702 81061 Furthermore, the Commission preliminarily believes that the disclosures that would be required under Item 1(b) would better inform potential subscribers about whether additional inquiry is necessary to fully understand the terms and conditions for trading on the NMS Stock ATS. Request for Comment 265. Do you believe the Commission should require the disclosure of the information on Part IV, Item 1(b) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 266. Do you believe Part IV, Item 1(b) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the terms and conditions of any contractual agreements for granting access to the NMS Stock ATS? Why or why not? Please support your arguments. 267. Is it sufficiently clear what information would be required by Part IV, Item 1(b) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 268. Do you believe there is other information that market participants might find relevant or useful regarding the terms and conditions of any contractual agreements by which access is granted to the services of the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 269. Do you believe there is any information that would be required by Part IV, Item 1(b) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 270. Do you believe that NMS Stock ATSs commonly have written contractual agreements for granting access to the NMS Stock ATS? Why or why not, and what is the basis for such belief? If not, how is access granted? How are the terms and conditions of trading on the NMS Stock ATS communicated to subscribers? Is there commonly an onboarding process for new subscribers? What does such onboarding process entail? Please explain in detail. 271. Do you believe there are agreements between subscribers and an NMS Stock ATS that are not written? If so, what is the basis for your belief, E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81062 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules what do those non-written agreements encompass, and how are they communicated to subscribers? Are any materials other than contracts provided to subscribers that set forth terms and conditions for granting access to the NMS Stock ATS? Please explain in detail. 272. What are the potential costs and benefits of disclosing the information required by Part IV, Item 1(b) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 1(b) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 273. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 1(b) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 1(b)? Part IV, Item 1(c) of proposed Form ATS–N would require an NMS Stock ATS to describe the types of subscribers and other persons that use the services of the NMS Stock ATS (e.g., institutional and retail investors, brokerdealers, proprietary trading firms). The NMS Stock ATS would also be required to state whether it accepts non-brokerdealers as subscribers to the NMS Stock ATS and describe any criteria for distinguishing among types of subscribers, classes of subscribers, or other persons. This item would provide information about the types of subscribers to the NMS Stock ATS, or other persons that can enter orders onto the NMS Stock ATS, so that market participants and the Commission would be better informed about the type of order flow that may be present on the NMS Stock ATS. Moreover, this item would, in conjunction with the other disclosure requirements of proposed Form ATS–N regarding differences in access to services or functionality of the NMS Stock ATS, inform market participants of any privileges or restrictions that attach to different categories of subscribers so that subscribers could evaluate which privileges or restrictions might apply to them or the counterparties against which they would be trading.448 For example, an NMS Stock ATS may only allow certain types of subscribers, including 448 But see supra notes 92–95 and 427–429 and accompanying text (discussing the fair access requirements of Regulation ATS). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 institutional investors, retail investors, broker-dealers, or proprietary trading firms, to enter a certain type of order on the NMS Stock ATS. Additionally, NMS Stock ATSs may assign different priorities to orders based on the types of subscribers that entered the orders on the NMS Stock ATS, such as orders originating from retail brokerage accounts or proprietary traders. Furthermore, the Commission understands that subscribers may wish to preclude or limit the interaction of their orders with the orders of certain other subscribers for several reasons, such as to help reduce information leakage or the possibility of trading with counterparties that they perceive to be undesirable. Accordingly, the Commission preliminarily believes that subscribers would find it useful to know the types of subscribers or other persons transacting on the NMS Stock ATS, and with that knowledge, they would be in a better position to evaluate the order flow on the NMS Stock ATS and determine whether they may wish to send their orders to the NMS Stock ATS for execution.449 The Commission also preliminarily believes that increased transparency regarding the types of subscribers—and distinctions an NMS Stock ATS makes among subscribers or other persons when trying to access the ATS—would advance the Commission’s objective of protecting investors by giving them better information with which to protect their own interests. Request for Comment 274. Do you believe the Commission should require the disclosure of the information on Part IV, Item 1(c) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 275. Do you believe Part IV, Item 1(c) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the types of subscribers and other persons that use the services of the NMS Stock ATS? Why or why not? Please support your arguments. 276. Is it sufficiently clear what information would be required by Part IV, Item 1(c) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 277. Do you believe there is other information that market participants might find relevant or useful regarding distinctions made by the NMS Stock 449 See Lime Brokerage letter, supra note 192 and accompanying text (stating the Commission should require ‘‘transparency around . . . membership of dark pools’’). PO 00000 Frm 00066 Fmt 4701 Sfmt 4702 ATS among subscribers? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 278. Do you believe there is any information that would be required by Part IV, Item 1(c) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 279. Do you believe that the information that would be required by Part IV, Item 1(c) of proposed Form ATS–N would aid subscribers in evaluating the order flow on the NMS Stock ATS and determining whether they wish to send their orders there for execution? Why or why not? Please support your arguments. 280. What are the potential costs and benefits of disclosing the information required by Part IV, Item 1(c) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 1(c) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 281. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 1(c) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 1(c)? Part IV, Item 1(d) of proposed Form ATS–N would require an NMS Stock ATS to describe any formal or informal arrangement the NMS Stock ATS has with a subscriber(s) or person(s) to provide liquidity to the NMS Stock ATS (e.g., undertaking to buy or sell continuously, or to meet specified thresholds of trading or quoting activity). Item 1(d) would further require an NMS Stock ATS to describe the terms and conditions of each arrangement and identify any liquidity providers that are affiliates of the broker-dealer operator. An NMS Stock ATS may want to ensure that there is sufficient liquidity in a particular NMS stock to incentivize subscribers to send order flow in that NMS stock to the NMS Stock ATS; market participants may believe they are more likely to get an execution because of such liquidity. The Commission understands that some ATSs that trade E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 NMS stocks may engage certain subscribers to provide liquidity to the NMS Stock ATS and perform similar functions to that of a market maker on a national securities exchange.450 These liquidity providers may quote in a particular NMS stock on the NMS Stock ATS during trading hours and may receive a benefit for performing this function, such as discounts on fees, rebates, or the opportunity to execute with a particular type of segmented order flow.451 The obligations required of liquidity providers and the benefits they are provided vary across NMS Stock ATSs. Accordingly, the Commission proposes to require NMS Stock ATSs to describe the terms of any formal or informal arrangement with a liquidity provider, which could entail such obligations and benefits as well as a description of the process by which a subscriber could become a liquidity provider on the NMS Stock ATS. The Commission preliminarily believes that information about liquidity providers would be useful to subscribers and market participants who, for example, may want their orders to only interact with agency orders (and not with those of a liquidity provider), or, conversely, may themselves want to become a liquidity provider on the NMS Stock ATS. Part IV, Item 1(d) of proposed Form ATS–N would also require an NMS Stock ATS to identify any liquidity providers that are affiliates of the broker-dealer operator. The Commission preliminarily believes that market participants would find it useful to know whether the broker-dealer operator itself, or its affiliates, have an arrangement to provide liquidity to the NMS Stock ATS. The Commission preliminarily believes that such information could reveal potential conflicts of interest, if, for example, an NMS Stock ATS were to only permit affiliates to act as liquidity providers 450 See, e.g., The NASDAQ Stock Market LLC, Rule 4613, Market Maker Obligations. Marketmakers on a national securities exchange typically undertake, among other things, two-sided quote obligations where the market maker holds itself out as willing to buy and sell a particular security or securities for its own account on a continuous basis during trading hours. The obligations required of market makers may vary across national securities exchanges. 451 Often, market makers on national securities exchanges are provided benefits for providing liquidity to the exchange, such as fee discounts, rebates, or volume incentive programs that may not be available to non-market makers. See, e.g., The NASDAQ Stock Market LLC, Rule 7014, Market Quality Incentive Programs (describing the ‘‘Qualified Market Maker Program’’ and ‘‘Lead Market Maker Program’’). The attendant benefits provided to market makers may vary across national securities exchanges. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 and provided significant benefits for performing that function. Request for Comment 282. Do you believe the Commission should require the disclosure of the information on Part IV, Item 1(d) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 283. Do you believe Part IV, Item 1(d) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to any formal or informal arrangement the NMS Stock ATS has with a subscriber(s) or person(s) to provide liquidity to the NMS Stock ATS? Why or why not? Please support your arguments. 284. Is it sufficiently clear what information would be required by Part IV, Item 1(d) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 285. Do you believe there is other information that market participants might find relevant or useful regarding arrangements with subscribers or other persons to provide liquidity to the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 286. Do you believe there is any information that would be required by Part IV, Item 1(d) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 287. Do you believe that the information that would be required by Part IV, Item 1(d) of proposed Form ATS–N would aid subscribers in evaluating the order flow on the NMS Stock ATS and determining whether they wish to send their orders there for execution? Why or why not? Please support your arguments. 288. Do you believe that the proposed requirement in Part IV, Item 1(d) of proposed Form ATS–N that the NMS Stock ATS identify any liquidity providers that are affiliates of the broker-dealer operator would aid subscribers in evaluating potential conflicts of interest of the broker-dealer operator, the order flow on the NMS Stock ATS, and determining whether they wish to send their orders there for execution? Why or why not? Please support your arguments. PO 00000 Frm 00067 Fmt 4701 Sfmt 4702 81063 289. What are the potential costs and benefits of disclosing the information required by Part IV, Item 1(d) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 1(d) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 290. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 1(d) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 1(d)? Part IV, Item 1(e) of proposed Form ATS–N would require an NMS Stock ATS to describe the circumstances by which access to the NMS Stock ATS for a subscriber or other person may be limited or denied, and describe any procedures or standards that are used to determine such action. If these circumstances, procedures, or standards are not applicable to all subscribers and persons, the NMS Stock ATS would be required to describe any differences. As an ATS, an NMS Stock ATS cannot exercise SRO powers and may not discipline subscribers other than by excluding them from trading.452 The Commission understands that ATSs that trade NMS stocks have rules governing subscribers’ participation on the ATS, and that if a subscriber fails to comply with these rules, the ATS may limit or deny access to the NMS Stock ATS.453 These limitations can result in some subscribers having different levels of functionality or more favorable terms of access than others. The Commission preliminarily believes that it is important for subscribers to have advance notice of the circumstances under which their access to NMS Stock ATSs would be limited or denied, and the procedures or standards that would be used to govern such actions. The Commission preliminarily believes that understanding such information would provide efficiencies as a market participant could source information about potential limits to accessing an 452 See supra note 286 and accompanying text. ATS–R, Exhibit C requires an ATS subject to the fair access obligations under Rule 301(b)(5) of Regulation ATS to list all persons granted, denied, or limited access to the ATS during the period covered by the ATS–R report, designating for each person (a) whether they were granted, denied, or limited access; (b) the date the alternative trading system took such action; (c) the effective date of such action; and (d) the nature of any denial on limitation of access. See Form ATS– R. 453 Form E:\FR\FM\28DEP3.SGM 28DEP3 81064 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 NMS Stock ATS, even if that market participant otherwise meets the eligibility criteria for subscribing to the NMS Stock ATS, and it would allow them to evaluate whether any limitations may result in receiving less favorable access from the NMS Stock ATS. The increased transparency regarding these procedures also may advance the Commission’s objective of protecting investors by helping the Commission to understand when NMS Stock ATSs deny or limit access to market participants. Request for Comment 291. Do you believe the Commission should require the disclosure of the information on Part IV, Item 1(e) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 292. Do you believe Part IV, Item 1(e) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the circumstances by which access to the NMS Stock ATS for a subscriber or other person may be limited or denied? Please explain. 293. Is it sufficiently clear what information would be required by Part IV, Item 1(e) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 294. Do you believe there is other information that market participants might find relevant or useful regarding the process by which access to an NMS Stock ATS for a subscriber may be limited or denied? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 295. Do you believe there is any information that would be required by Part IV, Item 1(e) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 296. What are the potential costs and benefits of disclosing the information required by Part IV, Item 1(e) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 1(e) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 297. Do you believe there are circumstances under which NMS Stock VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 ATSs currently limit the functionality available to subscribers due to an action or inaction on the part of a subscriber? If so, what is the basis for your belief, what are those circumstances, and what functionality is typically limited? Is it common for an NMS Stock ATS to deny access to subscribers as opposed to limiting access? Why or why not, and under what circumstances? Please be specific. 298. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 1(e) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Items 1(e)? B. Hours of Operations Part IV, Item 2(a) of proposed Form ATS–N would require an NMS Stock ATS to provide the days and hours of operation of the NMS Stock ATS, including the times when orders or other trading interest are entered on the NMS Stock ATS and the time when preopening or after-hours trading occur. Also, if the times when orders or other trading interest are entered on the NMS Stock are not the same for all subscribers and persons, Part IV, Item 2(b) would require the NMS Stock ATS to describe any differences. The Commission preliminarily believes that it is important for subscribers and the Commission to have information regarding when NMS Stock ATSs are operating and when orders can be entered on those trading centers, including when an NMS Stock ATS will accept orders outside of standard operating hours. The Commission notes that national securities exchanges’ rulebooks, which are publicly available, include such information.454 Making such information publicly available for NMS Stock ATSs would enable market participants to more easily compare when trading interest may be entered on NMS stock trading centers. This information also would allow the Commission to better understand the operations of NMS Stock ATSs. Request for Comment 299. Do you believe the Commission should require the disclosure of the 454 See, e.g., BATS Exchange Rules 1.5(c) (setting forth hours for the exchange’s After Hours Trading Session), 1.5(r) (setting forth hours for the exchange’s Pre-Opening Session), 1.5(w) (setting forth the hours for the exchange’s Regular Trading Hours), and 11.1 (setting forth the exchange’s hours of trading and trading days, and when certain order types may be entered). PO 00000 Frm 00068 Fmt 4701 Sfmt 4702 information on Part IV, Item 2 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 300. Do you believe Part IV, Item 2 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the days and hours of operation of the NMS Stock ATS? Why or why not? Please support your arguments. 301. Do you believe there is other information that market participants might find relevant or useful regarding the hours of operation of an NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS– N. Please support your arguments. 302. Do you believe that Part IV, Item 2 of proposed Form ATS–N is sufficiently clear with respect to the disclosures that would be required? If not, how should Part IV, Item 2 of proposed Form ATS–N be revised to provide additional clarity? Please explain in detail. 303. Do you believe there is any information that would be required by Part IV, Item 2 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 304. What are the potential costs and benefits of disclosing the information required by Part IV, Item 2 of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 2 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 305. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 2 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 2? C. Types of Orders Part IV, Item 3(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any types of orders that are entered on the NMS Stock ATS, their characteristics, operations, and how they are handled on the NMS Stock ATS, including: (i) Priority for each order type; (ii) conditions for each order E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 type; (iii) order types designed not to remove liquidity (e.g., post-only orders); (iv) order types that adjust their price as changes to the order book occur (e.g., price sliding orders or pegged orders) or have a discretionary range; (v) the timein-force instructions that can be used or not used with each order type; (vi) the availability of order types across all forms of connectivity to the NMS Stock ATS and differences, if any, between the availability of an order type across those forms of connectivity; (vii) whether an order type is eligible for routing to other trading centers; and (viii) the circumstances under which order types may be combined with a time-in-force or another order type, modified, replaced, canceled, rejected, or removed from the NMS Stock ATS.455 If the availability of order types and their terms and conditions are not the same for all subscribers and persons, Part IV, Item 3(b) would require the NMS Stock ATS to describe any differences. In addition, Part IV, Item 3(c) of Form ATS–N would require an NMS Stock ATS to describe any requirements and handling procedures for minimum order sizes, odd-lot orders, or mixed-lot orders. The NMS Stock ATS must also describe any differences if the requirements and handling procedures for minimum order sizes, odd-lot orders, or mixed-lot orders are not the same for all subscribers and persons.456 As discussed above, NMS Stock ATSs offer a wide range of order types and modifiers and offer different minimum order size requirements.457 Order types, in particular, are a primary means by which users of an NMS Stock ATS communicate their instructions for handling their orders to the NMS Stock ATS. Moreover, order types can be complex and operate in various ways, and the Commission is therefore proposing to request that NMS Stock ATSs provide the level of detail set forth in subsections (i) through (viii) of Item 3(a). The Commission believes that all market participants should have sufficient information about all aspects of the operations of order types available on an NMS Stock ATS to understand how to use order types to achieve their investing or trading objectives, as well as to understand how order types used by other market 455 Items 3(a)(i), (ii), (iii), (iv) and (vii) of proposed Form ATS–N provide further requirements of what needs to be included in responding to these items. See discussion under each item infra. 456 The Commission notes that a broker-dealer operator may have valid business reasons for offering various order types to subscribers and the Commission is not proposing to limit the ability for a broker-dealer operator to have such arrangements. 457 See supra Section III.B. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 participants could affect their trading interest. Item 3(a) would require a complete and detailed description of the order types available on the NMS Stock ATS, their characteristics, operations, and how they are handled to provide transparency to market participants and the Commission. Subsection (i) of Item 3(a) would require that the NMS Stock ATS describe the priority rules for each order type. The description would be required to include the order type’s priority on the NMS Stock ATS upon order entry as well as any subsequent change to priority (if applicable). Also, the NMS Stock ATS would need to describe whether an order type can receive a new time stamp (such as, for example, in the case of order types that adjust price), and such order type’s ` priority vis-a-vis other orders on the book due to changes in the NBBO or other reference price. In addition, this subsection would also require a description of any instance in which the order type could lose execution priority to a later arriving order at the same price. Subsection (ii) of Item 3(a) would require that the NMS Stock ATS describe any conditions for each order type. Such conditions would include: any price conditions, including how the order type is ranked and how price conditions affect the rank and price at which it can be executed; conditions on the display or non-display of an order; or conditions on the execution or routing of orders. Subsection (iii) of Item 3(a) would require that the NMS Stock ATS describe order types designed not to remove liquidity (e.g., post-only orders). The NMS Stock ATS would need to describe what occurs when such order is marketable against trading interest on the NMS Stock ATS when received. Subsection (iv) of Item 3(a) would require that the NMS Stock ATS describe order types that adjust their price as changes to the order book occur (e.g., price-sliding orders or pegged orders) or have a discretionary range. As part of a response, this description would be required to include an order’s rank and price upon order entry and whether such prices or rank may change based on the NBBO or other market conditions when using such an order type. In addition, the description would have to include when the order type is executable and at what price the execution would occur, and also whether the price at which the order type can be executed ever changes. Also, if the order type can operate in different ways, the NMS Stock ATS would need to explain the default operation of the order type. PO 00000 Frm 00069 Fmt 4701 Sfmt 4702 81065 Subsection (v) of Item 3(a) would require the NMS Stock ATS to describe the time-in-force instructions that can be used or not used with each order type. Subsection (vi) of Item 3(a) would require a description of the availability of order types across all forms of connectivity to the NMS Stock ATS and differences, if any, between the availability of order types across those forms of connectivity. For example, if an NMS Stock ATS offers certain order types to persons who connect through the broker-dealer operator, such as through use of a SOR (or similar functionality) or algorithm, as opposed to persons who connect directly through a FIX connection, that difference in availability would need to be described in response to this subsection. Subsection (vii) of Item 3(a) would require a description of whether the order type is eligible for routing to other trading centers. The response required by this item would be required to include, if it is routable, whether an order type can be used with any routing services offered. Subsection (viii) of Item 3(a) would require the NMS Stock ATS to describe the circumstances under which order types submitted to the NMS Stock ATS may be combined with a time-in-force or another order type, modified, replaced, canceled, rejected, or removed from the NMS Stock ATS. If an NMS Stock ATS allows a subscriber to combine separate order types, or combine an order type with a time-inforce restriction, both of those instances would be responsive to subsection (viii) of Item 3(a). Part IV, Item 3(b) of proposed Form ATS–N would require the NMS Stock ATS to describe any differences if the availability of its orders types and their terms and conditions are not the same for all subscribers and persons. Part IV, Item 3(c) of proposed Form ATS–N would require an NMS Stock ATS to describe any requirements and handling procedures for minimum order sizes, odd-lot orders, or mixed-lot orders. If the requirements and handling procedures for minimum order sizes, odd-lot orders, or mixed-lot orders are not the same for all subscribers and persons, the NMS Stock ATS would also be required to describe any differences. These would include, for example, any order size requirements that may differ based on factors such as the type of subscriber or person that uses the services of the NMS Stock ATS, or the type of order (e.g., if only certain subscribers or persons are eligible to use that order type). E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81066 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules The Commission preliminarily believes that a detailed description of the characteristics of the order types of an NMS Stock ATS would assist subscribers in better understanding how their orders would function and interact with other orders on the NMS Stock ATS.458 It also would allow market participants to see what order types could be used by other market participants, which could affect the probability, timing, and quality of their own executions. Moreover, the Commission preliminarily believes that requiring comprehensive disclosure of an NMS Stock ATS’s order types on proposed Form ATS–N would allow market participants to compare order types across NMS Stock ATSs and national securities exchanges. As a result, a market participant would be better able to assess the availability of order types and whether their characteristics would accomplish the market participant’s investing or trading objectives. The Commission also preliminarily believes that the disclosures about the characteristics and functions of order types would allow the Commission to better oversee NMS Stock ATSs, and alert the Commission as to whether the function of a particular order type may violate the federal securities laws or the rules or regulations thereunder, such as the requirement under Rule 611 of Regulation NMS that a trading center have policies and procedures reasonably designed to prevent trade-throughs of protected quotations in NMS stocks.459 The Commission preliminarily believes that the disclosures that would be required by Item 3(a) would help the Commission discover a potential violation of the federal securities laws and rules or regulations thereunder in a more expeditious manner than if the disclosures were not required. The disclosures required by Item 3(a) would also facilitate the Commission’s comparison of how the characteristics of order types were described to subscribers and how they operate in practice as part of any examination of the NMS Stock ATS. The Commission preliminarily believes this information would also advance the Commission’s interest in the protection of investors by allowing subscribers to clearly see the types of 458 See Consumer Federation of America Letter, supra note 188 and accompanying text (stating the Commission should require all ATSs to disclose certain information about the order types offered on the ATS); Liquidnet letter #1, supra note 171 and accompanying text (stating institutional brokers, including institutional ATSs, should disclose the order types offered). 459 See 17 CFR 242.611. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 orders available to them, as well as potential counterparties, and any differences between the order types, available among participants on the NMS Stock ATS. As noted above, Part IV, Item 3(b) would require the NMS Stock ATS to describe any differences if the availability of its order types and their terms and conditions are not the same for all subscribers and persons. The Commission preliminarily believes that this information would be important for a market participant to better assess whether other participants on the NMS Stock ATS may receive advantageous or disadvantageous treatment as a result of the ATS’s various order types and how that treatment may affect that market participant’s trading interest. Information about any disparate treatment of investors also would be important for the Commission as it monitors developments in the national market system. Part IV, Item 3(c) of proposed Form ATS–N would require an NMS Stock ATS to describe any requirements and handling procedures for minimum order sizes, odd-lot orders, or mixed-lot orders. The NMS Stock ATS would also be required to explain any differences if the requirements and handling procedures for minimum order sizes, odd-lot orders, or mixed-lot orders are not the same for all subscribers and persons. The information that would be required by Item 3(c) is designed to facilitate the entry of orders by subscribers by providing information on minimum order sizes, odd-lot orders, and mixed-lot orders. An explanation of how an NMS Stock ATS’s requirements and conditions for minimum order sizes, odd-lot orders, and mixed-lot orders differ among subscribers and persons would also provide a market participant with information regarding how its trading interest would be ` handled vis-a-vis other market participants. The information that would be required by Item 3(c) would also be useful to the Commission’s monitoring of developments in market structure. Request for Comment 306. Do you believe the Commission should require the disclosure of the information on Part IV, Items 3(a) through 3(c) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 307. Do you believe Part IV, Items 3(a) through 3(c) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the types of orders that are entered to the PO 00000 Frm 00070 Fmt 4701 Sfmt 4702 NMS Stock ATS, their characteristics, operations, and how they are handled on the NMS Stock ATS? Please explain. 308. Is it sufficiently clear what information would be required by Part IV, Items 3(a) through 3(c) of proposed Form ATS–N? Should the items be refined in any way? If so, how? Please be specific. 309. Do you believe the proposed requirement to disclose the information that would be required by Part IV, Item 3(a) of proposed Form ATS–N could impact innovation on NMS Stock ATSs? Why or why not? Please support your arguments. 310. Do you believe there is other information that market participants might find relevant or useful regarding the types of orders that are entered to the NMS Stock ATS, their characteristics, operations, and how they are handled on the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS– N. Please support your arguments. 311. Do you believe there is any information that would be required by Part IV, Items 3(a) through 3(c) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 312. Do you believe there are any other aspects of order types that an NMS Stock ATS should be required to disclose in a subpart to Part IV, Item 3(a) of proposed Form ATS–N that have not been identified? If so, what? Do you believe there are other order types about which the Commission should ask specifically? If so, what order types? Please explain in detail. 313. Should the Commission require greater specificity regarding the operation of order types? If so, why and how? If not, why not? Please support your arguments. 314. Do you believe that information relating to available order types would help market participants in determining the best trading venue for their orders? Why or why not? Please support your arguments. 315. Do you believe that Items 3(a) through 3(c) of Part IV of proposed Form ATS–N would advance the Commission’s interest in the protection of investors by allowing market participants to consider the types of orders available to them, as well as potential counterparties, and any differences between the order types, modifiers, and size requirements E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules available among participants on the NMS Stock ATS? Why or why not? Please support your arguments. 316. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Items 3(a) through 3(c) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Items 3(a) through 3(c)? 317. What are the potential costs and benefits of disclosing the information required by Part IV, Items 3(a) through 3(c) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Items 3(a) through 3(c) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 318. Do you believe that Part IV, Item 3(a) of proposed Form ATS–N should require a description of priority for each order type? Why or why not? Please support your answer. 319. Do you believe that Part IV, Item 3(a) of proposed Form ATS–N should require a description of any conditions for each order type? Why or why not? Please support your answer. 320. Do you believe that Part IV, Item 3(a) of proposed Form ATS–N should require a description of order types designed not to remove liquidity? Why or why not? Please support your answer. 321. Do you believe that Part IV, Item 3(a) of proposed Form ATS–N should require a description of order types that adjust their price as changes to the order book occur or have a discretionary range? Why or why not? Please support your answer. 322. Do you believe that Part IV, Item 3(a) of proposed Form ATS–N should require a description of the time-in-force instructions for each order type? Why or why not? Please support your answer. 323. Do you believe that Part IV, Item 3(a) of proposed Form ATS–N should require a description of the availability of order types across all forms of connectivity to the NMS Stock ATS? Why or why not? Please support your answer. 324. Do you believe that Part IV, Item 3(a) of proposed Form ATS–N should require a description of whether order types are eligible for routing to other trading centers? Why or why not? Please support your answer. 325. Do you believe that Part IV, Item 3(a) of proposed Form ATS–N should require a description of the circumstances under which order types VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 may be combined with a time-in-force or another order type, modified, replaced, canceled, rejected, or removed from the NMS Stock ATS? Why or why not? Please support your answer. Part IV, Item 3(d) of proposed Form ATS–N would require an NMS Stock ATS to describe any messages sent to or received by the NMS Stock ATS indicating trading interest (e.g., IOIs, actionable IOIs, or conditional orders), including information contained in the message, the means under which messages are transmitted, the circumstances in which messages are transmitted (e.g., automatically by the NMS Stock ATS or upon the subscriber’s request), and the circumstances by which they may result in an execution on the NMS Stock ATS. If the terms and conditions regarding these messages, indications of interest, and conditional orders are not the same for all subscribers and persons, the NMS Stock ATS would be required describe any differences. This item is designed to provide specific information about the use of IOIs, actionable IOIs, conditional orders, and similar functionalities on the NMS Stock ATS. Based on the Commission’s experience, IOIs are used by NMS Stock ATSs to convey trading interest available on those trading centers. Some NMS Stock ATSs also transmit ‘‘actionable’’ IOIs to selected market participants for the purpose of attracting contra-side order flow to the ATS. In general, an actionable IOI is an IOI containing enough information to effectively alert the recipient about the details of the NMS Stock ATS’s trading interest in a security. While an actionable IOI may not explicitly specify the price and/or size of the trading interest, the practical context in which it is submitted alerts the recipient about the side (buy or sell), size (minimum of a round lot of trading interest), and price (at or better than the NBBO, depending on the side of the order). Conditional orders are also messages indicating a trading interest on a trading venue, and conditional orders generally function in a similar manner to IOIs. A conditional order may contain the same attributes as other order types when a subscriber enters it onto the trading venue (e.g., side, price, and size), but NMS Stock ATSs will generally not transmit those details to other subscribers or market participants. Rather, the NMS Stock ATS will tentatively match the conditional order with contra side interest and then alert the subscriber that entered the conditional order of the potential match. That subscriber may then either accept or decline the execution (i.e., ‘‘firm up’’ PO 00000 Frm 00071 Fmt 4701 Sfmt 4702 81067 the conditional order). Based on Commission experience, NMS Stock ATSs typically only permit conditional orders to execute against other conditional orders, but some ATSs allow conditional orders to interact with other order types. The Commission preliminarily believes that understanding the manner in which NMS Stock ATSs use IOIs, actionable IOIs, conditional orders, and similar functionalities could be useful to market participants because it could impact the potential execution of a subscriber’s trading interest. Also, because an actionable IOI conveys substantial information, the potential for information leakage could be a concern to NMS Stock ATS subscribers using IOIs, particularly when they are seeking to execute large-sized orders. In the Commission’s experience, NMS Stock ATSs generally send IOIs and other conditional orders only to certain market participants. Accordingly, the disclosures that would be required by Item 3(d) are designed to help market participants better evaluate whether messages indicating trading interest (including IOIs, actionable IOIs, and conditional orders) are equally available to them as compared to other market participants and would be appropriate tools to accomplish their investing or trading objectives. Request for Comment 326. Do you believe the Commission should require the disclosure of the information on Part IV, Item 3(d) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 327. Do you believe Part IV, Item 3(d) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to any messages sent to or received by the NMS Stock ATS indicating trading interest? Please explain. 328. Is it sufficiently clear what information would be required by Part IV, Item 3(d) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 329. Do you believe there is other information that market participants might find relevant or useful regarding messages indicating trading interest (e.g., IOIs, actionable IOIs, or conditional orders)? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 330. Do you believe there are other types of messages that communicate E:\FR\FM\28DEP3.SGM 28DEP3 81068 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules trading interest that the Commission should specifically cite as examples in Part IV, Item 3(d) of proposed Form ATS–N? If so, what are those message types? Please provide a detailed explanation of each additional type of message and support your arguments as to each. 331. Do you believe there is any information that would be required by Part IV, Item 3(d) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? If so, what information and why? Please support your arguments. 332. Do you believe that there is potential concern for information leakage from the use of IOIs, particularly actionable IOIs on NMS Stock ATSs? If so, would disclosure about their operation on proposed Form ATS–N be an appropriate manner in which to mitigate any concern? If not, why not? Please support your arguments. 333. What are the potential costs and benefits of disclosing the information required by Part IV, Item 3(d) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 3(d) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 334. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 3(d) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 3(d)? mstockstill on DSK4VPTVN1PROD with PROPOSALS3 D. Connectivity, Order Entry, and CoLocation Part IV Item 4(a) of proposed Form ATS–N would require the NMS Stock ATS to describe the means by which subscribers or other persons connect to the NMS Stock ATS and enter orders or other trading interest on the NMS Stock ATS (e.g., directly, through a Financial Information eXchange (‘‘FIX’’) connection to the ATS, or indirectly, through the broker-dealer operator’s SOR, or any intermediate functionality, algorithm, or sales desk). This item also would require an NMS Stock ATS to describe any differences if the terms and conditions for connecting and entering orders or other trading interest on the NMS Stock ATS are not the same for all subscribers and persons. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Based on Commission experience reviewing Forms ATS, subscribers send orders or other trading interest to the NMS Stock ATS both directly and indirectly. A direct method of sending orders or other trading interest to an ATS that trades NMS stocks, for example, may include the use of the FIX Protocol. The FIX Protocol allows subscribers to enter orders or other trading interest into the ATS without an intermediary. To the extent that a subscriber connects to the NMS Stock ATS by way of a FIX connection and an order sent by that subscriber passes through an intermediate application or functionality on its way to the NMS Stock ATS, the NMS Stock ATS should identify the application or functionality and provide a description of its purpose.460 One example of an indirect method of sending orders or other trading interest to an NMS Stock ATS is sending orders or other trading interest to the broker-dealer operator, which may then use its SOR (or similar functionality) or algorithm to send such orders or other trading interest to the NMS Stock ATS. The disclosures regarding the direct or indirect means of order entry could be important to subscribers because they would provide information about the possible methods to reach the NMS Stock ATS and applicable system requirements necessary to send orders or other trading interest to the NMS Stock ATS. This information would also alert subscribers to the NMS Stock ATS as to whether trading interest can be entered on the NMS Stock ATS through the broker-dealer operator, which would allow subscribers to assess any potential advantages that orders sent through the broker-dealer operator may have with respect to other subscribers on the NMS Stock ATS.461 The Commission would find the information required by this item useful to understanding how trading interest moves from persons to possible trading centers and in evaluating any potential conflicts of interest presented between the brokerdealer operator and the NMS Stock ATS in how orders are entered onto the NMS Stock ATS. The disclosure of the information required for order entry on the NMS Stock ATS, such as limit price, size, 460 The Commission notes that, in this example, given that the intermediate application or functionality has access to a subscriber’s order information, the NMS Stock ATS should take appropriate measures to protect the confidentiality of such information pursuant to Rule 301(b)(10) of Regulation ATS. 461 But see supra notes 92–95 and 427–429 and accompanying text (discussing the fair access requirements of Regulation ATS). PO 00000 Frm 00072 Fmt 4701 Sfmt 4702 and/or side of the market, would inform all subscribers to the NMS Stock ATS about how to transmit orders or other trading interest to the NMS Stock ATS. The Commission preliminarily believes that understanding this information may expedite the order entry process of subscribers. The Commission, as part of its monitoring of developments in market structure, also could use this disclosure to better understand what information allows for the interaction of trading interest. The Commission preliminarily believes that requiring NMS Stock ATSs to disclose any differences if the terms and conditions for connecting and entering orders or other trading interest on the NMS Stock ATS are not the same for all subscribers and persons would allow market participants to source the various order entry procedures offered by NMS Stock ATSs as part of evaluating an NMS Stock ATS as a potential destination for them to route their orders for execution. Request for Comment 335. Do you believe the Commission should require the disclosure of the information on Part IV, Item 4(a) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 336. Do you believe Part IV, Item 4(a) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the means by which subscribers or other persons connect to the NMS Stock ATS and enter orders or other trading interest on the NMS Stock ATS? Please explain. 337. Is it sufficiently clear what information would be required by Part IV, Item 4(a) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 338. What are the direct and indirect means through which subscribers and other persons can send orders or other trading interest to the NMS Stock ATS? Do you believe there any means for which the Commission should specifically request information in Part IV, Item 4(a) of proposed Form ATS–N? If so, please explain how those means to send orders or other trading interest are used by subscribers and other persons. 339. Do you believe there are any methods of sending orders or other trading interest to NMS Stock ATSs that are more advantageous than others? If so, please explain how such methods provide advantages to subscribers or other persons who use them. Should those advantages, if any, be specifically disclosed? E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules 340. Do you believe there is other information that market participants might find relevant or useful regarding the means by which subscribers can send orders or other trading interest to the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 341. Do you believe there is any information that would be required by Part IV, Item 4(a) of Proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 342. Do you believe that the information that would be required by Part IV, Item 4(a) of proposed Form ATS–N could be important to market participants in assessing any potential advantages that orders sent through the broker-dealer operator may have over other market participants on the NMS Stock ATS? Why or why not? Please support your arguments. 343. Do you believe that the information that would be required by Part IV, Item 4(a) of proposed Form ATS–N would be important to market participants when deciding whether to trade on an NMS Stock ATS and would assist them in devising appropriate trading strategies to help accomplish their investing or trading objectives? Why or why not? Please support your arguments. 344. What are the potential costs and benefits of disclosing the information required by Part IV, Item 4(a) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 4(a) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 345. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 4(a) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 4(a)? Part IV Item 4(b) of proposed Form ATS–N would require that the NMS Stock ATS describe any co-location services or any other means by which any subscriber or other persons may enhance the speed by which to send or receive orders, trading interest, or messages to or from the NMS Stock ATS VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 and the terms and conditions of colocation services. If the terms and conditions of the co-location services are not the same for all subscribers and persons, Part IV, Item 4(b) would require the NMS Stock ATS to describe any differences. Co-location is the placement of a user’s systems in close physical proximity to the trading and execution system of a trading venue to reduce latency and enhance speed. The description of co-location services that could enhance the speed of orders and messages and the terms and conditions thereof would allow subscribers to evaluate these services and determine whether they would like to subscribe to such services if available. Moreover, subscribers and potential subscribers would know that others can use a colocation service even if they determine not to use it themselves, which would assist them in devising appropriate trading strategies if they choose to participate.462 For instance, a subscriber could choose certain types of orders or trading strategies with the knowledge that other subscribers have enhanced speeds for submitting trading interest through the use of the NMS Stock ATS’s connectivity or co-location services. The proposed requirement that the NMS Stock ATS describe any differences in the terms and conditions of an NMS Stock ATS’s co-location services among subscribers or other persons also could help inform the trading strategies chosen by subscribers. Information on such connectivity and co-location options would further the Commission’s understanding of the dynamics of the markets and overall market structure for NMS stocks. In addition, this information would allow the Commission to evaluate whether the NMS Stock ATS is unreasonably prohibiting or limiting any person with respect to the access to services offered by the NMS Stock ATS in contravention of Rule 301(b)(5) of Regulation ATS for those NMS Stock ATSs that have surpassed the applicable trading volume thresholds. Request for Comment 346. Do you believe the Commission should require the disclosure of the information on Part IV, Item 4(b) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 462 See SIFMA letter #1, supra note 194 and accompanying text (stating its belief that ‘‘added disclosure about co-location and other market access arrangements would be beneficial to market participants’’); Morgan Stanley letter, supra note 197 and accompanying text (stating that it received questions from customers specific to dark pools related to the co-location of servers). PO 00000 Frm 00073 Fmt 4701 Sfmt 4702 81069 347. Do you believe Part IV, Item 4(b) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to co-location services or any other means by which any subscriber or other persons may enhance the speed by which to send or receive orders, trading interest, or messages to or from the NMS Stock ATS? Please explain. 348. Is it sufficiently clear what information would be required by Part IV, Item 4(b) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 349. Do you believe there is other information that market participants might find relevant or useful regarding co-location services by which a subscriber may enhance the speed that it may submit orders or send and receive messages? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 350. Do you believe there is any information that would be required by Part IV, Item 4(b) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 351. Do believe that the information that would be required by Part IV, Item 4(b) of proposed Form ATS–N would be useful to market participants when deciding whether to trade on an NMS Stock ATS and would assist them in devising appropriate trading strategies to help accomplish their investing or trading objectives? Why or why not? Please support your arguments. 352. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 4(b) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 4(b)? 353. What are the potential costs and benefits of disclosing the information required by Part IV, Item 4(b) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 4(b) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81070 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules E. Segmentation of Order Flow and Notice About Segmentation Part IV, Item 5(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any segmentation of orders or other trading interest on the NMS Stock ATS (e.g., classification by type of participant, source, nature of trading activity). Part IV, Item 5(a) would also require the NMS Stock ATS to describe the segmented categories, the criteria used to segment these categories, and procedures for determining, evaluating, and changing segmented categories. If the segmented categories, the criteria used to segment these categories, and any procedures for determining, evaluating or changing segmented categories are not the same for all subscribers and persons, this item would require an NMS Stock ATS to describe any differences. Based on Commission experience, some NMS Stock ATSs segment order flow entered on the NMS Stock ATS according to various categories and allow subscribers to select the type of persons or order flow they want to trade or not trade against. An NMS Stock ATS may segment trading interest by type of participant (e.g., buy-side or sell-side firms, proprietary trading firms, agencyonly firms, firms above or below certain assets under management thresholds). For example, buy-side or institutional order flow may seek to only trade against other buy-side or institutional order flow, or may seek to avoid trading against proprietary trading firms or socalled high frequency trading firms. When segmenting by source, an NMS Stock ATS may look to the underlying source of the trading interest in the case of trading interest that is intermediated, such as the trading interest of retail customers. Some NMS Stock ATSs segment by the nature of the trading activity, which could include segmenting by patterns of behavior, time horizons of traders, or the passivity or aggressiveness of trading strategies. NMS Stock ATSs might elect to use some combination of these criteria or other criteria altogether. This item would require that an NMS Stock ATS disclose the segmented categories, the criteria used to segment these categories, and procedures for determining, evaluating, and changing segmented categories. This would include, for example, any modification or overriding of an existing segmented category and a description of how existing subscribers in the segmented category would be handled and notified. This item would provide market participants with an understanding of the categories of order flow or types of VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 market participants with which they may interact and allow them to both assess the consistency of a segmented group and determine whether the manner in which the trading interest is segmented comports with its views of how certain trading interest should be categorized. Disclosure of the procedures and criteria used to segment categories would allow a market participant to determine whether its view of what constitutes certain trading interest it wants to seek or avoid is classified in the same way by the NMS Stock ATS. For example, a subscriber may find it useful to understand the metrics or criteria an NMS Stock ATS uses to categorize high frequency trading firms so that it can compare the criteria used by the NMS Stock ATS with its view of what constitutes a high frequency trading firm, and thus be able to successfully trade against or avoid such trading interest. Similarly, information regarding the procedures applicable to trading among segmented categories would allow market participants to evaluate whether they can successfully trade against or avoid the segments of trading interest they desire. In addition, disclosure of any differences in the segmentation among participants would allow subscribers to more clearly note if certain persons are, for instance, not subject to segmentation in the same way as other persons, or not subject to segmentation at all and able to trade against all order flow. All participants would have access to the same information as to how the NMS Stock ATS segments order flow, and whether the segmentation criteria are applied by the NMS Stock ATS uniformly.463 These disclosures would help the Commission understand the categories and manner in which persons and order flow (or both) are segmented across NMS Stock ATSs and could aid the Commission in its oversight of the markets including, for example, its evaluation of whether segmentation could facilitate or hinder market participants from achieving their investing or trading objectives. The Commission is not proposing to prohibit NMS Stock ATSs from segmenting their 463 See Blackrock letter, supra note 186 and accompanying text (stating mandatory ATS disclosure should include greater detail on how the platform matches orders between client segments); Consumer Federation of America letter, supra note 187 and accompanying text (stating that Form ATS should require ATSs to provide ‘‘critical details about . . . segmentation’’ because ‘‘the information will allow market participants . . . to assess whether an ATS’s terms of access and service are such that it makes sense to trade on that venue’’). PO 00000 Frm 00074 Fmt 4701 Sfmt 4702 order flow; 464 the Commission is instead proposing only that an NMS Stock ATS disclose to market participants and the Commission how they segment their order flow. Request for Comment 354. Do you believe the Commission should require the disclosure of the information on Part IV, Item 5(a) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 355. Do you believe Part IV, Item 5(a) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to segmentation of orders or other trading interest on the NMS Stock ATS? Please explain. 356. Is it sufficiently clear what information would be required by Part IV, Item 5(a) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 357. Do you believe there is other information that market participants might find relevant or useful regarding segmentation of order flow on the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 358. Do you believe there is any information that would be required by Part IV, Item 5(a) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 359. Do you believe there are any forms or types of order segmentation that would not be captured by Part IV, Item 5(a) of proposed Form ATS–N or should be addressed separately? If so, please provide a detailed explanation of how orders are segmented under such functionalities on NMS Stock ATSs. 360. What are the potential costs and benefits of disclosing the information required by Part IV, Item 5(a) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 5(a) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 361. Do you believe there are other ways to obtain the same information as 464 However, an ATS that crossed the fair access threshold and wished to segment its order flow could do so only in accordance with the fair access provisions of existing Rule 301(b)(5) of Regulation ATS. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules would be required from NMS Stock ATSs by Part IV, Item 5(a) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 5(a)? Part IV, Item 5(b) of proposed Form ATS–N would require the NMS Stock ATS to state whether the NMS Stock ATS informs subscribers or persons about the segmentation category that a subscriber or a person is assigned and to describe any notice provided to subscribers or persons about the segmentation category that they are assigned and the segmentation identified in Part IV, Item 5(a), including the content of any notice and the means by which any notice is communicated. Also, an NMS Stock ATS would be required to describe any differences if the notice is not the same for all subscribers and persons. As discussed above, an NMS Stock ATS can elect to segment its order flow entered on the NMS Stock ATS according to various categories and allow subscribers and other persons to select the type of persons or order flow they want to trade or not trade against. Based on the experience of the Commission and its staff, ATSs provide subscribers with limited information about how they segment order flow and do not always inform subscribers about the categories into which they are segmented. A market participant that is unaware of its segmented category may not know about the order flow it is trading against, and therefore, the Commission preliminarily believes that market participants trading on an NMS Stock ATS would want to know about their assigned segmented categories and understand how those categories were determined.465 The category into which a subscriber is placed also informs its decision of where to trade because it could affect the contra-side trading interest available to them to trade against. Item 5(b) is therefore designed to inform market participants about the potential information that the NMS Stock ATS may provide to inform them about such segmentation, particularly with respect to whether the NMS Stock ATS informs subscribers about how it assigns a participant to a segmented category, as well as any differences in the notice provided to subscribers. The Commission preliminarily believes that market participants would find it useful to understand how they will be alerted about segmentation on an NMS Stock 465 See supra notes 171, 186, 198, 199 and accompanying text. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 ATS before deciding whether or not to subscribe to the NMS Stock ATS. Request for Comment 362. Do you believe the Commission should require the disclosure of the information on Part IV, Item 5(b) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 363. Do you believe Part IV, Item 5(b) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to informing subscribers or persons about the segmentation category that a subscriber or a person is assigned? Please explain. 364. Is it sufficiently clear what information would be required by Part IV, Item 5(b) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 365. Do you believe there is any information that would be required by Part IV, Item 5(b) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 366. Do you believe there is any specific information that the Commission should require NMS Stock ATSs to disclose to each subscriber with regard to how it segments each subscriber’s orders? If so, explain what information and why. Please support your arguments. 367. Do you believe transparency with respect to how an NMS Stock ATS notifies subscribers regarding how those subscribers’ trading interests are segmented is useful to market participants when deciding whether to trade on the NMS Stock ATS and would assist them in devising appropriate trading strategies to help accomplish their investing or trading objectives? If not, why? Please support your arguments. 368. What are the potential costs and benefits of disclosing the information required by Part IV, Item 5(b) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 5(b) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 369. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 5(b) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be PO 00000 Frm 00075 Fmt 4701 Sfmt 4702 81071 obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 5(b)? Part IV, Item 5(c) of proposed Form ATS–N would require an NMS Stock ATS to describe any means and the circumstances by which a subscriber, the broker-dealer operator, or any of its affiliates may designate an order or trading interest submitted to the NMS Stock ATS to interact or not to interact with specific orders, trading interest, or persons on the NMS Stock ATS (e.g., designating an order or trading interest to be executed against a specific subscriber) and how such designations affect order priority and interaction. Part IV, Item 5(c) would require the NMS Stock ATS to describe any means by which subscribers can seek or avoid certain executions against certain orders, persons, or trading interest. In response to this item, an NMS Stock ATS would be required to disclose, for example, any circumstances by which an NMS Stock ATS allows persons to designate an order submitted to the NMS Stock ATS to interact with specific orders resting on the NMS Stock ATS. The NMS Stock ATS would need to describe this process and how such order preferencing works with other rules governing order priority and interaction. The response to this item also would also be required to include a description of any means by which a subscriber could avoid executing against any order, person, or trading interest. For instance, an NMS Stock ATS would need to describe any mechanisms by which a person could avoid executing against its own orders or orders of its affiliates on the NMS Stock ATS. The Commission preliminarily believes that it is important for market participants to understand whether— and how—they may designate their orders or other trading interest to avoid interacting with specific orders, trading interest, or persons on an NMS Stock ATS. The Commission preliminarily believes that this understanding would help market participants better evaluate the NMS Stock ATS as a potential trading venue. For instance, if a market participant seeks to avoid interacting with an order type that is commonly employed as part of certain trading strategies, the Commission preliminarily believes that the disclosures required under Item 5(c) would better enable that market participant to determine whether submitting order flow to a particular NMS Stock ATS would allow it to carry out its own trading strategy. Similarly, if a market participant would find it desirable to be able to designate an order submitted to the NMS Stock ATS to interact with specific orders resting E:\FR\FM\28DEP3.SGM 28DEP3 81072 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 on an NMS Stock ATS’s order book, the Commission preliminarily believes that the information required by Item 5(c) would inform that market participant whether—and how—it can do so on a particular NMS Stock ATS, thereby assisting that market participant when it evaluates that NMS Stock ATS as a potential trading venue. Request for Comment 370. Do you believe the Commission should require the disclosure of the information on Part IV, Item 5(c) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 371. Do you believe Part IV, Item 5(c) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the means and the circumstances by which a subscriber, the broker-dealer operator, or any of its affiliates may designate an order or trading interest submitted to the NMS Stock ATS to interact or not to interact with specific orders, trading interest, or persons on the NMS Stock ATS? Please explain. 372. Do you believe there is other information that market participants might find relevant or useful regarding the means and the circumstances by which a subscriber, the broker-dealer operator, or any of its affiliates may designate an order or trading interest submitted to the NMS Stock ATS to interact or not to interact with specific orders, trading interest, or persons on the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 373. Is it sufficiently clear what information would be required by Part IV, Item 5(c) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 374. Do you believe there is any information that would be required by Part IV, Item 5(c) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 375. Should the requirement to describe the means by which persons, orders, or trading interest may be sought or avoided on an NMS Stock ATS be refined in any way? Please be specific. 376. Does the process for seeking or avoiding specific orders, persons, or trading interest raise any other market structure issues or concerns that the VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Commission should consider? Please be specific. 377. What are the potential costs and benefits of disclosing the information required by Part IV, Item 5(c) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 5(c) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 378. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 5(c) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 5(c)? F. Display of Order and Trading Interest Part IV, Item 6(a) of proposed Form ATS–N would require that an NMS Stock ATS describe any means and circumstances by which orders or other trading interest on the NMS Stock ATS are displayed or made known outside the NMS Stock ATS and the information about the orders and trading interest that are displayed. Also, if the display of orders or other trading interest is not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. Part IV, Item 6(b) of proposed Form ATS–N would also require the NMS Stock ATS to identify the subscriber(s) or person(s) (in the case of a natural person, to identify only the position or title) to whom the orders and trading interest are displayed or otherwise made known. As discussed more fully above,466 most NMS Stock ATSs do not publicly display quotation data and are commonly referred to as ‘‘dark pools.’’ The Commission preliminarily believes that market participants generally are very sensitive to precisely how and when their trading interest is displayed or otherwise made known outside the NMS Stock ATS. The Commission is concerned that market participants currently may not know the extent to which their trading interest sent to ATSs is displayed outside those ATSs. Accordingly, for any NMS Stock ATSs that display some or all of the trading interest on their systems, Part IV, Item 6 of proposed Form ATS–N would require the NMS Stock ATS to identify the subscriber(s) or person(s) to whom orders or other trading interest information is displayed or otherwise made known, the means and 466 See PO 00000 supra note 123 and accompanying text. Frm 00076 Fmt 4701 Sfmt 4702 circumstances by which orders or other trading interest are displayed or made known, and the contents of that information. Because NMS Stock ATSs that are also ECNs may differ in how and where orders or other trading interest are displayed, the Commission preliminarily believes this item would clarify for market participants and the Commission exactly how such display may occur. In addition, an NMS Stock ATS would need to disclose arrangements, whether formal or informal (oral or written) to the extent they exist, with third parties to display the NMS Stock ATS’s trading interest outside of the NMS Stock ATS, such as IOIs from the NMS Stock ATS’s subscribers being displayed on vendor systems, or arrangements with third parties to transmit IOIs between subscribers. The Commission preliminarily believes that when an NMS Stock ATS sends electronic messages outside of the NMS Stock ATS that expose the presence of orders or other trading interest on the NMS Stock ATS, it is displaying or making known orders or other trading interest on the NMS Stock ATS. For instance, an NMS Stock ATS may send to subscribers or other persons a direct data feed from the NMS Stock ATS that contains real-time information about current quotes, orders or other trading interest on the NMS Stock ATS. Accordingly, it would be responsive to this item for the NMS Stock ATS to disclose the circumstances under which the NMS Stock ATS would send these messages, the persons that received them, and the information contained in the messages, including the symbol or any other information relating to trading interest on the NMS Stock ATS. The NMS Stock ATS would need to disclose the information required by this item, including the exact content of the information, such as symbol, price, size, attribution, or any other information made known. The Commission preliminarily believes that disclosures in response to this item are important because the information disclosed would provide market participants with advance notice of the potential display of their orders or other trading interest outside of the NMS Stock ATS.467 The Commission preliminarily believes that market 467 See Morgan Stanley letter, supra note 197 and accompanying text (stating customers questioned it about whether its dark pool is truly dark); Bloomberg Tradebook letter, supra note 190 and accompanying text (recommending that the Commission ask ATSs to complete a questionnaire that would include questions relating to the sharing of orders or order information with affiliates or other trading venues by the ATS). E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 participants, whose trading strategies are sensitive to how and to whom their orders and trading interest are displayed, would use the information disclosed under Item 6 to evaluate whether routing orders to a particular NMS Stock ATS would be consistent with their respective strategies. Request for Comment 379. Do you believe the Commission should require the disclosure of the information on Part IV, Item 6 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific 380. Do you believe Part IV, Item 6 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the means and circumstances by which orders or other trading interest on the NMS Stock ATS are displayed or made known outside the NMS Stock ATS and the information about the orders and trading interest that are displayed? Please explain. 381. What are the means through which NMS Stock ATSs currently display or make known trading interest? Do you believe any of these means raise any concerns? If so, why? Please support your arguments. Do you believe that Part IV, Item 6 of proposed Form ATS–N would mitigate any of those concerns through the disclosure of responsive information? Why or why not? Please support your arguments. 382. Is it sufficiently clear what information would be required by Part IV, Item 6 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 383. Do you believe there is other information that market participants might find relevant or useful regarding orders or other trading interest on the NMS Stock ATS that are displayed or otherwise made known outside the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 384. Do you believe there is any information that would be required by Part IV, Item 6 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 385. What are the potential costs and benefits of disclosing the information required by Part IV, Item 6 of proposed Form ATS–N? Would the proposed VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 disclosures in Part IV, Item 6 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 386. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 6 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 6? G. Trading Services Part IV, Item 7(a) of proposed Form ATS–N would require an NMS Stock ATS to describe the means or facilities used by the NMS Stock ATS to bring together the orders of multiple buyers and sellers, including the structure of the market (e.g., crossing system, auction market, limit order matching book). If the use of these means or facilities are not the same for all subscribers and persons, the NMS Stock ATS would also be required to describe any differences. This item is primarily designed to inform market participants and the Commission about an NMS Stock ATS’s market and the facilities and mechanisms that it uses to match counterparties. Part IV, Item 7(a) of proposed Form ATS–N would require a description, with specificity, of the facilities and mechanisms into which subscribers enter orders and how orders entered into these facilities and mechanisms would interact. The Commission has previously explained that a trading center brings together orders when orders entered into the system for a given security have the opportunity to interact with other orders entered into the system for the same security.468 For instance, a trading center brings together orders if it displays, or otherwise represents, trading interests entered on the system, such as a consolidated quote screen, to system users.469 Furthermore, a trading center also brings together orders if it receives subscribers’ orders centrally for future processing and execution, such as part of a limit order matching book that allows subscribers to display buy and sell orders in particular securities and to obtain execution against matching orders contemporaneously entered or stored in the system.470 Additionally, as 468 See Regulation ATS Adopting Release, supra note 7, at 70849. 469 See id. 470 See id. PO 00000 Frm 00077 Fmt 4701 Sfmt 4702 81073 explained above, to qualify for the Rule 3a1–1(a)(2) exemption from the statutory definition of ‘‘exchange,’’ an ATS must bring together the orders of multiple buyers and sellers.471 Based on Commission experience, ATSs that trade NMS stocks use various types of trading mechanisms. For example, many ATSs bring together multiple buyers and sellers using limit order matching systems. Other ATSs use crossing mechanisms that allow participants to enter unpriced orders to buy and sell securities, with the ATS’s system crossing orders at specified times at a price derived from another market.472 Some ATSs use an auction mechanism that matches multiple buyers and sellers by first pausing execution in a certain security for a set amount of time, during which the ATS’s system seeks out and/or concentrates liquidity for the auction; after the trading pause, orders will execute at either a single auction price or according to the priority rules for the auction’s execution. Furthermore, some ATSs use a blotter scraping functionality, which may inform the ATS’s system about the orders placed on a participant’s order management system, but not yet entered into the ATS; the ATS or broker-dealer operator oftentimes can automatically generate those orders and enter them into the ATS on behalf of the subscriber, in accordance with the relevant terms and conditions, when certain contra-side trading interest exists in the ATS. The Commission preliminarily believes that the disclosures required under Part IV, Item 7(a) would be useful to market participants when evaluating whether or not to route orders to a particular NMS Stock ATS. At times, market participants may route orders to a trading venue with certain characteristics to accomplish a particular trading strategy. For instance, a market participant aiming to execute a block transaction may seek out a trading platform that operates a block crossing network with specialized size discovery mechanisms and controls for information leakage. At the same time, a different market participant may seek to use an NMS Stock ATS’s auction 471 See id. The Commission emphasized in the Regulation ATS Adopting Release that the mere interpositioning of a designated counterparty as riskless principal for settlement purposes after the purchasing and selling counterparties to a trade have been matched would not, by itself, mean that the system does not have multiple buyers and sellers. See id. Additionally, systems in which there is only a single seller, such as systems that permit issuers to sell their own securities to investors, would not be included within Rule 3b–16. See id. 472 See Regulation ATS Adopting Release, supra note 7, at 70849 n.37. E:\FR\FM\28DEP3.SGM 28DEP3 81074 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 function if that market participant believes the auction process would provide the best opportunity for price discovery or price improvement. Accordingly, the Commission preliminarily believes that disclosure of the information that would be required under Item 7(a) of proposed Form ATS– N would better enable market participants to evaluate an NMS Stock ATS as a potential destination for them to route their orders. In addition, this information also would assist the Commission to fully evaluate the facilities and mechanisms that consist of the NMS Stock ATS and whether an NMS Stock ATS meets the requirements of Rule 3b–16 that it is bringing together the orders for securities of multiple buyers and sellers.473 Request for Comment 387. Do you believe the Commission should require the disclosure of the information on Part IV, Item 7(a) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 388. Do you believe Part IV, Item 7(a) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the means or facilities used by the NMS Stock ATS to bring together the orders of multiple buyers and sellers, including the structure of the market? Please explain. 389. Is it sufficiently clear what information would be required by Part IV, Item 7(a) of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 390. Do you believe there is other information that market participants might find relevant or useful regarding the means or facilities used by the NMS Stock ATS to bring together the orders of multiple buyers and sellers? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 391. Do you believe there is any information that would be required by Part IV, Item 7(a) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 392. Are there particular means or facilities for bringing together the orders of multiple buyers and sellers on which the Commission should request information specifically that is not 473 See 17 CFR 240.3b–16(a)(1). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 included as a component under Part IV, item 7(a) of proposed Form ATS–N? 393. What are the potential costs and benefits of disclosing the information required by Part IV, Item 7(a) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 7(a) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 394. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 7(a) of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 7(a)? Part IV, Item 7(b) of Form ATS–N would require an NMS Stock ATS to describe the established, nondiscretionary methods that dictate the terms of trading among multiple buyers and sellers on the facilities of the NMS Stock ATS, including rules and procedures governing the priority, pricing methodologies, allocation, matching, and execution of orders and other trading interest. If these rules and procedures are not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. Part IV, Item 7(b) of proposed Form ATS–N is primarily designed to inform market participants about how orders interact on an NMS Stock ATS upon being entered into the system. Item 7(b) would require a description, with specificity, of all rules and procedures relevant to order interaction and execution, such as those addressing order priority, pricing methodologies, allocation, matching, and execution of orders and other trading interest. The Commission previously explained in the Regulation ATS Adopting Release that use of established, non-discretionary methods could include operation of a trading facility or the setting of rules governing the trading of subscribers.474 For example, the Commission considers the use of an algorithm by an electronic trading system, which sets trading procedures and priorities, to be a trading facility that uses established, non-discretionary methods.475 Similarly, the Commission has previously stated that rules imposing execution priorities, such as time and price priority rules, would be 474 See Regulation ATS Adopting Release, supra note 7, at 70851–52. 475 See id. at 70851. PO 00000 Frm 00078 Fmt 4701 Sfmt 4702 ‘‘established, non-discretionary methods.’’ 476 Based on Commission experience, NMS Stocks ATSs employ various terms and conditions under which orders interact and match. As noted above, some NMS Stock ATSs may offer pricetime priority to determine how to match orders (potentially with various exceptions), while other NMS Stock ATSs may offer midpoint-only matching with time priority.477 Some NMS Stock ATSs might also take into account other factors to determine priority. For example, an NMS Stock ATS may assign either a lower or higher priority to an order entered by a subscriber in a certain class (e.g., orders of proprietary traders or retail investors) or routed from a particular source (e.g., orders routed by the broker-dealer operator’s SOR (or similar functionality) or algorithm) when compared to an equally priced order entered by a different subscriber or via a different source. Furthermore, in the Commission’s experience, an NMS Stock ATS might elect to apply different priority rules for matching conditional orders than it does for matching other order types. Part IV, Item 7(c) of proposed Form ATS–N would require an NMS Stock ATS to describe any trading procedures related to price protection mechanisms, short sales, locked-crossed markets, the handling of execution errors, timestamping of orders and executions, or price improvement functionality. If the trading procedures are not the same for all subscribers and persons, the NMS Stock ATS would also be required to describe any differences. Some ATSs that trade NMS stocks apply various methods to determine an execution price based on the circumstances of the match. For example, an ATS may price an execution of a midpoint pegged order with a limit or market order at the midpoint of the NBBO. An ATS executing a match of two limit orders, or a limit and market order, might price the execution at or within the NBBO, with the possibility of offering the limit order(s) price improvement. On the other hand, an ATS that operates a block crossing network, with specialized size discovery mechanisms, might calculate a volume-weighted average price after the final size of the execution has been determined. In the Commission’s experience, NMS Stock ATSs have also adopted other trading procedures governing the execution of orders, which the NMS Stock ATS would be required to explain under Part IV, Item 7(c) of proposed 476 See 477 See E:\FR\FM\28DEP3.SGM id. at 70852. supra Section III.B. 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Form ATS–N. For instance, an NMS Stock ATS might elect to use price protections to re-price orders or prevent their execution under certain circumstances, such as Limit Up Limit Down price bands pursuant to the National Market System Plan to Address Extraordinary Market Volatility (‘‘LULD Plan’’).478 An NMS Stock ATS might also permit short sales to be executed on its system and would thus be required to configure its system to comply with federal securities laws related to short sales, including Regulation SHO.479 Additionally, an NMS Stock ATS could have rules and procedures governing and/or precluding the execution of orders in a locked or crossed market. If an NMS Stock ATS has any procedures governing the handling of execution errors, such as the use of an error account by the NMS Stock ATS, it would be required to explain those procedures in Item 7(c). Furthermore, under Part IV, Item 7(c) of proposed Form ATS–N, an NMS Stock ATS would also be required to describe any protocols for timestamping orders and executions to ensure compliance with the Exchange Act and the rules and regulations thereunder and any execution procedures related to price improvement. For example, if an NMS Stock ATS has procedures to reprice orders under its price protection mechanisms, to reprice short sale orders to ensure compliance with Regulation SHO, or to reprice orders due to pricesliding order types (such as certain pegged order types), it would be required to explain when it creates new timestamps for such re-priced orders.480 In addition, any functionality or mechanism available on the NMS Stock ATS that allows for price improvement would also need to be described in response to this item. The Commission preliminarily believes that information about how an NMS Stock ATS prices and matches orders is useful to market participants’ 478 See Securities Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) (File No. 4–631) (‘‘LULD Approval Order’’). The registered national securities exchanges and FINRA filed the LULD Plan to create a market-wide limit up-limit down mechanism to address extraordinary market volatility in NMS Stocks. See id. at 33500. The Plan sets forth procedures that provide for market-wide limit up-limit down requirements that would be designed to prevent trades in individual NMS Stocks from occurring outside of the specified price bands. See id. 479 17 CFR 242.200 through 242.204. 480 Additionally, if subscriber orders are routed from the NMS Stock ATS and are not filled, or filled only in part on the NMS Stock ATS, the Commission preliminarily believes that the NMS Stock ATS should describe how such orders are time stamped for priority purposes. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 and the Commission’s understanding of that trading center’s operation. The Commission preliminarily believes that the information required under Part IV, Items 7(b) and 7(c) of proposed Form ATS–N would allow market participants to evaluate the terms and conditions under which their orders will interact and execute on an NMS Stock ATS, and would thus provide them with a better opportunity to determine whether that NMS Stock ATS is the appropriate trading destination for their orders. For example, a market participant whose order would be given a higher priority on an NMS Stock ATS based on its subscriber class may choose to first route its order to that venue, whereas a market participant seeking to enter a conditional order may choose to route an order based on an NMS Stock ATS’s specific priority rules governing conditional orders. Likewise, market participants likely would want to know whether an NMS Stock ATS applies price protection mechanisms, or other standards, that could re-price an order or prevent it from executing under certain conditions. In addition, the Commission preliminarily believes that the information provided in response to Items 7(a), 7(b), and 7(c) would allow the Commission to more easily evaluate whether the entity that filed the proposed Form ATS–N meets the criteria of Rule 3b-16 and the definition of an NMS Stock ATS. Request for Comment 395. Do you believe the Commission should require the disclosure of the information on Part IV, Items 7(b) and 7(c) of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 396. Do you believe Part IV, Item 7(b) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to the established, non-discretionary methods that dictate the terms of trading among multiple buyers and sellers on the facilities of the NMS Stock ATS, including rules and procedures governing the priority, pricing methodologies, allocation, matching, and execution of orders and other trading interest? Please explain. 397. Do you believe Part IV, Item 7(c) of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding the trading procedures related to price protection mechanisms, short sales, locked-crossed markets, the handling of execution errors, time-stamping of orders and PO 00000 Frm 00079 Fmt 4701 Sfmt 4702 81075 executions, or price improvement functionality? Please explain. 398. Is it sufficiently clear what information would be required by Part IV, Items 7(b) and 7(c) of proposed Form ATS–N? Should these items be refined in any way? If so, how? Please be specific. 399. Do you believe there is other information that market participants might find relevant or useful regarding the established non-discretionary methods that dictate the terms of trading among multiple buyers and sellers on the market or facilities of an NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS– N. Please support your arguments. 400. Do you believe there is other information that market participants might find relevant or useful regarding trading procedures related to price protection mechanisms, short sales, locked-crossed markets, the handling of execution errors, time-stamping of orders and executions, or price improvement functionality on an NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 401. Do you believe there is any information that would be required by Part IV, Items 7(b) and 7(c) of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 402. Are there any aspects of the nondiscretionary methods that dictate the terms of trading among buyers and sellers on which the Commission should specifically require information that is not included as a component under Part IV, Item 7(b) of proposed Form ATS–N? 403. What are the potential costs and benefits of disclosing the information required by Part IV, Items 7(b) and 7(c) of proposed Form ATS–N? Would the proposed disclosures in Part IV, Items 7(b) and 7(c) of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 404. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Items 7(b) and 7(c) of proposed Form ATS–N other than through disclosure on proposed Form E:\FR\FM\28DEP3.SGM 28DEP3 81076 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Items 7(b) and 7(c)? mstockstill on DSK4VPTVN1PROD with PROPOSALS3 H. Suspension of Trading, System Disruption or Malfunction Part IV, Item 8 of proposed Form ATS–N would require an NMS Stock ATS to describe any procedures governing trading in the event the NMS Stock ATS suspends trading or experiences a system disruption or malfunction. In addition, if the procedures governing trading during a suspension or system disruption or malfunction are not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. This item is designed to inform market participants of whether, among other things, an NMS Stock ATS will continue to accept orders after suspension or system malfunction or disruption occurs, whether the NMS Stock ATS routes, holds, or continues to execute orders resting in the system prior to the disruption, and the type of notice the NMS Stock ATS provides to subscribers and other market participants during a suspension or system disruption or malfunction. Examples of system disruptions would include, but are not limited to, internal software problems that prevent the NMS Stock ATS’s system from opening or continuing trading,481 a significant increase in volume that exceeds the ability of the trading system of the NMS Stock ATS to process incoming orders,482 and the failure of the ability of the trading system of the NMS Stock ATS to receive NBBO or other external pricing information that is used in the system’s pricing methodology. The Commission preliminarily believes that information regarding an NMS Stock ATS’s procedures on how orders may be handled during a suspension of trading or system disruption or malfunction would be useful to market participants because such an event might preclude the NMS Stock ATS from accepting and/or executing time sensitive orders and could impact the price the subscriber receives. The information about how an NMS Stock ATS would handle orders under such circumstances would better inform a subscriber’s trading decisions at the time of such an event and thus help that subscriber accomplish its investing or trading objectives. 481 See SCI Adopting Release, supra note 17 at 72254–55 n.28. 482 See id. at 72255 n.29. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Information regarding the procedures for how an NMS Stock ATS would handle orders during a suspension of trading or system disruption or malfunction would also help the Commission better monitor the securities markets. The Commission has recently noted that given the speed and interconnected nature of the U.S. securities markets, a seemingly minor systems problem at a single entity can quickly create losses and liability for market participants, and spread rapidly across the national market system, potentially creating widespread damage and harm to market participants and investors.483 Accordingly, it is important to fully understand what, if any, trading procedures an NMS Stock ATS would follow during a suspension of trading or system disruption or malfunction. The Commission preliminarily believes that the disclosures that would be required by Item 8 would help the Commission discover a potential violation of the federal securities laws and rules or regulations thereunder in a more expeditious manner than if the disclosures were not required. The Commission notes that it is not proposing to require NMS Stock ATSs to adopt specific procedures governing trading during a system disruption or malfunction as it did under Regulation SCI for certain significant-volume ATSs that trade NMS stocks or non-NMS stocks.484 Rather, under Part IV, Item 8 of proposed Form ATS–N, the Commission is only requiring an NMS Stock ATS to disclose what procedures, if any, it follows during a suspension of trading or system disruption or malfunction on the NMS Stock ATS. Accordingly, the disclosure requirements under Item 8, similar to other items on proposed Form ATS–N, are intended to inform market participants of an NMS Stock ATS’s procedures rather than impose any new procedural requirements on NMS Stock ATSs. Request for Comment 405. Do you believe the Commission should require the disclosure of the information on Part IV, Item 8 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 406. Do you believe Part IV, Item 8 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding any 483 See 484 See id. at 72253. supra notes 102–103 and accompanying text. PO 00000 Frm 00080 Fmt 4701 Sfmt 4702 procedures governing trading in the event the NMS Stock ATS suspends trading or experiences a system disruption or malfunction? Please explain. 407. Is it sufficiently clear what information would be required by Part IV, Item 8 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 408. Do you believe there is other information that market participants might find relevant or useful regarding procedures governing trading in the event an NMS Stock ATS suspends trading or experiences a system disruption or malfunction? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 409. Do you believe there is any information that would be required by Part IV, Item 8 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 410. What are the potential costs and benefits of disclosing the information required by Part IV, Item 8 of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 8 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 411. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 8 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 8? I. Opening, Reopening, and Closing Processes, and After Hours Procedures Part IV, Item 9 of proposed Form ATS–N would require an NMS Stock ATS to describe its opening, reopening, and closing processes, if any, and any after-hours trading procedures. Part IV, Item 9(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any opening and reopening processes, including how orders or other trading interest are matched and executed prior to the start of regular trading hours or following a stoppage of trading in a security during regular trading hours and how unexecuted orders or other trading interest are E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 handled at the time the NMS Stock ATS begins regular trading at the start of regular trading hours or following a stoppage of trading in a security during regular trading hours. An NMS Stock ATS would also be required to describe any differences between pre-opening executions, executions following a stoppage of trading in a security during regular trading hours, and executions during regular trading hours. Part IV, Item 9(b) of proposed Form ATS–N would require a description of any closing process, including how unexecuted orders or other trading interest are handled at the close of regular trading. An NMS Stock ATS would also be required to describe any differences between the closing executions and executions during regular trading hours. Part IV, Item 9(c) of proposed Form ATS–N would require a description of any after-hours trading procedures, including how orders and trading interest are matched and executed during after-hours trading. An NMS Stock ATS would also be required to describe any differences between the after-hours executions and executions during regular trading hours. Part IV, Item 9 of proposed Form ATS–N is designed to inform market participants about whether an NMS Stock ATS uses any special procedures to match orders outside of regular trading hours and/or processes to set a single opening, reopening, or closing price to, for example, maximize liquidity and accurately reflect market conditions at the opening, reopening, or close of trading. The Commission notes that it is standard practice for national securities exchanges to conduct opening, reopening, and closing auctions, or similar procedures, to start and conclude the trading day, or reopen trading in a security during the trading day.485 Furthermore, to facilitate their opening and closing processes, exchanges often permit members to enter orders specially designated to execute on the opening or closing.486 485 See, e.g., New York Stock Exchange Rule 123D (setting forth the duties of NYSE Designated Market Maker when opening and reopening trading in a stock); New York Stock Exchange Rule 123C (setting forth the exchange’s closing procedures); The Nasdaq Stock Market LLC Rule 4752 (setting forth rules for the Nasdaq Opening Cross); The Nasdaq Stock Market LLC Rule 4753 (setting forth rules for the Nasdaq Halt Cross); The Nasdaq Stock Market LLC Rule 4754 (setting forth rules for the Nasdaq Closing Cross); BATS Exchange Rules 11.23 and 11.24 (setting forth the exchange’s procedures for openings, closings and auctions following a trading halt). 486 See, e.g., New York Stock Exchange Rule 13 (defining Market-on-Open. Market-on-Close, Limiton-Open, and Limit-on-Close, and Closing Offset order types); The Nasdaq Stock Market LLC Rule 4752 (a) (defining Market on Open, Limit on Open, VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 The disclosures under this item would allow for comparisons between NMS Stock ATSs and exchanges. Market participants would likely want to know about any special opening, reopening, or closing processes, and after-hours trading procedures, employed by an NMS Stock ATS. In particular, the Commission preliminarily believes that market participants would want to know which, if any, order types participate in an NMS Stock ATS’s opening, reopening, and/or closing processes, and after-hours trading. The Commission preliminarily believes that such information would help market participants assess whether participating in an NMS Stock ATS’s opening, reopening, or closing processes, or after-hours trading on the NMS Stock ATS, would help accomplish their investing or trading objectives and thus, cause them to route orders to the NMS Stock ATS. The disclosures required under Part IV, Item 9 of proposed Form ATS–N are also designed to help the Commission to better oversee NMS Stock ATSs and alert the Commission about any potential regulatory issues arising from an NMS Stock ATS’s opening, reopening, or closing processes, or afterhours trading procedures. For example, under Rule 611(b)(3) of Regulation NMS,487 single-priced opening and closing transactions are excepted from the Order Protection Rule under Rule 611(a) of Regulation NMS.488 The Commission preliminarily believes the disclosures required under Part IV, Item 9 of proposed Form ATS–N would help the Commission analyze whether the opening, reopening, and/or closing processes of an NMS Stock ATS, and after-hours trading procedures, are consistent with the Exchange Act and the rules and regulations thereunder. Request for Comment 412. Do you believe the Commission should require the disclosure of the information on Part IV, Item 9 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 413. Do you believe Part IV, Item 9 of proposed Form ATS–N captures the information that is most relevant to Opening Imbalance Only, and Market Hours order types); The Nasdaq Stock Market LLC Rule 4754(a) (defining Market on Close, Limit on Close, and Imbalance Only order types); BATS Exchange Rule 11.23(a) (defining Eligible Auction, Market-onOpen, Limit-on-Open, Late-Limit-on-Open, Marketon-Close, Limit-on-Close, and Late Limit-on-Close order types). 487 See 17 CFR 242.611(b)(3). 488 See 17 CFR 242.611(a). PO 00000 Frm 00081 Fmt 4701 Sfmt 4702 81077 understanding the operations of the NMS Stock ATS regarding its opening, reopening, or closing processes, if any, and any after-hours trading procedures? Please explain. 414. Do you believe there is other information that market participants might find relevant or useful regarding the opening or reopening processes, closing process, or after-hours trading procedures on the NMS Stock ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 415. Is it sufficiently clear what information would be required by Part IV, Item 9 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 416. Do you believe there is any information that would be required by Part IV, Item 9 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 417. Do you believe the information that would be required by Part IV, Item 9 of proposed Form ATS–N would be useful to market participants when deciding whether to trade on the NMS Stock ATS and would assist them in devising appropriate trading strategies to help accomplish their investing or trading objectives? Why or why not? Please support your arguments. 418. What are the potential costs and benefits of disclosing the information required by Part IV, Item 9 of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 9 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 419. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 9 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 9? J. Outbound Routing Part IV, Item 10(a) of Proposed Form ATS–N would require an NMS Stock ATS to describe the circumstances under which orders or other trading interest are routed from the NMS Stock ATS to another trading center, including whether outbound routing occurs at the E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81078 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules affirmative instruction of the subscriber or at the discretion of the broker-dealer operator, and the means by which routing is performed (e.g., a third party or order management system or a SOR (or similar functionality) or algorithm of the broker-dealer operator or any of its affiliates). If the means by which orders or other trading interest are routed from the NMS Stock ATS are not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences under Part IV, Item 10(b) of proposed Form ATS–N. Based on Commission experience, some NMS Stock ATSs, by way of their broker-dealer operator, provide outbound routing services whereby a subscriber’s order or trading interest could be routed to another trading center.489 Orders and trading interest could be routed to other trading centers under a variety of circumstances. For instance, a subscriber could instruct the NMS Stock ATS to route its orders to another trading center if it is not immediately executed on the NMS Stock ATS upon entry. Also, a subscriber could enter an order on the NMS Stock ATS that rests as an open order on the NMS Stock ATS and is concurrently routed to another trading center for potential execution. If the order is executed at the away trading center, the NMS Stock ATS would cancel the order resting as an open order on the NMS Stock ATS. If the order is executed on the NMS Stock ATS, the order that was routed to the away market would be canceled. The descriptions in response to Part IV, Item 10 of proposed Form ATS–N would be required to include who determines routing destinations, whether the subscriber, the brokerdealer operator, or both. This information is meant to illuminate when subscribers would have control over potential routing destinations and when the broker-dealer operator would have discretion to route away. The Commission preliminarily believes that subscribers would find it useful to be aware of any instance in which the broker-dealer operator has discretion to route trading interest so that a subscriber could better protect its interests and monitor any such routing. Item 10 of proposed Form ATS–N would also require a description of the means by which the routing is 489 ‘‘Trading center’’ under Regulation NMS is defined as ‘‘a national securities exchange or national securities association that operates an SRO trading facility, an alternative trading system, 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). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 performed. Examples of the means of outbound routing could include a thirdparty router, an order management system or SOR (or similar functionality) or algorithm of the broker-dealer operator or any of its affiliates, or any other functionality used to outbound route trading interest. The Commission preliminarily believes that it is important for subscribers and potential subscribers to know at whose discretion any outbound routing occurs and who would be performing the routing. The Commission preliminarily believes that such disclosures concerning outbound routing would provide subscribers and potential subscribers with the ability to gauge how their orders would be handled if they are not executed on the NMS Stock ATS. Subscribers and potential subscribers might, for example, have concerns about the leakage of confidential trading information when their orders are routed to other trading centers. Part IV, Item 10 of proposed Form ATS–N is designed to provide subscribers and potential subscribers with relevant information to evaluate the potential for leakage of their confidential trading information. In addition, subscribers and potential subscribers could have concerns about the treatment of their confidential trading information should their orders be routed by a third party or the SOR (or similar functionality) or algorithm of the broker-dealer operator. Overall, the Commission preliminarily believes that information about routing would likely be useful to market participants when deciding whether to subscribe or otherwise submit orders to an NMS Stock ATS that might be eligible for routing. The Commission also preliminarily believes that the disclosures required by Part IV, Item 10 of proposed Form ATS– N would aid it in evaluating whether an NMS Stock ATS is in compliance with Rule 301(b)(10) of Regulation ATS.490 The Commission could use the disclosures required under Item 10 of proposed Form ATS–N to evaluate whether there are any risks to the confidentiality of trading information on an NMS Stock ATS due to the outbound routing functionality being used. These disclosures would provide the Commission with insight into what trading information may be visible to the entity performing the NMS Stock ATS’s outbound routing functions, such as a third party or the broker-dealer operator’s SOR (or similar functionality) or algorithm. 490 See PO 00000 17 CFR 242.301(b)(10). Frm 00082 Fmt 4701 Sfmt 4702 Request for Comment 420. Do you believe the Commission should require the disclosure of the information on Part IV, Item 10 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 421. Do you believe Part IV, Item 10 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding the circumstances under which orders or other trading interest are routed from the NMS Stock ATS to another trading center? Please explain. 422. Is it sufficiently clear what information would be required by Part IV, Item 10 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 423. What mechanisms are available for NMS Stock ATSs to perform outbound routing? Do you believe there is any additional information that the Commission should require NMS Stock ATSs to disclose with regard to outbound routing? If so, explain what information and why. Please support your arguments. 424. Do you believe there is any information that would be required by Part IV, Item 10 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 425. Do you believe that the disclosures required under Part IV, Item 10 of proposed Form ATS–N would provide market participants with relevant information to evaluate the potential for leakage of their confidential trading information? Why or why not? Please be specific. 426. Do you believe transparency in how an NMS Stock ATS routes orders to other trading centers is useful to market participants when deciding whether to trade on the NMS Stock ATS and would assist them in devising appropriate trading strategies to help accomplish their investing or trading objectives? Why or why not? 427. Do you believe there is other information that market participants might find relevant or useful regarding the circumstances under which orders or other trading interest are routed from the NMS Stock ATS to another trading center? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS– N. Please support your arguments. 428. What are the potential costs and benefits of disclosing the information E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules required by Part IV, Item 10 of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 10 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 429. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 10 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 10? mstockstill on DSK4VPTVN1PROD with PROPOSALS3 K. Market Data Part IV, Item 11 of proposed Form ATS–N would require an NMS Stock ATS to disclose its sources and use of market data. Part IV, Item 11(a) of proposed Form ATS–N would require a description of the market data used by the NMS Stock ATS and the source of that market data (e.g., market data feeds disseminated by the consolidated data processor (‘‘SIP’’) and market data feeds disseminated directly by an exchange or other trading center or third-party vendor of market data). Part IV, Item 11(b) of proposed Form ATS–N would require the NMS Stock ATS to describe the specific purpose for which the market data is used by the NMS Stock ATS, including how market data is used to determine the NBBO, protected quotes, pricing of orders and executions, and routing destinations. For instance, an NMS Stock ATS can elect to use market data feeds for purposes of complying with the trade through rule of Rule 611 of Regulation NMS 491 and for pricing executions on the NMS Stock ATS that are derived from prices on other trading centers, such as an execution at the mid-point of the NBBO. An NMS Stock ATS also might use data feeds to determine the prices available at other trading centers for purposes of routing orders or other trading interest. The Commission preliminarily believes that market participants would likely find it useful to know the source and specific purpose for which market data is used by an NMS Stock ATS. For instance, the market data received by an NMS Stock ATS might affect the price at which orders are executed on the NMS Stock ATS.492 In addition, because 491 See 17 CFR 242.611(a). supra Section VIII.G (explaining how NMS Stock ATSs might use the NBBO to set execution prices). See also Morgan Stanley letter, supra note 197, (stating it received customer questions specific to the use of direct market data 492 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 of the latency differences between the SIP and the direct data feeds of the exchanges,493 the source of an NMS Stock ATS’s market data could impact the price received by a market participant, depending on the ATS’s source of the market data. Accordingly, the Commission preliminarily believes that Part IV, Item 11 of proposed Form ATS–N would provide market participants with information to assist them in developing optimal trading strategies to account for any potential latency differences between market data feeds. Furthermore, the Commission preliminarily believes that these disclosures would assist subscribers to understand the procedures employed by the NMS Stock ATS for complying with Regulation NMS, including an understanding about how their orders might be routed by the NMS Stock ATS. The Commission also preliminarily believes that the disclosures required under Item 11 could help the Commission in understanding how market data is used for purposes of monitoring developments in market structure. Request for Comment 430. Do you believe the Commission should require the disclosure of the information on Part IV, Item 11 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 431. Do you believe Part IV, Item 11 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding the sources and use of market data? Please explain. 432. Is it sufficiently clear what information would be required by Part IV, Item 11 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 433. Do you believe there is other information that market participants might find relevant or useful regarding the sources and use of market data? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 434. Do you believe there is any information that would be required by feeds by the dark pool’s servers and algorithmic strategies). 493 See 2010 Equity Market Structure Release, supra note 124, at 3611 (‘‘Given the extra step required for SROs to transmit market data to plan processors, and for plan processors to consolidate the information and distribute it the public, the information in the individual data feeds of exchanges and ECNs generally reaches market participants faster than the same information in the consolidated data feeds.’’). PO 00000 Frm 00083 Fmt 4701 Sfmt 4702 81079 Part IV, Item 11 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 435. Are there any other applications for which NMS Stock ATSs use market data that the Commission should specifically identify and/or discuss under Part IV, Item 11 of Proposed Form ATS–N? 436. Do you believe that transparency regarding what market data an NMS Stock ATS uses and how the NMS Stock ATS uses that market data is useful to market participants when deciding whether to trade on the NMS Stock ATS and would assist them in devising appropriate trading strategies to help accomplish their investing or trading objectives? Why or why not? 437. Do you believe that the disclosures required under Part IV, Item 11 of Proposed Form ATS–N would assist the Commission to understand the procedures employed by an NMS Stock ATS for complying with Regulation NMS and to understand how orders are priced, handled, and routed by the NMS Stock ATS? Why or why not? 438. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 11 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 11? 439. What are the potential costs and benefits of disclosing the information required by Part IV, Item 11 of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 11 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. L. Fees Part IV, Item 12 of proposed Form ATS–N would require the NMS Stock ATS to disclose and describe its fee and rebate structure. Part IV, Item 12(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any fees, rebates, or other charges of the NMS Stock ATS (e.g., connectivity fees, subscription fees, execution fees, volume discounts) and provide the range (e.g., high and low) of such fees, rebates, or other charges. If the fees, rebates, or other charges of the NMS Stock ATS are not the same for all subscribers and persons, the NMS Stock E:\FR\FM\28DEP3.SGM 28DEP3 81080 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 ATS would be required to describe any differences under Part IV, Item 12(b) of proposed Form ATS–N. The Commission preliminarily believes that by requiring a description of an NMS Stock ATS’s fees, rebates, and other charges, market participants would be able to review and evaluate the fee structure of each NMS Stock ATS. If an NMS Stock ATS has a recognized fee structure, such as a maker-taker pricing model,494 that information would be required to be disclosed under Part IV, Item 12 of proposed Form ATS–N. The Commission preliminarily believes these disclosures would allow market participants to analyze the fee structures across NMS Stock ATSs in an expedited manner and decide which ATS offers them the best pricing according to the characteristics of their order flow, the type of participant they are (if relevant), or any other aspects of an ATS’s fee structure that serves to provide incentivizes or disincentives for specific market participants or trading behaviors. For instance, an institutional subscriber that commonly adds nonmarketable, resting orders that offer liquidity may choose to subscribe to an ATS that rewards liquidity-providing orders with rebates. The types of fees charged for services also could influence whether a market participant subscribes to, or the extent to which it participates on, an NMS Stock ATS. For instance, an NMS Stock ATS with relatively higher connectivity fees and relatively lower execution fees may not be as attractive to a market participant that only intends to send the NMS Stock ATS a small amount of trading interest. The Commission also is proposing to require that NMS Stock ATSs describe any differences in their fees, rebates, or other charges among differing types of subscribers or other persons. The Commission preliminarily believes that this information would further illuminate the types of subscribers and/ or trading interest that the NMS Stock ATS may be trying to attract.495 This information would allow market participants to observe whether an NMS Stock ATS is offering more preferential treatment to other market participants 494 Under the maker-taker pricing model, nonmarketable, resting orders that offer (make) liquidity at a particular price receive a liquidity rebate if they are executed, while incoming orders that execute against (take) the liquidity of resting orders are charged an access fee. See 2010 Equity Market Structure Release, supra note 124, at 3598–3599. 495 See Bloomberg Tradebook letter, supra note 190 and accompanying text (recommending that the Commission ask ATSs to complete a questionnaire including questions relating to any special fees or rebates which lead to a preference of one order over another). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 and, therefore, aid market participants in deciding where to route their trading interest accordingly.496 Part IV, Item 12 of proposed Form ATS–N also would require that the NMS Stock ATS provide the range (e.g., high and low) of such fees, rebates, or other charges. For these disclosures, the types of fees should be categorized in the same manner as the NMS Stock ATS divides fees internally or on its fee schedule. For example, if an NMS Stock ATS provides rebates for liquidity added onto the ATS, then the range for such rebates would be required by this item. If these rebates are further divided into differing rebate amounts depending on order types used, then the range of such rebates for each order type would also need to be disclosed on proposed Form ATS–N. Item 12, however, does not require NMS Stock ATSs to disclose a complete schedule of their fees. In some cases, the fee schedules employed by NMS Stock ATSs are highly bespoke, and it may not be practical or desirable to require an NMS Stock ATS to disclose the fee schedule applicable to each subscriber to the NMS Stock ATS. The Commission, therefore, is proposing that the NMS Stock ATS disclose only the range of fees for each service. These disclosures are designed to give market participants an awareness of the fees charged by the NMS Stock ATS and allow market participants to understand and compare fees across NMS Stock ATSs, which could reduce the search costs of market participants in deciding where to send their orders and trading interest. The Commission preliminarily believes that the disclosures required by Part IV, Item 12 of proposed Form ATS– N would also assist the Commission in better understanding the fee structures of NMS Stock ATSs and trends in the market as part of the Commission’s overall review of market structure. Request for Comment 440. Do you believe the Commission should require the disclosure of the information on Part IV, Item 12 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 441. Do you believe Part IV, Item 12 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding its fee and rebate structure? Please explain. 442. Is it sufficiently clear what information would be required by Part 496 But see supra notes 92–95 and 427–429 and accompanying text (discussing the fair access requirements of Regulation ATS). PO 00000 Frm 00084 Fmt 4701 Sfmt 4702 IV, Item 12 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 443. Do you believe the Commission should require NMS Stock ATSs to publicly disclose their fees, charges, and rebates on proposed Form ATS–N? Why or why not? 444. Do you believe the Commission should require NMS Stock ATSs to disclose their complete fee schedules? Are there other ways that NMS Stock ATSs earn revenue about which the Commission should require disclosure? 445. Do you believe there is other information that market participants might find relevant or useful regarding fees, rebates and other charges? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 446. Do you believe there is any information that would be required by Part IV, Item 12 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 447. Do you believe that the information required by Part IV, Item 12 of proposed Form ATS–N would assist market participants and the Commission in comparing fees across NMS Stock ATSs? Why or why not? Please support your arguments. 448. Do you believe that the information required by Part IV, Item 12 of proposed Form ATS–N would allow the Commission to gather further information and analyze trends in the market, including how the prevalence of different fee structures may impact different categories of market participants? Would this information assist the Commission in evaluating the potential incentives and disincentives created by different fee structures in the market for NMS stocks? Why or why not? Please support your arguments. 449. What are the potential costs and benefits of disclosing the information required by Part IV, Item 12 of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 12 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 450. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 12 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 12? mstockstill on DSK4VPTVN1PROD with PROPOSALS3 M. Trade Reporting, Clearance and Settlement Part IV, Item 13 would require an NMS Stock ATS to describe its arrangements or procedures for trade reporting, clearance, and settlement of transactions. Part IV, Item 13(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any arrangements or procedures for reporting transactions on the NMS Stock ATS and if the trade reporting procedures are not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. Part IV, Item 13(b) of proposed Form ATS–N would require an NMS Stock ATS to describe any arrangements or procedures undertaken by the NMS Stock ATS to facilitate the clearance and settlement of transactions on the NMS Stock ATS. If the clearance and settlement procedures are not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. The Commission notes that Item 13 of proposed Form ATS–N would solicit similar information that is solicited pursuant to Exhibit F, subsection (d) of Form ATS, which currently requires ATSs to provide their procedures governing execution, reporting, clearance, and settlement of transactions effected through the ATS.497 Trade reporting furthers the transparent, efficient, and fair operation of the securities markets.498 For example, among other requirements, a broker-dealer operator of an NMS Stock ATS that is a member of FINRA has trade reporting obligations to FINRA under FINRA Rule 4552 and FINRA Rule 6730. The Commission preliminarily believes the proposed disclosure of the trade reporting procedures of an NMS Stock ATS under Part IV, Item 13(a) of proposed Form 497 In contrast to current Form ATS, Form ATS– N further would require that an NMS Stock ATS describe any differences in the manner in which its trade reporting, clearance, and settlement procedures are applied among subscribers and other persons. Also, Exhibit F, subsection (d) of Form ATS requires ATSs to provide the procedures governing execution in the same section as reporting and clearance and settlement procedures, whereas Form ATS–N would require information on execution procedures under a separate item, Part IV, Item 7. 498 See Regulation ATS Adopting Release, supra note 7, at 70887 (stating the market-wide transaction and quotation reporting plans operated by the registered national securities exchanges are responsible for the transparent, efficient, and fair operations of the securities markets). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 81081 ATS–N would also allow the Commission and the NMS Stock ATS’s SRO to more easily review the compliance of the NMS Stock ATS with its applicable trade reporting obligations. The Commission also preliminarily believes market participants may also find the disclosure of these procedures useful to understanding how their trade information is reported. Part IV, Item 13(b) of proposed Form ATS–N would require that an NMS Stock ATS describe any arrangements or procedures undertaken by the NMS Stock ATS to facilitate the clearance and settlement of transactions on the NMS Stock ATS. The Commission has previously stated that the integrity of the trading markets depends on the prompt and accurate clearance and settlement of securities transactions.499 For example, the description of procedures required by Item 13(b) of proposed Form ATS–N could include the process through which an NMS Stock ATS clears a trade (e.g., whether the NMS Stock ATS becomes a counterparty to a transaction, interposing itself between two counterparties to a transaction, or whether the NMS Stock ATS submits trades to a registered clearing agency for clearing) and any requirements an NMS Stock ATS places on its subscribers, or other persons whose orders are routed to an NMS Stock ATS, to have clearance and settlement systems and/or arrangements with a clearing firm. The Commission preliminarily believes market participants would likely find the disclosures required by Item 13(b) to be useful in understanding the measures undertaken by an NMS Stock ATS to facilitate clearance and settlement of subscriber orders on the NMS Stock ATS and allow them to more easily compare the clearance arrangements required across NMS Stock ATSs as part of deciding where to route their trading interest. The Commission preliminarily believes that the disclosures required by Part IV, Item 13 of proposed Form ATS– N may assist the Commission in better understanding the trade reporting, clearance and settlement procedures of NMS Stock ATSs and trends in the market as part of the Commission’s overall review of market structure. 452. Do you believe Part IV, Item 13 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding its arrangements or procedures for trade reporting, clearance, and settlement of transactions? Please explain. 453. Do you believe there is other information that market participants might find relevant or useful regarding procedures for trade reporting, clearance, and settlement of transactions on the NMS Stock ATSs? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 454. Is it sufficiently clear what information would be required by Part IV, Item 13 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific 455. Do you believe there is any information that would be required by Part IV, Item 13 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 456. Do you believe that the information required by Part IV, Item 13 of proposed Form ATS–N will assist market participants in the manner described above? Why or why not? Please support your arguments. 457. What are the potential costs and benefits of disclosing the information required by Part IV, Item 13 of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 13 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 458. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 13 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 13? Request for Comment 451. Do you believe the Commission should require the disclosure of the information on Part IV, Item 13 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. N. Order Display and Execution Access Part IV, Item 14 of proposed Form ATS–N would require an NMS Stock ATS to provide the following information if the NMS Stock ATS displays orders in an NMS stock to any person other than employees of the NMS Stock ATS and executed 5% or more of the average daily trading 499 See PO 00000 id. at 70897. Frm 00085 Fmt 4701 Sfmt 4702 E:\FR\FM\28DEP3.SGM 28DEP3 81082 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 volume in that NMS stock as reported by an effective transaction reporting plan for four of the preceding six calendar months: (a) The ticker symbol for each such NMS stock displayed for each of the last 6 calendar months; (b) the manner in which the NMS Stock ATS displays such orders on a national securities exchange or through a national securities association; and (c) how the NMS Stock ATS provides access to such orders displayed in the national market system equivalent to the access to other orders displayed on that exchange or association.500 The information elicited in Part IV, Item 14 relates to an NMS Stock ATS’s obligations under current Rule 301(b)(3) of Regulation ATS, which applies if an ATS displays a subscriber order in an NMS stock to any person other than ATS employees, and during at least 4 of the preceding 6 calendar months, executed 5% or more of the average daily trading volume in that NMS Stock as reported by an effective transaction reporting plan. Rule 301(b)(3)(ii) and (iii) requires qualifying ATSs to report their highest bid and lowest offer for the relevant NMS stock for inclusion in the quotation data made available by the national securities exchange or national securities association to which it reports and provide equivalent access to effect a transaction with other orders displayed on the exchange or by the association.501 Under the current regulatory regime for ATSs, there is no mechanism under which an ATS must notify the Commission, its SRO, or market participants after it has triggered those requirements.502 500 In response to Part IV, Item 14 of proposed Form ATS–N, an NMS Stock ATS filing a Form ATS–N would indicate ‘‘not applicable’’ if the NMS Stock ATS had not triggered the volume thresholds under Rule 301(b)(3)(i) of Regulation ATS before commencing operations pursuant to an effective Form ATS–N. If an NMS Stock ATS triggers the Rule 301(b)(3)(i) thresholds after commencing operations pursuant to an effective Form ATS–N, the Commission generally would consider this to be a material change to the operations of the NMS Stock ATS (assuming it is not already complying with the display and access requirements of Rule 301(b)(3)), and the NMS Stock ATS would be required to file a Form ATS–N Amendment pursuant to proposed Rule 304(a)(2)(i)(A). In the case where an NMS Stock ATS has voluntarily chosen to comply with the display and access requirements of Rule 301(b)(3)(ii) and (iii) before crossing the relevant thresholds, the NMS Stock ATS would nevertheless have to file a Form ATS– N Amendment upon surpassing the thresholds within 30 days after the end of the calendar quarter pursuant to proposed Rule 304(a)(2)(i)(B). 501 See 17 CFR 242.301(b)(3)(ii) and (iii). 502 In contrast, an ATS that triggers the ‘‘fair access’’ requirements under Rule 301(b)(5), see VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 The information required by Part IV, Item 14 of proposed Form ATS–N is designed to elicit information about how the NMS Stock ATS complies with the requirements of Rule 301(b)(3) of Regulation ATS when applicable. The Commission preliminarily believes that the disclosure of the information required by Item 14 of proposed Form ATS–N would facilitate the Commission’s oversight of NMS Stock ATSs and their compliance with Rule 301(b)(3) and help the Commission discover a potential violation of the federal securities laws and rules or regulations thereunder in a more expeditious manner than if the disclosures were not required. In part, because the thresholds required for display and access are counted for each NMS stock individually, an NMS Stock ATS would be required to disclose the ticker symbol for the relevant NMS stock to aid the Commission in evaluating its compliance. The Commission also preliminarily believes that these disclosures would help ensure that market participants and the Commission are aware when an NMS Stock ATS has become a significant source of liquidity in an NMS stock. Further, the Commission preliminarily believes that market participants would find the information disclosed in this item useful to understand how they can access applicable quotations. Request for Comment 459. Do you believe the Commission should require the disclosure of the information on Part IV, Item 14 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 460. Do you believe Part IV, Item 14 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding the NMS Stock ATS’s obligations under current Rule 301(b)(3) of Regulation ATS? Please explain. supra notes 92–95 and 426–429 and accompanying text, is required to attach Exhibit C to Form ATS– R, which is filed with the Commission, but not publicly available. Exhibit C of Form ATS–R requires an ATS that triggered the fair access requirements to: (1) Provide a list of all persons granted, denied, or limited access to the ATS during the period covered by the ATS–R and (2) designate for each person (a) whether they were 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 on limitation of access. See supra note 453. PO 00000 Frm 00086 Fmt 4701 Sfmt 4702 461. Do you believe there is other information that market participants might find relevant or useful regarding the NMS Stock ATS’s obligations under current Rule 301(b)(3) of Regulation ATS? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS– N. Please support your arguments. 462. Is it sufficiently clear what information would be required by Part IV, Item 14 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 463. Do you believe there is any information that would be required by Part IV, Item 14 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 464. Do you believe that the information required by Part IV, Item 14 of proposed Form ATS–N will assist market participants in accessing applicable quotations and ensuring they receive equivalent access on the NMS Stock ATS? Why or why not? Please support your arguments. 465. Do you believe that the imposition of the requirements of Rule 301(b)(3) on an NMS Stock ATS crossing the relevant volume thresholds of Rule 301(b)(3)(i) and meeting the display requirement of the rule, should constitute a material change in the operations of the NMS Stock ATS such that it should be reported to the Commission in advance? Why or why not? 466. What are the potential costs and benefits of disclosing the information required by Part IV, Item 14 of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 14 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 467. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 14 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 14? E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules In 2009, the Commission published a proposal to address certain practices with respect to undisplayed liquidity, which is trading interest that is available for execution at a trading center, but is not included in the consolidated quotation data that is widely disseminated to the public.503 Among other things, the Commission proposed amending Rule 301(b)(3) of Regulation ATS to lower the trading volume threshold that triggers public display obligations for ATSs from 5% or more of the aggregate average daily share volume for an NMS stock as reported by an effective transaction reporting plan to 0.25% or more of the aggregate average daily share volume for an NMS stock as reported by an effective transaction reporting plan.504 The Commission also proposed to change the definition of ‘‘bid’’ or ‘‘offer’’ in Regulation NMS to clarify that the public quoting requirements apply to actionable indications of interest privately transmitted by dark pools to selected market participants.505 Request for Comment 468. Do you believe that the Commission should lower the 5% trading volume threshold in Rule 301(b)(3) of Regulation ATS that triggers the public display requirement for ATSs? Why or why not? If so, what is the appropriate threshold level? Please support your arguments. 469. Do you believe that the Commission should define actionable indications of interest in the definition of ‘‘bid’’ and ‘‘offer’’ in Regulation NMS? Why or why not? Please support your arguments. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 O. Fair Access Part IV, Item 15 of proposed Form ATS–N would require an NMS Stock ATS to provide the following information if the NMS Stock ATS executes 5% or more of the average daily trading volume in an NMS stock as reported by an effective transaction reporting plan for four of the preceding six calendar months: (a) The ticker symbol for each NMS stock for each of the last 6 calendar months; and (b) a description of the written standards for granting access to trading on the NMS 503 See generally Regulation of Non-Public Trading Interest, supra note 123. 504 See id. at 61216. 505 See id. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Stock ATS.506 As explained above,507 Rule 301(b)(5)(ii)(A) of Regulation ATS requires an ATS to establish written standards for granting access to trading on its system when it crosses the fair access thresholds of Rule 301(b)(5)(i) and does not meet the exception set forth in Rule 301(b)(5)(iii). If an ATS crosses the fair access thresholds, Rule 301(b)(5)(ii)(B) requires the ATS to ‘‘not unreasonably prohibit or limit any person in respect to access to services offered by such alternative trading system by applying the [written] standards . . . in an unfair or discriminatory manner.’’ 508 The Commission preliminarily believes that the disclosure of the information requested by Part IV, Item 15 of proposed Form ATS–N would facilitate the Commission’s oversight of NMS Stock ATSs and their compliance with Rule 301(b)(5). Because the volume thresholds required for fair access are counted for each NMS stock individually, an NMS Stock ATS would be required to disclose the ticker symbol for the relevant NMS stock to aid the Commission in evaluating the NMS Stock ATS’s compliance. The Commission also preliminarily believes that it is important for market participants to be aware of whether an NMS Stock ATS is a significant source of liquidity for an NMS stocks and therefore, must provide fair access. Although Exhibit C of Form ATS–R requires an ATS to notify the Commission when it has crossed a fair access threshold in a particular calendar quarter,509 there is currently no requirement that an ATS must notify the public when it has done so. The Commission preliminarily believes that having such information publicly available will help market participants 506 In response to Part IV, Item 15 of proposed Form ATS–N, an NMS Stock ATS filing a Form ATS–N would indicate ‘‘not applicable’’ if the NMS Stock ATS had not triggered the volume thresholds under Rule 301(b)(5)(i) of Regulation ATS before commencing operations pursuant to an effective Form ATS–N. If an NMS Stock ATS triggers the Rule 301(b)(5)(i) thresholds after commencing operations pursuant to an effective Form ATS–N, the Commission would generally consider this to be a material change to the operations of the NMS Stock ATS (assuming it is not already complying with the fair access requirements of Rule 301(b)(5)), and the NMS Stock ATS would be required to file a Form ATS–N Amendment pursuant to proposed Rule 304(a)(2)(i)(A). In the case where an NMS Stock ATS has voluntarily chosen to comply with the fair access requirements of Rule 301(b)(5)(ii) before crossing the relevant thresholds, the NMS Stock ATS would nevertheless have to file a Form ATS–N Amendment upon surpassing the thresholds within 30 days after the end of the calendar quarter pursuant to Rule proposed 304(a)(2)(i)(B). 507 See supra notes 92–95 and accompanying text. 508 See 17 CFR 242.301(b)(5)(ii)(B). 509 See supra note 453. PO 00000 Frm 00087 Fmt 4701 Sfmt 4702 81083 better evaluate trading opportunities and where to route orders in order to reach their trading and/or investment objectives. The Commission preliminarily believes that the disclosures that would be required by Item 15 would help the Commission discover a potential violation of the federal securities laws and rules or regulations thereunder in a more expeditious manner than if the disclosures were not required. Request for Comment 470. Do you believe the Commission should require the disclosure of the information on Part IV, Item 15 of Form ATS–N? Why or why not? If so, what level of detail should be disclosed? Please be specific. 471. Do you believe Part IV, Item 15 of proposed Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS regarding the written standards for granting access to trading on its system when it crosses the fair access thresholds of Rule 301(b)(5)(i) (and does not meet the exception set forth in Rule 301(b)(5)(iii))? Please explain. 472. Do you believe there is other information that market participants might find relevant or useful regarding the written standards for granting access to trading on its system when it crosses the fair access thresholds of Rule 301(b)(5)(i) (and does not meet the exception set forth in Rule 301(b)(5)(iii))? If so, describe such information and explain whether, and if so why, such information should be required to be provided under proposed Form ATS–N. Please support your arguments. 473. Do you believe there is any information that would be required by Part IV, Item 15 of proposed Form ATS– N that an NMS Stock ATS should not be required to disclose due to concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. 474. Is it sufficiently clear what information would be required by Part IV, Item 15 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 475. Do you believe that the disclosures under Part IV, Item 15 of proposed Form ATS–N would help market participants better evaluate trading opportunities and where to route orders in order to reach their investment objectives? Why or why not? Please support your arguments. 476. Do you believe that the imposition of the requirements of Rule E:\FR\FM\28DEP3.SGM 28DEP3 81084 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 301(b)(5) on an NMS Stock ATS crossing the relevant volume thresholds of Rule 301(b)(5)(i) should constitute a material change in the operations of the NMS Stock ATS such that it should be reported to the Commission in advance? Why or why not? 477. What are the potential costs and benefits of disclosing the information required by Part IV, Item 15 of proposed Form ATS–N? Would the proposed disclosures in Part IV, Item 15 of proposed Form ATS–N require an NMS Stock ATS to reveal too much (or not enough) information about its structure and operations? Why or why not? Please support your arguments. 478. Do you believe there are other ways to obtain the same information as would be required from NMS Stock ATSs by Part IV, Item 15 of proposed Form ATS–N other than through disclosure on proposed Form ATS–N? If so, how else could this information be obtained and would such alternative means be preferable to the proposed disclosures in Part IV, Item 15? P. Market Quality Statistics Published or Provided by the NMS Stock ATS to Subscribers Part IV, Item 16 of proposed Form ATS–N would require an NMS Stock ATS to explain and provide certain aggregate platform-wide market quality statistics that it publishes or provides to one or more subscribers regarding the NMS Stock ATS.510 Under Item 16, if the NMS Stock ATS publishes or otherwise provides to one or more subscribers aggregate platform-wide order flow and execution statistics of the NMS Stock ATS that are not otherwise required disclosures under Exchange Act Rule 605 of Regulation NMS, it would be required to: (i) List and describe the categories of the aggregate platform-wide order flow and execution statistics published or provided; (ii) describe the metrics and methodology used to calculate the aggregate platform-wide order flow and execution statistics; and (iii) attach as Exhibit 5 the most recent disclosure of the aggregate platform-wide order flow and execution statistics published or provided to one or more subscribers for each category or metric as of the end of the calendar quarter. An NMS Stock ATS would not be required to develop or publish any new statistics for purposes of making this disclosure; it would only be required to make the disclosures for statistics it already 510 An NMS Stock ATS would only be required to provide order flow and execution statistics that are aggregated across the ATS as a whole, not subscriber-specific order flow and execution statistics. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 otherwise collects and publishes or provides to one or more subscribers to the NMS Stock ATS. The Commission preliminarily believes that some NMS Stock ATSs voluntarily publish or otherwise provide to subscribers aggregate platform-wide order flow and execution statistics that do not fall under the statistical information that is required to be disclosed under Exchange Act Rule 605,511 which requires market centers, such as NMS Stock ATSs, to publish monthly reports of statistics on their order executions. To the extent an NMS Stock ATS publishes or provides such aggregate platform-wide statistics to one or more subscribers, Part IV, Items 16(a) and (b) of proposed Form ATS–N would require the NMS Stock ATS to list and describe the categories or metrics of the statistics it publishes or provides to subscribers and describe any criteria or methodology that the ATS uses to calculate those statistics, respectively. Item 16(c) would require the NMS Stock ATS to attach as Exhibit 5 the most recent disclosure of order flow and execution statistics published or provided for each category or metric as of the end of the calendar quarter.512 To comply with the requirements of Item 16(c), an NMS Stock ATS would file a Form ATS–N Amendment with an updated Exhibit 5 within 30 calendar days after the end of each calendar quarter.513 Under Part IV, Item 16, an NMS Stock ATS would be required to explain and provide any aggregate platform-wide order flow or execution statistic that is not otherwise a required disclosure under Exchange Act Rule 605 and published or provided to one or more subscribers by the NMS Stock ATS. An example of a type of statistic that would be a required disclosure under Item 16 would be statistics related to the percentage of midpoint executions on the NMS Stock ATS that the NMS Stock ATS publishes or otherwise provides to subscribers. The NMS Stock ATS would be required to list that category under Part IV, Item 16(a) and explain how the NMS Stock ATS calculates that statistic 511 17 CFR 242.605. instance, if an NMS Stock ATS publishes or provides a particular statistic on a daily basis, the NMS Stock ATS would include in Exhibit 5 the statistic that was published or provided to one or more subscribers on the last trading day of the calendar quarter (e.g., the statistic published or provided on June 30th or last trading day prior to June 30th). If an NMS Stock ATS publishes or provides a particular statistic weekly, the NMS Stock ATS would be required to include in Exhibit 5 the statistic that was published or provided to one or more subscribers at the end of the week prior to the end of the calendar quarter (e.g., the statistic published for the last full week of June). 513 See proposed Rule 304(a)(2)(i)(B). 512 For PO 00000 Frm 00088 Fmt 4701 Sfmt 4702 under Item 16(b). Within 30 calendar days after the end of each calendar quarter, the NMS Stock ATS would be required to attach an Exhibit 5 containing the most recent percentage it disseminated during the previous quarter. The Commission preliminarily believes that requiring the NMS Stock ATS to provide the statistic on Form ATS–N on a quarterly basis would allow market participants to obtain insight into the nature of trading on the NMS Stock ATS on a sufficiently frequent basis while minimizing the reporting burden for the NMS Stock ATS. The Commission preliminarily believes that an NMS Stock ATS may choose to create and publish or provide to one or more subscribers information concerning order flow and execution quality for different reasons. For example, the NMS Stock ATS may have concluded that publication of certain statistics may highlight certain characteristics of the NMS Stock ATS that would attract certain order flow. Or a subscriber may have requested that the NMS Stock ATS provide certain aggregated information concerning order flow and execution quality that the subscriber needed to assess the ATS’s operations. The Commission notes that certain performance metrics and statistics may be important factors for investors and subscribers in comparing and selecting an ATS that is most appropriate for their investment objectives.514 Indeed, Exchange Act Rule 605 currently requires ATSs to provide quarterly public reports containing certain information concerning ATS executions. As such, to the extent that an NMS Stock ATS has made a determination to create and publish or provide to subscribers certain aggregate platform-wide order flow and execution quality statistics, the Commission preliminarily believes that others may also find such information useful when evaluating an NMS Stock ATS as a possible venue to which to route orders in order to accomplish their investing or trading objectives. The Commission also solicits comment on whether other standardized statistical disclosures should be required from NMS Stock ATSs and the nature and extent of any such metrics or statistics that commenters believe should be disclosed. Request for Comment 479. Do you believe the Commission should require the disclosure of the information on Part IV, Item 16 of Form ATS–N? Why or why not? If so, what 514 See generally Tuttle: ATS Trading in NMS Stocks, supra note 126. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules level of detail should be disclosed? Please be specific. 480. Do you believe that the statistics required on Part IV, Item 16 of Form ATS–N should be provided on a more or less frequent basis? Why or why not? If so, how often should the statistics be provided (e.g., on a daily, weekly, monthly, quarterly, or annual basis)? Please support your arguments. 481. Is it sufficiently clear what information would be required by Part IV, Item 16 of proposed Form ATS–N? Should the item be refined in any way? If so, how? Please be specific. 482. Do you believe that the disclosures under Part IV, Item 16 of proposed Form ATS–N would help market participants better evaluate trading opportunities and where to route orders in order to reach their investment objectives? Why or why not? Please support your arguments. 483. Do you believe that the Commission should require standardized public disclosures of performance metrics or statistics for each NMS Stock ATS? Why or why not? Please support your arguments. If so, what metrics or statistics should NMS Stock ATSs be required to disclose publicly? Please be specific. 484. What percentage of NMS Stock ATSs publish or provide market quality statistics not otherwise required under Exchange Act Rule 605? Please explain how you have calculated this number. 485. Do you believe that there are other statistics or data that an NMS Stock ATS should be required to provide on proposed Form ATS–N that would be useful to market participants that either subscribe to or are considering subscribing to the NMS Stock ATS? If so, please identify those metrics and explain how they would be useful to market participants. Please support your arguments. 486. Should the Commission require NMS Stock ATSs to disclose on Form ATS–N, statistics regarding the extent of trading by the broker-dealer operator and its affiliates on the NMS Stock ATS? Why or why not? If so, what statistics should be required to be disclosed? Please support your arguments. If you believe that an NMS Stock ATS should disclose statistics about the extent of its broker-dealer operator’s and its affiliates’ trading activity on the NMS Stock ATS, how often should these statistics be disclosed (e.g., on a weekly, monthly, quarterly, annual basis)? 487. Do you believe there is any information that would be required by Part IV, Item 16 of proposed Form ATS–N that an NMS Stock ATS should not be required to disclose due to VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 concerns regarding confidentiality, business reasons, trade secrets, burden, or any other concerns? Why or why not? Please support your arguments. The Commission also notes that some industry participants have previously requested public statistics about the quality of these markets. In the 2010 Equity Market Structure Release, the Commission solicited public comment about, among other things, market structure performance and order execution quality, and how transparency could be improved in these areas.515 For example, the Commission noted that an important objective of many dark pools is to offer institutional investors an efficient venue in which to trade in large size with minimized market impact,516 and requested comment on the extent to which dark pools meet this objective of improving execution quality for the large orders of institutional investors.517 In seeking comment on other tools to protect investor interests, the Commission also requested comment on Exchange Act Rules 605 and Exchange Act Rule 606.518 Exchange Act Rule 606 requires broker-dealers to publish quarterly reports on their routing practices, including the venues to which they route orders for execution.519 Specifically, the Commission asked about the currency of Exchange Act Rules 605 and 606 and whether the information provided on the reports was useful to investors and their brokers in assessing the quality of order execution and routing practices.520 In response, some commenters stated their concern about the lack of market quality information available to the public about ATSs and other trading centers. For example, one commenter expressed support for national securities exchanges and ATSs to disclose how often a functionality is used and more market quality statistics, such as quoteper-execution ratios, duration of quotes and number of times orders are routed out without getting filled so that investors and other market participants could better gauge execution quality.521 Another commenter stated that ‘‘regulators should direct broker-dealers to provide public reports of order 515 See Equity Market Structure Release, supra note 124 at 3602–3614. See also supra Section III.D (discussing certain comments received on the Equity Market Structure Release). 516 See Equity Market Structure Release, supra note 124 at 3612. 517 See id. 518 17 CFR 242.606. 519 See 2010 Equity Market Structure Release, supra note 124, at 3605–3606. 520 See id. 521 Goldman Sachs letter, supra note 175, at 10. PO 00000 Frm 00089 Fmt 4701 Sfmt 4702 81085 routing and execution quality metrics that are geared toward retail investors.’’ 522 This commenter also stated that ‘‘the Commission should direct broker-dealers to provide institutional clients with standardized execution venue statistical analysis reports’’ and noted its commitment ‘‘to working with other industry groups to develop consistent industry templates, which it believes will greatly enhance institutional investors’ ability to evaluate their brokers’ routing practices and the quality of execution provided by different venues.’’ 523 Another commenter stated its belief that publicly available order routing and execution quality statistics pursuant to Rules 605 and 606 do not provide information to measure broker-dealers’ and execution venues’ performance with respect to specific institutional investors and that the reports are not presented in a uniform manner that allows for easy comparison across different brokerdealers and venues.524 With regard to the comment that the execution quality statistics currently made public under Rules 605 and 606 are inadequate, the Commission notes that it is considering proposing to amend Rules 600 and 606 to standardize and improve transparency around how broker-dealers handle and route institutional customer orders. These 522 See SIFMA letter #2, supra note 175 at 12. For example, the commenter suggested including information on ‘‘(i) percent of shares Improved, (ii) average price improvement, (iii) net Price Improvement per share, and (iv) effective/quoted spread ratio.’’ 523 See SIFMA letter #2, supra note 175 at 13. The commenter gave examples of the types of information (per venue) that should be incorporated into these reports as: (i) Percentage of orders executed, (ii) average number of shares ordered and executed, (iii) fill rates—overall, taken, added, and routed, and (iv) percentage executed displayed and undisplayed. 524 See letter from Dorothy M. Donohue, Deputy General Counsel, Investment Company Institute; Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; and Randy Snook, Executive Vice President, Securities Industry and Financial Markets Association, dated October 23, 2014, at 2. This commenter also provided a template for disclosure of order routing and execution quality information that institutional investors could request from their broker-dealers, which included, among other things: The number of total shares routed as actionable IOIs; the percent of shares routed to the venue by the broker that resulted in executions at that venue); the average length of time (measured in milliseconds) that orders (other than IOCs) were posted to a venue before being filled or cancelled; the average size, by number of shares, of each order actually executed on the venue; the aggregate number of shares executed at the venue that were priced at or near the mid-point between the bid and the offer; and the percentage of total shares executed that were executed at or near the midpoint between the bid and the offer. See id. at ‘‘Broker Routing Venue Analysis Template Definitions.’’ E:\FR\FM\28DEP3.SGM 28DEP3 81086 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 revisions being considered would include addressing commenter concerns regarding disclosures by broker-dealers about the trading venues to which they route orders, particularly with respect to order and execution sizes, fill rates, price improvement, and the use of actionable indications of interests.525 The Commission also is considering disclosures to facilitate the ability of institutional investors to assess potential conflicts of interest and risks of information leakage. Request for Comment 488. Do you believe that there is information that the Commission should require NMS Stock ATSs to disclose other than the information that is currently available to market participants from order execution reports pursuant to Exchange Act Rule 605? Why or why not? Please support your arguments. If so, what information should be disclosed and how would the information be useful to market participants? Please explain. Do you believe that there is information that the Commission should require a brokerdealer operator of the NMS Stock ATS to disclose other than the information that is currently available to market participants from order routing reports pursuant to Exchange Act Rules 606? Why or why not? Please support your arguments. 489. Do you believe that there are other means by which market quality metrics should be required to be made available by NMS Stock ATSs to market participants, other than as disclosures on proposed Form ATS–N? Why or why not? Please support your arguments. If so, please identify by what means and why? Please support your arguments. 490. Do you believe that an NMS Stock ATS should be required to disclose information about orders entered into its system and the ultimate disposition of such orders? Why or why not? Please support your arguments. For example, should NMS Stock ATSs disclose information regarding the average order size, average execution size, and percentage of orders marked immediate or cancel? Why or why not? Please support your arguments. 491. Do you believe that NMS Stock ATSs should be required to disclose whether the NMS Stock ATS provided order flow and execution statistics to some subscribers and not others? Why or why not? Please support your arguments. 492. Do you believe that NMS Stock ATSs should be required to disclose execution information such as the total 525 See id. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 number and percentage of shares executed at the midpoint, total number and percentage of shares executed at the national best bid, total number and percentage of shares executed at the national best offer, total number and percentage of shares executed between the national best bid and the midpoint, and total number and percentage of shares executed between the midpoint and the national best offer? Why or why not? Please support your arguments. If so, do you believe such information should be disclosed publicly on an aggregated basis or should the information be disclosed to each subscriber based on its own orders? Please support your arguments. 493. Do you believe that the jointindustry plan should be amended for publicly disseminating consolidated trade data to require real-time disclosure of the identity of NMS Stock ATSs on reports of their executed trades? Why or why not? Please support your arguments. Alternatively, should executions on NMS Stock ATSs be publicly disseminated on a delayed basis? 526 Why or why not? Please support your arguments. If so, how should this be done and what would be the appropriate delay? Please explain. 494. Do you believe that there are other data elements that should be provided by NMS Stock ATSs in the consolidated trade data? What are they and why should they be required? Please be specific. IX. Proposed Amendment to Rule 301(b)(10): Written Safeguards and Written Procedures To Protect Confidential Trading Information Current Rule 301(b)(10) of Regulation ATS 527 requires every ATS to have in place safeguards and procedures to protect subscribers’ confidential trading information and to separate ATS functions from other broker-dealer functions, including proprietary and customer trading.528 In the Regulation ATS Adopting Release, the Commission recognized that some broker-dealer operators provide traditional brokerage services as well as access to their ATS(s).529 The Commission further stated that Rule 301(b)(10) was not intended to preclude an ATS from 526 FINRA Rule 4552 requires each ATS to report to FINRA weekly volume information and number of trades regarding equity securities transactions within the ATS. Each ATS is also required to use a single MPID when reporting information to FINRA and to report weekly aggregate volume information on a security-by-security basis to FINRA. 527 See 17 CFR 242.301(b)(10). 528 See Regulation ATS Adopting Release, supra note 7, at 70879. 529 See id. PO 00000 Frm 00090 Fmt 4701 Sfmt 4702 providing its traditional brokerage services; rather, Rule 301(b)(10) was designed to prevent the misuse of private customer information in the system for the benefit of other customers, the ATS’s operator, or its employees.530 The Commission also stated its belief that the sensitive nature of trading information subscribers send to ATSs requires such systems to take certain steps to ensure the confidentiality of such information.531 To illustrate its point, the Commission provided the example that unless subscribers consent, registered representatives of an ATS should not disclose information regarding trading activities of such subscribers to other subscribers that could not be ascertained from viewing the ATS’s screens directly at the time the information is conveyed.532 As a result of its concerns regarding confidentiality, the Commission adopted Rule 301(b)(10), which was designed to eliminate the potential for abuse of the confidential trading information that subscribers send to ATSs.533 Rule 301(b)(10), however, does not currently require that the safeguards and procedures mandated under Rule 301(b)(10) be memorialized in writing. The Commission is now proposing to amend Rule 301(b)(10) to require that such safeguards and procedures be reduced to writing.534 Specifically, the Commission proposes to amend Rule 301(b)(10)(i) to require that all ATSs (including non-NMS Stock ATSs) establish written safeguards and written procedures to protect subscribers’ confidential trading information.535 This would include an ATS adopting written safeguards and written procedures that limit access to the confidential trading information of subscribers to those employees of the ATS who are operating the system or are responsible for its compliance with 530 See id. id. 532 The Commission stated that its concern regarding confidentiality grew out of its inspections of some ECNs, during which the Commission and its staff found that some of the broker-dealers operating ECNs used the same personnel to operate the ECN as they did for more traditional brokerdealer activities, such as handling customer orders that were received by telephone. These types of situations create the potential for misuse of the confidential trading information in the ECN, such as customers’ orders receiving preferential treatment, or customers receiving material confidential information about orders in the ECN. See id. 533 See id. 534 As discussed above, proposed Form ATS–N would also require NMS Stock ATSs to describe the written safeguards and procedures. See Part III, Item 10 of Proposed Form ATS–N. See also supra Section VII.B.11. 535 See proposed Rule 301(b)(10)(i). 531 See E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Regulation ATS or any other applicable rules,536 and implementing written standards controlling employees of the ATS trading for their own accounts.537 The Commission is also proposing to amend Rule 301(b)(10)(ii) to require that the oversight procedures, which an ATS adopts and implements to ensure that the above safeguards and procedures are followed, be in writing.538 The Commission continues to believe that safeguards and procedures to ensure the confidential treatment of ATS subscribers’ trading information are important, and that the potential for misuse of such information continues to exist. The Commission preliminarily believes that requiring an ATS to reduce to writing those safeguards and procedures, as well as its oversight procedures to ensure that such safeguards and procedures are followed, would strengthen the effectiveness of the ATS’s safeguards and procedures and would better enable the ATS to protect confidential subscriber trading information and implement and monitor the adequacy of, and the ATS’s compliance with, its safeguards and procedures. For example, if an ATS were required to reduce its safeguards and procedures to writing, it could selfaudit—or if it chose to do so, undergo a third-party audit—for compliance with those safeguards and procedures, and also assess their adequacy. In addition, the Commission preliminarily believes that reducing ATSs’ safeguards and procedures under Rule 301(b)(10) to writing will help the Commission and its staff, and the staff of the SRO of which an ATS’s broker-dealer operator is a member, evaluate whether an ATS has established such procedures and safeguards, whether the ATS has implemented and is abiding by them, and whether they comply with the requirements of Rule 301(b)(10). This should enable the Commission, and the applicable SRO(s), to exercise more effective oversight of ATSs regarding the ATSs’ compliance with Rule 301(b)(10) and other federal securities laws, rules, and regulations. The Commission also preliminary believes that its proposal would benefit market participants because they would be able to better evaluate the implementation of such safeguards and procedures, due to the proposed rule to reduce those safeguards and procedures to writing. Request for Comment 495. Do you believe the Commission should require ATSs to reduce to 536 See proposed Rule 301(b)(10)(i)(A). proposed Rule 301(b)(10)(i)(B). 538 See proposed Rule 301(b)(10)(ii). 537 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 writing their safeguards and procedures as described above? Why or why not? Should the requirement apply to all ATSs or only a subset such as NMS Stock ATSs? Please support your arguments. 496. Do you believe that requiring ATSs to reduce to writing their safeguards and procedures, as proposed, would help to ensure that subscribers’ confidential trading information is protected and not misused? If not, why not? Please support your arguments. 497. Are there other conditions that the Commission should implement to achieve the goal of protecting subscribers’ confidential trading information? If so, what are they and why would they be preferable? Please be specific. 498. Currently, how common is it for ATSs to reduce to writing their safeguards and procedures to protect subscribers’ confidential trading information and/or their oversight procedures to ensure that those safeguards and procedures are followed? For ATSs that have not reduced their safeguards and procedures to protect subscribers’ confidential trading information to writing, how do they currently ensure their compliance with the requirements of Rule 301(b)(10)? Please be specific. 499. For ATSs that have not reduced to writing their safeguards and procedures to protect subscribers’ confidential trading information and/or their oversight procedures to ensure that those safeguards and procedures are followed, how long would it take to do so? Please explain. X. Recordkeeping Requirements The Commission is proposing to amend Rules 303(a)(1) and 303(a)(2) of Regulation ATS to reflect its proposed amendments to Rule 301(b)(2) 539 and 301(b)(10),540 and its proposed addition of Rule 304.541 In addition, the Commission is proposing to make a minor technical amendment to Rule 303. Currently, unless not required to comply with Regulation ATS pursuant to Rule 301(a) 542 of Regulation ATS, ATS must comply with the recordkeeping requirements of Regulation ATS. Specifically, Rule 301(b)(8) 543 requires an ATS to make and keep current the records specified in Rule 302 544 and to preserve the 539 See supra Section IV.C. supra Section IX. 541 See supra Section IV.C. 542 17 CFR 242.301(a). 543 See 17 CFR 242.301(b)(8). 544 See 17 CFR 242.302. 540 See PO 00000 Frm 00091 Fmt 4701 Sfmt 4702 81087 records specified in Rule 303.545 In the Regulation ATS Adopting Release, the Commission stated that the requirements to make and preserve records set forth in Regulation ATS are necessary to create a meaningful audit trail and permit surveillance and examination to help ensure fair and orderly markets.546 Rule 303(a)(1) requires an ATS to preserve certain records for at least three years, the first two years in an easily accessible place.547 Specifically, Rule 303(a)(1) 548 requires an ATS to preserve: All records required to be made pursuant to Rule 302; all notices provided to subscribers, including notices addressing hours of operation, system malfunctions, changes to system procedures, and instructions pertaining to access to the ATS; documents made or received in the course of complying with the system capacity, integrity, and security standards in Rule 301(b)(6), if applicable; 549 and, if the ATS is subject to the fair access requirements under Rule 304(b)(5),550 a record of its access standards. Rule 303(a)(2) 551 requires that certain other records must be kept for the life of the ATS and any successor enterprise, including partnership articles or articles of incorporation (as applicable), and copies of reports filed pursuant to Rule 301(b)(2),552 which includes current Form ATS, and records made pursuant to Rule 301(b)(5).553 In particular, reports required to be maintained for the life of the ATS or any successor enterprise include initial operation reports, amendments, and cessation of operations reports, filed on Form ATS.554 The Commission is proposing to amend the record preservation requirements of Rule 303 to incorporate the preservation of records that would be created pursuant to the proposed requirements that NMS Stock ATSs file Forms ATS–N, Form ATS–N Amendments, and notices of cessation instead of Form ATS. Specifically, the Commission is proposing to amend Rule 303(a)(2)(ii) to require that an ATS shall preserve, for the life of the enterprise and of any successor enterprise, copies of reports filed pursuant to Rule 301(b)(2) or—in the case of an NMS 545 See 17 CFR 242.303. Regulation ATS Adopting Release, supra note 7, at 70877–78. 547 See 17 CFR 242.303(a)(1). 548 See 17 CFR 242.303(a)(1). 549 See supra notes 96–100 and accompanying text. 550 See supra notes 92–95 and accompanying text. 551 See 17 CFR 242.303(a)(2). 552 See 17 CFR 242.301(b)(2). 553 See supra notes 92–95 and accompanying text. 554 See 17 CFR 242.301(b)(2). 546 See E:\FR\FM\28DEP3.SGM 28DEP3 81088 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Stock ATS—Rule 304, and records made pursuant to Rule 301(b)(5).555 As a result, because an NMS Stock ATS would be required to file Forms ATS– N, Form ATS–N Amendments, and notices of cessation pursuant to proposed Rule 304, instead of on Form ATS, the NMS Stock ATS would be required to preserve those reports for the life of the enterprise and of any successor enterprise pursuant to the proposed amendments to Rule 303(a)(2).556 The Commission is not proposing any amendments to the recordkeeping requirements of Rule 302, or any other amendments to the record preservation requirements of Rule 303(a)(2). The Commission is also proposing amendments to the record preservation requirements of Rule 303(a)(1) to incorporate the Commission’s proposed amendments to Rule 301(b)(10),557 which would require an ATS to reduce to writing its safeguards and procedures to ensure confidential treatment of subscribers’ trading information and the oversight procedures to ensure that those safeguards and procedures are followed.558 Accordingly, the Commission is proposing to require an ATS, for a period of not less than three years, the first two years in an easily accessible place, to preserve at least one copy of the written safeguards and written procedures to protect subscribers’ confidential trading information and the written oversight procedures created in the course of complying with Rule 301(b)(10).559 The Commission is not proposing to amend any other aspects of the records preservation requirements of Rule 303(a)(1). The Commission preliminarily believes that the proposed amendments to Rule 303 are necessary to create a meaningful audit trail of an ATS’s current and previous written safeguards and procedures pursuant to Rule 301(b)(2) and permit surveillance and examination to help ensure fair and orderly markets,560 without imposing any undue burden on ATSs. Finally, the Commission proposes to make a minor technical amendment to Rule 303(a). Currently, Rule 303(a) references ‘‘paragraph (b)(9) of 555 See proposed Rule 301(a)(2)(ii). Commission notes that an NMS Stock ATS that had previously made filings on Form ATS would be required to preserve those filings for the life of the enterprise, as well as filings made going forward on Form ATS–N. 557 See proposed Rule 301(b)(10). 558 See supra Section VII (discussing the Commission’s proposed amendments to Rule 301(b)(10)). 559 See proposed Rule 303(a)(1)(v). 560 See Regulation ATS Adopting Release, supra note 7, at 70877–78. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 556 The VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 § 242.301’’ when setting forth the record preservation requirements for ATSs. The Commission is proposing to change the above reference to ‘‘paragraph (b)(8) of § 242.301’’ because Rule 301(b)(8) sets forth the recordkeeping requirements for ATSs. Request for Comment 500. Do you believe the Commission should amend the recordkeeping requirements for ATSs as proposed? Why or why not? 501. Do you believe that there are any other requirements of Rule 303 that should be amended to satisfy the objectives of this proposal? If so, what are they and why? 502. Do you believe that the proposed amendments to the record preservation requirements of Rule 303 are reasonable? If not, why? Please support your arguments. XI. General Request for Comment The Commission is requesting comments from all members of the public. The Commission particularly requests comment from the point of view of persons who operate ATSs that would meet the proposed definition of NMS Stock ATS, subscribers to those systems, investors, and registered national securities exchanges. The Commission seeks comment on all aspects of the proposed rule amendments and proposed form, particularly the specific questions posed above. Commenters should, when possible, provide the Commission with data to support their views. Commenters suggesting alternative approaches should provide comprehensive proposals, including any conditions or limitations that they believe should apply, the reasons for their suggested approaches, and their analysis regarding why their suggested approaches would satisfy the objectives of the proposed amendments. The Commission will carefully consider the comments it receives. 503. Do you believe that there is other information about the nature or extent of the operations of an NMS Stock ATS that should be disclosed on proposed Form ATS–N? Are there specific topics about which the Commission should request more information? If so, what information should be disclosed and why? 504. Do you believe that there are activities of an NMS Stock ATS brokerdealer operator and its affiliates that may give rise to potential conflicts of interest, other than those described, that should be disclosed on Form ATS–N? If so, what information should be PO 00000 Frm 00092 Fmt 4701 Sfmt 4702 disclosed and why? If so, what are they and why? 505. Is there other information or data that would be useful for a market participant to consider when evaluating an NMS Stock ATS as a potential trading center for its orders? If so, what are they and why? XII. Paperwork Reduction Act Certain provisions of the proposal contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).561 The titles of these requirements are: • Requirements for Alternative Trading Systems That Are Not National Securities Exchanges—Rule 301, Form ATS and Form ATS–R, 17 CFR 242.301 (OMB Control No. 3235–0509); • Rule 303 (17 CFR 242.303) Record Preservation Requirements for Alternative Trading Systems (OMB Control No. 3235–0505). • Rule 304 and Form ATS–N (a proposed new collection of information). We are submitting these requirements to the Office of Management and Budget (‘‘OMB’’) for review and approval in accordance with the PRA and its implementing regulations.562 We are applying for an OMB control number for the proposed new collection of information in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. If adopted, responses to the new collection of information would be mandatory. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.563 A. Summary of Collection of Information The proposed amendments to Regulation ATS include two new categories of obligations that would require a collection of information within the meaning of the PRA. The first category relates to Rule 301(b)(10) of Regulation ATS 564 and would apply to all ATSs, while the second category relates to proposed Form ATS–N and would apply only to NMS Stock ATSs. 1. Requirements Relating to Rule 301(b)(10) of Regulation ATS Under Rule 301(b)(10) of Regulation ATS, all ATSs are currently required to: (1) Establish adequate safeguards and procedures to protect subscribers’ 561 44 U.S.C. 3501 et seq. U.S.C. 3507; 5 CFR 1320.11. 563 5 CFR 1320.11(l). 564 17 CFR 242.301(b)(10). 562 44 E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 confidential trading information; and (2) adopt and implement adequate oversight procedures to ensure that the safeguards and procedures established to protect subscribers’ confidential trading information are followed. Rule 301(b)(10) of Regulation ATS further requires that the safeguards and procedures to protect subscribers’ confidential trading information shall include: (1) 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 (2) implementing standards controlling employees of the ATS trading for their own accounts. The proposed amendments to Regulation ATS would require written safeguards and written procedures to protect subscribers’ confidential trading information and written oversight procedures to ensure that the safeguards and procedures are followed. In addition, the Commission proposes to amend Rule 303(a)(1) 565 of Regulation ATS to provide that all ATSs must preserve at least one copy of their written safeguards and written procedures to protect subscribers’ confidential trading information and the written oversight procedures created in the course of complying with Rule 301(b)(10) of Regulation ATS. Under the proposed amendment, Rule 303(a)(1)(v) would be added to Regulation ATS to require an ATS to preserve such written safeguards and written procedures, and written oversight procedures for a period of not less than three years, the first two years in an easily accessible place.566 2. Requirements Relating to Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Proposed Form ATS–N As described above, the Commission proposes that any ATS that meets the definition of an NMS Stock ATS would be required to complete Form ATS–N and file it with the Commission in a structured format.567 Upon the Commission declaring a Form ATS–N effective, the Commission would make the Form ATS–N publicly available. The Commission would also make publicly available upon filing all properly filed Form ATS–N Amendments and notices of cessation on Form ATS–N. The proposed amendments to Regulation ATS would also require each NMS Stock ATS to make public via posting 565 17 CFR 242.303(a)(1). 566 Id. 567 See generally supra Section IV. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 on its Web site a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2). Proposed Form ATS–N consists of five parts. First, the entity submitting the filing would indicate whether it is submitting or withdrawing an initial filing. The entity would also indicate the type of filing—whether the filing is a Form ATS–N, a Form ATS–N Amendment (whether a material amendment, periodic amendment, or correcting amendment), or a notice of cessation, and if it is a notice of cessation, the date the NMS Stock ATS will cease to operate. If the filing is a Form ATS–N Amendment, the NMS Stock ATS would also be required to provide a brief narrative description of the amendment and a redline(s) showing changes to Part III and/or Part IV of proposed Form ATS–N. Part I would require that entity to state the name of the Registered Broker Dealer of the NMS Stock ATS (i.e., the brokerdealer operator), the name under which the NMS Stock ATS conducts business, if any, the MPID of the NMS Stock ATS, and whether it is an NMS Stock ATS currently operating pursuant to a previously filed initial operation report on Form ATS. Part II would require registration information regarding the broker-dealer operator of the ATS, such as the broker-dealer’s file number with the Commission, the name of the national securities association with which the broker-dealer operator is a member, the effective dates of the broker-dealer’s registration with the Commission and membership in the national securities association, and the broker-dealer operator’s CRD Number. In addition, Part II would require the address of the physical location of the NMS Stock ATS matching system, the NMS Stock ATS’s mailing address, and a URL to the Web site of the NMS Stock ATS. Part II would also require information regarding the legal status of the broker-dealer operator of the NMS Stock ATS (e.g., corporation, partnership, sole proprietorship) and its date of formation. Furthermore, Part II of proposed Form ATS–N would require the NMS Stock ATS to attach the following three exhibits: (1) Exhibit 1— a copy of any materials currently provided to subscribers or other persons related to the operations of the NMS Stock ATS or the disclosures on Form ATS–N; (2) Exhibit 2A—a copy of the most recently filed or amended Schedule A of the broker-dealer operator’s Form BD disclosing information relating to direct owners and executive officers; and (3) Exhibit PO 00000 Frm 00093 Fmt 4701 Sfmt 4702 81089 2B—a copy of the most recently filed or amended Schedule B of the brokerdealer operator’s Form BD disclosing information related to indirect owners. In lieu of attaching Exhibits 2A and 2B to proposed Form ATS–N, the NMS Stock ATSs would be able to provide a URL address for where the required documents can be found. Part III of proposed Form ATS–N would require an NMS Stock ATS to provide certain disclosures related to the activities of the broker-dealer operator and its affiliates in connection with the NMS Stock ATS. Part III consists of ten items, which are summarized here, and explained in greater detail below in the discussion of the estimated burdens related to each disclosure requirement. Part III of proposed Form ATS–N would include disclosures relating to: (1) Whether the broker-dealer operator, or any of its affiliates, operate or control any nonATS trading centers and how such nonATS trading centers coordinate or interact with the NMS Stock ATS, if at all; (2) whether the broker-dealer operator, or any of its affiliates, operates another NMS Stock ATS and how such other NMS Stock ATS coordinates or interacts with the NMS Stock ATS completing the Form ATS–N, if at all; (3) the products and services offered by the broker-dealer operator, or any of its affiliates, to subscribers in connection with their use of the NMS Stock ATS; (4) whether the broker-dealer operator, or any of its affiliates, has any formal or informal arrangement with an unaffiliated person(s), or affiliate(s) of such person(s), that operates a trading center regarding access to the NMS Stock ATS, including preferential routing arrangements; (5) whether the broker-dealer operator or any of its affiliates enter orders or other trading interest on the NMS Stock ATS and the manner in which such trading is done; (6) whether the broker-dealer operator or any of its affiliates use a SOR(s) (or similar functionality), an algorithm(s), or both to send or receive orders or other trading interest to or from the NMS Stock ATS, and the interaction or coordination between the SOR(s) (or similar functionality) or algorithm(s) and the NMS Stock ATS; (7) whether there are any employees of the brokerdealer operator that service the operations of the NMS Stock ATS that also service any other business unit(s) of the broker-dealer operator or any affiliate(s) other than the NMS Stock ATS, and the roles and responsibilities of such shared employees; (8) whether any operation, service, or function of the NMS Stock ATS is performed by any E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81090 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules person(s) other than the broker-dealer operator, a description of such operation, service, or function, and whether those person(s), or any of their affiliates, may enter orders or other trading interest on the NMS Stock ATS; (9) whether the NMS Stock ATS makes available or applies any service, functionality, or procedure of the NMS Stock ATS to the broker-dealer operator or its affiliates that is not available or does not apply to a subscriber(s) to the NMS Stock ATS and a description of such service, functionality, or procedure; and (10) a description of the written safeguards and written procedures to protect the confidential trading information of subscribers to the NMS Stock ATS, including (a) a description of the means by which a subscriber can consent or withdraw consent to the disclosure of confidential trading information, (b) identification of the positions or titles of any persons that have access to confidential trading information, the type of confidential trading information those persons can access, and the circumstances under which they can access it, (c) a description of the written standards controlling employees of the NMS Stock ATS trading for their own accounts, and (d) a description of the written oversight procedures to ensure that the ATS’s Rule 301(b)(10) safeguards and procedures are implemented and followed. Part IV of proposed Form ATS–N would require an NMS Stock ATS to provide certain disclosures related to the manner of operations of the NMS Stock ATS. Part IV consists of 15 items, which are summarized here, and explained in greater detail below in the discussion of the estimated burdens related to each disclosure requirement. Part IV of proposed Form ATS–N would include disclosures relating to: (1) Subscribers to the NMS Stock ATS, including any eligibility requirements to gain access to the services of the ATS, the terms or conditions of any contractual agreement for access, the types of subscribers and other persons that use the services of the ATS, any formal or informal arrangement the NMS Stock ATS may have with a subscriber or person to provide liquidity to the ATS (including the terms and conditions of each arrangement and the identity of any liquidity provider that is an affiliate of the broker-dealer operator), the circumstances by which a subscriber or other person may be limited or denied access to the NMS Stock ATS, and any differences in the treatment of different subscribers and persons with respect to eligibility, terms VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 and conditions of use, criteria for distinguishing among subscribers or other persons, and limitations and denials of access; (2) the days and hours of operation of the NMS Stock ATS, including the times when orders or other trading interest are entered and the time when pre-opening or afterhours trading occur, and whether there are any differences in when orders or other trading interest may be entered by different subscribers or persons; (3) the order types and modifiers entered on the NMS Stock ATS, including their characteristics, operations, how they are ranked and executed on the ATS (such ` as priority vis-a-vis other orders), eligibility and conditions for routing to other trading centers, the available timein-force instructions for each order type, whether the availability and terms and conditions of each order type is the same for all subscribers and persons, any requirements and handling procedures for minimum order sizes, odd-lot orders or mixed-lot orders, including whether such requirements and procedures are the same for all subscribers and persons, and any messages sent to or received by the NMS Stock ATS indicating trading interest, including any differences in the terms and conditions for such messages for different subscribers and persons; (4) the means by which subscribers and other persons connect to the NMS Stock ATS and enter orders or other trading interest on the NMS Stock ATS (e.g., direct FIX connection or indirect connection via the broker-dealer operator’s SOR or any intermediate functionality, algorithm or sales desk); any co-location services or other means by which any subscriber or other persons may enhance the speed by which to send or receive orders, trading interest, or messages to or from the NMS Stock ATS; and any differences in the terms and conditions for connecting and entering trading interest or co-location services for different subscribers or persons; (5) the segmentation of orders or other trading interest on the NMS Stock ATS and notice about segmentation to subscribers or persons, including the criteria used to segment orders or other trading interest on the NMS Stock ATS, any notice provided to subscribers or persons about the segmented category that a subscriber or a person is assigned, any differences in segmentation (or notice about segmentation) for different subscribers or persons, and order preferencing and its effect on order priority and interaction; (6) the means and circumstances by which orders or other trading interest on the NMS Stock ATS PO 00000 Frm 00094 Fmt 4701 Sfmt 4702 are displayed or made known outside the NMS Stock ATS, type of information displayed, any differences in display for different subscribers and persons, and to whom orders and trading interest is displayed; (7) the trading services of the NMS Stock ATS, including the means used by the ATS to bring multiple buy and sell orders together, the established, non-discretionary methods dictating the terms of trading on the facilities of the NMS Stock ATS, trading procedures related to price protection mechanisms, short sales, locked-crossed markets, the handling of execution errors, timestamping of orders and executions, or price improvement functionality, and any differences for different subscribers and persons; (8) the procedures governing trading in the event the NMS Stock ATS suspends trading or experiences a system disruption or malfunction, including any differences in the procedures among subscribers and persons; (9) the opening, reopening or closing processes, or after-hours trading procedures of the NMS Stock ATS; (10) the circumstances under which orders or other trading interest are routed from the NMS Stock ATS to another trading center, and any differences in the means by which orders are routed among subscribers and persons; (11) the market data used by the NMS Stock ATS and the source of that market data, and the specific purpose for which market data is used by the ATS, including how it is used to determine the NBBO; (12) the fees, rebates, or other charges of the NMS Stock ATS and whether such fees are not the same for all subscribers and persons; (13) arrangements or procedures for trade reporting of transactions on the NMS Stock ATS, and arrangements or procedures undertaken by the NMS Stock ATS to facilitate the clearance and settlement of transaction on the ATS, including any differences in these procedures among subscribers and persons; (14) information related to the NMS Stock ATS’s order display and execution obligations under Rule 301(b)(3) of Regulation ATS, if applicable; (15) information related to the NMS Stock ATS’s obligations under the fair access requirements of Rule 301(b)(5) of Regulation ATS, if applicable; and (16) aggregate market quality statistics published or provided to one or more subscribers. Part V of proposed Form ATS–N would require an NMS Stock ATS to provide certain basic information about the point of contact for the NMS Stock ATS, such as the point of contact’s name, title, telephone number and email E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules address. Part V would also require the NMS Stock ATS to consent to service of any civil action brought by, or any notice of any proceeding before, the Commission or an SRO in connection with the ATS’s activities. The Commission proposes that Form ATS–N would be filed electronically and require an electronic signature. Consequently, the proposed amendments to Regulation ATS would require that every NMS Stock ATS have the ability to file forms electronically with an electronic signature. The Commission preliminarily believes that most, if not all, ATSs that transact in NMS stock currently have the ability to access and submit an electronic form such that the requirement to file Form ATS–N electronically with an electronic signature would not impose new implementation costs. The burdens related to electronic submission and providing an electronic signature are included in the burden hour estimates provided below. In addition, the Commission proposes to amend Rule 303(a)(2)(ii) 568 of Regulation ATS to provide that all ATSs must preserve copies of all reports filed pursuant to Rule 304, which includes Form ATS–N filings, for the life of the enterprise and any successor enterprise. Furthermore, under this proposal, an ATS that effects transactions in both NMS stocks and non-NMS stocks would be required to file both a Form ATS–N with respect to its trading of NMS stocks and a revised Form ATS that removes discussion of those aspects of the ATS related to the trading of NMS stocks. The ATS would also be required to file two Forms ATS–R—one to report its trading volume in NMS stocks and another to report its trading volume in non-NMS stocks. B. Proposed Use of Information mstockstill on DSK4VPTVN1PROD with PROPOSALS3 1. Proposed Amendments to Rules 301(b)(10) of Regulation ATS As noted above, the proposed amendments to Rule 301(b)(10) of Regulation ATS would require all ATSs to have in place written safeguards and written procedures to protect subscribers’ confidential trading information. Proposed Rule 303(a)(1)(v) of Regulation ATS would require all ATSs to preserve at least one copy of those written safeguards and written procedures. The Commission preliminarily believes that both the Commission and the SRO of which the ATS’s broker dealer-operator is a member will use these written safeguards and written 568 17 CFR 242.303(a)(2)(ii). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 procedures in order to better understand how each ATS protects subscribers’ confidential trading information from unauthorized disclosure and access. The Commission preliminarily believes that the information contained in the records required to be preserved by proposed Rule 303(a)(1)(v) would be used by examiners and other representatives of the Commission, state securities regulatory authorities, and SROs to evaluate whether ATSs are in compliance with Regulation ATS as well as other applicable rules and regulations. The Commission also preliminarily believes that the proposed requirements to memorialize in writing the safeguards and procedures to protect subscribers’ confidential trading information would assist ATSs in more effectively complying with their existing legal requirements under Regulation ATS; in particular, the requirements to protect the confidentiality of subscribers’ trading information under Rule 301(b)(10) of Regulation ATS. 2. Proposed Rules 301(b)(2)(viii), 304 of Regulation ATS, Including Proposed Form ATS–N, and 301(b)(9) Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS would require each NMS Stock ATS to file a Form ATS–N, Form ATS–N Amendments, and a notice of cessation on proposed Form ATS–N.569 As noted above, proposed Form ATS–N would require information regarding the broker-dealer operator of the NMS Stock ATS and, in some instances affiliates of the broker-dealer operator, and the operation of the NMS Stock ATS, including detailed disclosures regarding the ATS’s method of operation, order types and access criteria. Additionally, an ATS that effects transactions in both NMS stocks and non-NMS stocks would be required to file both a Form ATS–N with respect to its trading of NMS stocks and a revised Form ATS that removes discussion of those aspects of the ATS 569 Specifically, proposed Rule 304(a)(1) would require an NMS Stock ATS to file a Form ATS–N prior to the NMS Stock ATS commencing operations. Proposed Rule 304(a)(2)(i) would require an NMS Stock ATS to file amendments to its proposed Form ATS–N: (A) At least 30 calendar days prior to the date of implementation of a material change to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that are subject to disclosure on Form ATS–N; (B) within 30 calendar days after the end of each calendar quarter to correct any other information on proposed Form ATS–N that has become inaccurate; or (C) promptly, to correct any information on proposed Form ATS–N that was inaccurate when originally filed. Proposed Rule 304(a)(3) would require an NMS Stock ATS to notice its cessation of operations at least 10 business days before the date on which the NMS Stock ATS ceases operation. PO 00000 Frm 00095 Fmt 4701 Sfmt 4702 81091 relating to the trading of NMS stocks.570 Under the proposed amendments to Rule 301(b)(9), an ATS that effects trades in both NMS stocks and nonNMS stocks would be required to file two Forms ATS–Rs—one reporting its trading volume in NMS stocks and the other reporting its trading volume in non-NMS stocks.571 The information filed on proposed Form ATS–N would be publicly available on the Commission’s Web site and each NMS Stock ATS would be required to post on the NMS Stock ATS’s Web site a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2), but information filed on Forms ATS and ATS–R would be kept confidential, subject to the provisions of current applicable law. The Commission preliminarily believes that market participants would use the information publicly disclosed on proposed Form ATS–N to source, evaluate, and compare and contrast information about different NMS Stock ATSs, including information relating to the broker-dealer operator and any potential conflicts of interests it may have with respect to its operation of the NMS Stock ATS. The Commission also preliminarily believes that market participants would use the information publicly disclosed on proposed Form ATS–N to source, evaluate, and compare and contrast information about, among other things, an NMS Stock ATS’s eligibility requirements, trading hours, order types, connection and order entry functionalities, segmentation of order flow, display of orders and other trading interests, trading platform functionality, procedures governing trading during a suspension of trading, system disruption, or system malfunction, opening, closing, and after-hours trading processes or procedures, routing procedures, market data usages and sources, fees, trade reporting, clearing, and settlement, order display and execution access standards, fair access standards, and market quality statistics published or provided to one or more subscribers. Accordingly, the Commission preliminarily believes that market participants would use the information disclosed on proposed Form ATS–N to better evaluate to which trading venue they may want to subscribe and/or route orders for execution in order to accomplish their investing or trading objectives. The Commission preliminarily believes it will use the information 570 See 571 See E:\FR\FM\28DEP3.SGM proposed Rule 301(b)(2)(viii). proposed Rule 301(b)(9). 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81092 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules disclosed on proposed Form ATS–N, Form ATS, and Form ATS–R to oversee the growth and development of NMS Stock ATSs, including those that also effect transactions in non-NMS stocks, and to evaluate whether those systems operate in a manner consistent with the federal securities laws should the disclosures provided on Form ATS–N reveal potential non-compliance with federal securities laws. In particular, the Commission preliminarily believes that the information collected and reported to the Commission by NMS Stock ATSs would enable the Commission to evaluate better the operations of NMS Stock ATSs with regard to the Commission’s duty under the Exchange Act to remove impediments to and perfect the mechanisms of a national market system for securities 572 and evaluate the competitive effects of these systems to ascertain whether the regulatory framework remains appropriate to the operation of such systems. The information provided on Form ATS–N should also assist the SRO for the broker-dealer operator in exercising oversight over the brokerdealer operator. For example, by having to describe their safeguards and procedures to protect the confidential trading information of subscribers, and knowing that such descriptions will be public, NMS Stock ATSs may be encouraged to carefully consider the adequacy of their means of protecting the confidential trading information of subscribers. The Commission also proposes to amend Rule 303(a)(2)(ii) of Regulation ATS to provide that all ATSs must preserve copies of all reports filed pursuant to proposed Rule 304 for the life of the enterprise and any successor enterprise. The Commission preliminarily believes that the information contained in the records required to be preserved by the proposed amendment to Rule 303(a)(2)(ii) would be used by examiners and other representatives of the Commission, state securities regulatory authorities, and SROs to evaluate whether ATSs are in compliance with Regulation ATS as well as other applicable rules and regulations. 572 See 15 U.S.C. 78b (providing that the necessity for the Exchange Act is, among other things, ‘‘to require appropriate reports, to remove impediments to and perfect the mechanisms of a national market system for securities . . . and to impose requirements necessary to make such regulation and control reasonably complete and effective . . .’’). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 C. Respondents The ‘‘collection of information’’ requirements under the proposed amendments to Regulation ATS relating to Rule 301(b)(10) and proposed Rule 303(a)(1)(v), as described above, would apply to all ATSs, including NMS Stock ATSs. The ‘‘collection of information’’ requirements under the proposed amendments to Regulation ATS relating to proposed Rule 304, Form ATS–N, and the proposed amendments to Rule 303(a)(2)(ii), as described above, would apply only to NMS Stock ATSs, and the ‘‘collection of information’’ requirements under the proposed amendments to Rule 301(b)(9), as described above, would apply to NMS Stock ATSs that also effect trades in both NMS stocks and non-NMS stocks. Currently, there are 84 ATSs that have filed Form ATS with the Commission. Of these 84 ATSs, 46 would meet the definition of an NMS Stock ATS.573 Accordingly, the Commission estimates that 84 entities would be required to comply with the proposed amendments related to Rule 301(b)(10) of Regulation ATS and 46 entities would be required to complete Form ATS–N.574 In addition, the Commission notes that there are currently 11 ATSs that trade, or have indicated in Exhibit B to their Form ATS that they expect to trade, both NMS stocks and non-NMS stocks on the ATS.575 Under the proposed amendments to Regulation ATS, these 11 entities would be required to file a Form ATS–N to disclose information about their NMS stock activities and file a Form ATS to disclose information about their nonNMS stock activities. Consequently, 573 Data compiled from Form ATS submitted to the Commission as of November 1, 2015. That is, 46 ATS have disclosed on their Form ATS that they trade or expect to trade NMS stock. 574 The Commission recognizes that there may be new entities that will seek to become ATSs, or NMS Stock ATSs, that would be required to comply with the proposed amendments to Rule 301(b)(10). From 2012 through the first half of 2015, there has been an average of 8 Form ATS initial operation reports filed each year with the Commission. Similarly, there may be some ATSs that may cease operations in the normal course of business or possibly in response to the proposed amendments to Regulation ATS. From 2012 through the first half of 2015, there has been an average of 11 ATSs, including those that trade NMS stocks, that have ceased operations. For the purposes of this paperwork burden analysis, the Commission assumes that there are 84 respondents that would be required to comply with the proposed amendments to Rule 301(b)(10), if adopted. The Commission is estimating that the number of entities that may file a Form ATS initial operation report would generally offset any ATSs that may file a Form ATS cessation of operations report. 575 Data compiled from Forms ATS and ATS–R submitted to the Commission as of November 1, 2015. These 11 ATSs are included within the 46 NMS Stock ATSs. PO 00000 Frm 00096 Fmt 4701 Sfmt 4702 these 11 ATSs would have to amend their Forms ATS to remove discussion of those aspects of the ATS related to the trading of NMS stocks and on an ongoing basis, file separate Forms ATS– R to report trading volume in NMS stocks and trading volume in non-NMS stocks.576 With respect to proposed Form ATS– N, the Commission recognizes there may be entities that might file a Form ATS–N to operate an NMS Stock ATS in the future. From 2012 through the first half of 2015, there has been an average of 2 new ATSs per year that disclose that they trade or expect to trade NMS stocks on their initial operation reports, which would therefore fall within the proposed definition of an NMS Stock ATS. Similarly, some ATSs that currently trade NMS stocks may choose to cease operations rather than comply with the proposed amendments requiring them to file proposed Form ATS–N. Other ATSs may choose to cease operations in the normal course of business. From 2012 through the first half of 2015, there has been an average of 6 ATSs that trade NMS stocks that have ceased operations each year. The Commission preliminarily believes that most ATSs that currently trade NMS stocks would continue to operate notwithstanding the proposed amendments to Regulation ATS. For the purposes of this analysis of the paperwork burden associated with the proposed amendments to Regulation ATS, the Commission assumes that there will be 46 respondents. The Commission preliminarily believes that this number is reasonable, as it assumes that most ATSs that currently trade NMS stocks would file a Form ATS–N with the Commission, and acknowledges that there may be some ATSs that cease operations altogether and other entities that may choose to commence operations as an NMS Stock ATS. Based on the number of initial filings and cessation of operations reports on current Form ATS for ATSs that trade NMS stocks described above, the Commission estimates that, 2 to 3 new entities will file to become an NMS Stock ATS and 4 to 6 NMS Stock ATSs will cease operations in each of the next three years. 576 Pursuant to Rule 301(b)(9), all ATSs are required to file Form ATS–R within 30 calendar days after the end of each calendar quarter in which the market has operated, and within 10 calendar days after the ATS ceases to operate. For ATSs that trade both NMS stocks and non-NMS stocks, the ATS would report its transactions in NMS stocks on one Form ATS–R, and its transaction volume in other securities on a separate Form ATS–R. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules D. Total Initial and Annual Reporting and Recordkeeping Burdens protect subscribers’ confidential trading information.581 1. Proposed Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS b. Burden a. Baseline Measurements Under current Rule 301(b)(10) of Regulation ATS,577 all ATSs must establish adequate safeguards and procedures to protect subscribers’ confidential trading information, as well as oversight procedures to ensure such safeguards and procedures are followed. As discussed below, the Commission preliminarily believes that ATSs—in particular, ATSs whose broker-dealer operators are large, multi-service brokerdealers—generally have and maintain in writing their safeguards and procedures to protect subscribers’ confidential trading information, as well as the oversight procedures to ensure such safeguards and procedures are followed.578 However, neither Rule 301(b)(10) nor Rule 303(a)(1) of Regulation ATS currently requires that an ATS have and preserve those safeguards and procedures in writing. For ATSs that currently have and preserve in written format the safeguards and procedures to protect subscribers’ confidential trading information under Rule 301(b)(10) of Regulation ATS, the Commission preliminarily estimates that the average annual burden they voluntarily undertake to update and preserve those written safeguards and written procedures is 4 hours.579 Because neither current Rule 301(b)(1) nor current Rule 303(a)(1) requires an ATS to have and preserve its safeguards and procedures to protect subscribers’ confidential trading information in writing, this burden is not reflected in the current PRA baseline burdens for Rules 301 and 303.580 As such, in accordance with the below analysis, the Commission would modify the current PRA burdens for Rules 301 and 303 to account for the proposed requirement that ATSs have and preserve in written format the safeguards and procedures to 577 17 CFR 242.301(b)(10). infra Section XIII.B.4. 579 Attorney at 2 hours + Compliance Clerk at 2 hours = 4 burden hours. For ATSs that do not have their safeguards and procedures or oversight procedures in a written format, these firms would incur a one-time initial burden to record their safeguards and procedures as well as their oversight procedures in a written format as described below. 580 See FR Doc. 2014–02143, 79 FR 6236 (February 3, 2014) (Request to OMB for Extension of Rule 301 and Forms ATS and ATS–R; SEC File No. 270–451; OMB Control No. 3235–0509) (hereinafter ‘‘Rule 301 PRA Update’’); FR Doc. 2013–17474, 78 FR 43943 (July 22, 2013) (Request to OMB for Extension of Rule 303; SEC File No. 270–450; OMB Control No. 3235–0505) (hereinafter ‘‘Rule 303 PRA Update’’). mstockstill on DSK4VPTVN1PROD with PROPOSALS3 578 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 The Commission recognizes that proposed Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS would impose certain burdens on respondents. For ATSs that currently have and preserve in written format the safeguards and procedures to protect subscribers’ confidential trading information and written oversight procedures to ensure such safeguards and procedures are followed, the Commission preliminarily believes that there will be no increased burden under the proposed amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS. The Commission preliminarily believes that the current practices of those ATSs would already be in compliance with the proposed rules. Therefore, the proposed amendments should not require those ATSs to take any measures or actions in addition to those currently undertaken. For ATSs that have not recorded in writing their safeguards and procedures to protect subscribers’ confidential trading information and oversight procedures to ensure such safeguards and procedures are followed, there will be an initial, one-time burden to memorialize them in a written document(s). The Commission preliminarily estimates that an ATS’s initial, one-time burden to put in writing its safeguards and procedures to protect subscribers’ confidential trading information and the oversight procedures to ensure such safeguards and procedures are followed would be approximately 8 hours,582 but the Commission preliminarily estimates that the burden could range between 5 and 10 hours.583 Because ATSs are already required to have safeguards and procedures to protect subscribers’ confidential trading information and to have oversight procedures to ensure such safeguards and procedures are followed, the Commission preliminarily believes that recording these items in a written format would not impose a substantial burden on ATSs. Consequently, the Commission preliminarily believes that ATSs would rely on internal staff to record the ATS’s Rule 301(b)(10) procedures in writing. The Commission preliminarily estimates that, of the 84 current ATSs, 15 ATSs might not have their safeguards 581 See infra note 587 and accompanying text. at 7 hours + Compliance Clerk at 1 hour = 8 burden hours. 583 Attorney at 4–9 hours + Compliance Clerk at 1 hour = 5–10 burden hours. 582 Attorney PO 00000 Frm 00097 Fmt 4701 Sfmt 4702 81093 and procedures to protect subscribers’ confidential trading information or oversight procedures to ensure such safeguards and procedures are followed in writing, and would therefore be subject to this one-time initial burden.584 Accordingly, the Commission preliminarily estimates that the aggregate initial, one-time burden on all ATSs would be 150 hours based on the Commission’s highest approximation of the additional burden per ATS.585 As explained above, the Commission preliminarily estimates that the average annual, ongoing burden per ATS to update and preserve written safeguards and written procedures to protect subscribers’ confidential trading information, as well as to update and preserve the written standards controlling employees of the ATS trading for their own account and the written oversight procedures, would be 4 hours.586 As a result, the Commission preliminarily estimates that the total aggregate, ongoing burden per year for all ATSs would be 336 hours,587 and thus, the Commission is modifying the current PRA burden estimates for Rules 301 and 303 to account for this increased burden on ATSs. 2. Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Proposed Form ATS–N a. Baseline Measurements Currently, Rule 301(b)(2)(i) of Regulation ATS 588 requires an ATS to file an initial operation report on current Form ATS at least 20 days prior to commencing operation as an alternative trading system. Current Form ATS requires information regarding the operation of the ATS, including, among other things, classes of subscribers, the types of securities traded, the outsourcing of operations of the ATS to other entities, the procedures governing the entry of orders, the means of access to the ATS, and procedures governing execution and reporting. Regarding amendments to an existing Form ATS, Rule 301(b)(2)(ii) of Regulation ATS 589 584 It is likely that most, if not all, ATSs fulfill their Rule 301(b)(10) obligations in writing, given the practical difficulty in ensuring such safeguards and procedures, as well as oversight procedures, are ‘‘adequate,’’ as required under Rule 301(b)(10), and contain all necessary components. The Commission solicits comment on the accuracy of this estimate. 585 (Attorney at 9 hours + Compliance Clerk at 1 hour) × (15 ATSs) = 150 burden hours. See supra note 583 and accompanying text. 586 See supra note 579 and accompanying text. 587 (Attorney at 2 hours + Compliance Clerk at 2 hours) × 84 ATSs = 336 burden hours. 588 17 CFR 242.301(b)(2)(i). 589 17 CFR 242.301(b)(2)(ii). E:\FR\FM\28DEP3.SGM 28DEP3 81094 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules requires an ATS to file amendments to its current Form ATS at least 20 calendar days prior to implementing a material change to its operations. Rule 301(b)(2)(iii) of Regulation ATS 590 requires an ATS to file amendments to its current Form ATS within 30 calendar days after the end of each calendar quarter if any information contained in its initial operation report becomes inaccurate and has not been previously reported to the Commission.591 Regarding shutting down an ATS, Rule 301(b)(2)(v) of Regulation ATS 592 requires an ATS to promptly file a cessation of operation report on current Form ATS upon ceasing operations as an ATS. The Commission’s currently approved estimate for an initial operation report on current Form ATS is 20 hours to gather the necessary information, provide the required disclosures in Exhibits A through I, and submit the Form ATS to the Commission.593 With respect to Form ATS amendments, the Commission understands, based on the review of Form ATS amendments by the Commission and its staff, that ATSs that trade NMS stocks typically amend their Form ATS on average twice per year.594 The frequency and scope of Form ATS amendments vary depending on whether the ATS is implementing a material change or a periodic change. Some ATSs may not change the manner in which they operate or anything else that might require an amendment to Form ATS in a given year while others may implement a number of changes during a given year that require Form ATS amendments. The Commission estimates that the current average compliance burden for each amendment to Form ATS is approximately 6 hours.595 Accordingly, the estimated average annual ongoing burden of updating and amending Form ATS is approximately 12 hours per NMS Stock ATS.596 With respect to ceasing operations, the currently approved average estimated compliance burden for an ATS to complete a cessation of operations report is 2 hours to check the 590 17 CFR 242.301(b)(2)(iii). addition, Rule 301(b)(2)(iv) requires an ATS to promptly file an amendment on current Form ATS after the discovery that any information previously filed on current Form ATS was inaccurate when filed. 17 CFR 242.301(b)(2)(iv). 592 17 CFR 242.301(b)(2)(v). 593 Attorney at 13 hours + Compliance Clerk at 7 hours = 20 burden hours. See Rule 301 PRA Update, supra note 580, 79 FR 6237. 594 See id. 595 Attorney at 4.5 hours + Compliance Clerk at 1.5 hours = 6 burden hours. See id. 596 2 Form ATS Amendments filed annually × 6 burden hours per Form ATS Amendment = 12 burden hours per ATS. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 591 In VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 appropriate box on Form ATS and send the cessation of operations report to the Commission.597 The Commission’s currently approved estimate for the average compliance burden for each Form ATS–R filing is 4 hours.598 b. Burdens The Commission recognizes that proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS, including proposed Form ATS–N, would impose certain burdens on respondents.599 Although the Commission preliminarily believes that many of the disclosures required by proposed Form ATS–N are currently required by Form ATS, proposed Form ATS–N would require an NMS Stock ATS to provide significantly more detail in those disclosures than currently is required by Form ATS. Proposed Form ATS–N would also require additional disclosures not currently mandated by current Form ATS such as those contained in Part III of proposed Form ATS–N. Under the proposed amendments to Regulation ATS, NMS Stock ATSs would be required to complete and file the enhanced and additional disclosures on proposed Form ATS–N.600 Section XII.D.2.b.i below provides the estimated burden above the current Form ATS baseline of each item of proposed Form ATS–N. The Commission notes that many of the proposed disclosure items on proposed Form ATS–N are already required disclosures by respondents in whole or in part on current Form ATS, while other disclosure items on proposed Form ATS–N are novel (i.e., current Form ATS does not require some form of the proposed disclosure). Section XII.D.2.b.ii aggregates these new burdens and the additional burdens above the current Form ATS baseline that will be imposed by proposed Form ATS–N. 597 Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 2 burden hours. See id. 598 Attorney at 3 hours + Compliance Clerk at 1 hour = 4 burden hours. See id. 599 In establishing the estimates below with respect to proposed Form ATS–N, the Commission has considered its estimate of the burden for an SRO to amend a Form 19b–4. Specifically, the Commission estimated that 34 hours is the amount of time required to complete an average rule filing and 129 hours is the amount of time required to complete a complex rule filing, and three hours is the amount of time required to complete an average amendment to a rule filing. See Securities Exchange Act Release No. 50486 (October 4, 2004), 69 FR 60287 (October 8, 2004), 60294. 600 These disclosures would be provided on proposed Form ATS–N and may have to be amended periodically as provided in proposed Rule 304. PO 00000 Frm 00098 Fmt 4701 Sfmt 4702 i. Analysis of Estimated Additional Burden for Proposed Form ATS–N Parts I and II of proposed Form ATS–N would require disclosure of certain general information regarding the broker-dealer operator and the NMS Stock ATS. Part I of proposed Form ATS–N would require the NMS Stock ATS to state the name of its brokerdealer operator, the name under which the NMS Stock ATS conducts business, if any, the MPID of the NMS Stock ATS, and whether it is an NMS Stock ATS operating pursuant to a previously filed initial operation report on Form ATS. Part II of proposed Form ATS–N would require the address of the physical location of the NMS Stock ATS matching system and the NMS Stock ATS’s mailing address. Part II of proposed Form ATS–N would also require registration information of the broker-dealer operator, including its SEC File Number, the effective date of the broker-dealer operator’s registration with the Commission, its CRD Number, the name of its national securities association, and the effective date of the broker-dealer operator’s membership with the national securities association. In addition, Part II of proposed Form ATS–N would require disclosure of certain information regarding the legal status of the broker-dealer operator and would require the NMS Stock ATS to provide a URL address to its Web site. Finally, Part II would require the NMS Stock ATS to attach Exhibit 1 (a copy of any materials provided to subscribers or any other persons related to the operations of the NMS Stock ATS or the disclosures on Form ATS–N), Exhibit 2A (a copy of the most recently filed or amended Schedule A of the brokerdealer operator’s Form BD disclosing information related to direct owners and executive officers), and Exhibit 2B (a copy of the most recently filed or amended Schedule B of the brokerdealer operator’s Form BD disclosing information related to indirect owners). In lieu of attaching those exhibits to Form ATS–N, the NMS Stock ATSs would be able to provide a URL address to where the required documents can be found. Under current Form ATS, an ATS is required to provide all of the information that would be required under Parts I and II of proposed Form ATS–N with the exception of: (1) Its Web site address; (2) the effective date of the broker-dealer operator’s registration with the Commission; (3) the name of the national securities association and effective date of the broker-dealer operator’s membership with the national securities association; E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 (4) the MPID of the NMS Stock ATS; (5) the broker-dealer operator’s legal status (e.g., corporation or partnership); (6) the date of formation and the state in which the broker-dealer operator was formed; and (7) copies of the broker-dealer operator’s most recently filed or amended Schedules A and B of Form BD.601 Current Form ATS, however, requires an ATS to provide a copy of its governing documents, such as its constitution and bylaws,602 which would not be required in proposed Form ATS–N. The Commission preliminarily believes that all ATSs currently have access to all of these items because such information is germane to the operation of its brokerdealer operator. Accordingly, the Commission preliminarily estimates that, on average, preparing Parts I and II for a Form ATS–N would add 0.5 hours to the current baseline for an initial operation report on current Form ATS. The aggregate initial burden on all NMS Stock ATSs to complete Parts I and II of proposed Form ATS–N would be 23 hours above the current baseline.603 Part III, Item 1 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether or not the broker-dealer operator or any of its affiliates operate or control any nonATS trading center(s), and if so, to (1) identify the non-ATS trading center(s); and (2) describe any interaction or coordination between the identified non-ATS trading center(s) and the NMS Stock ATS including: (i) Circumstances under which subscriber orders or other trading interest sent to the NMS Stock ATS are displayed or otherwise made known to the identified non-ATS trading center(s) before entering the NMS Stock ATS; (ii) circumstances under which subscriber orders or other trading interest received by the brokerdealer operator or its affiliates may execute, in whole or in part, in the identified non-ATS trading center(s) before entering the NMS Stock ATS; and (iii) circumstances under which orders or other trading interest are removed from the NMS Stock ATS and sent to the identified non-ATS trading center(s). Under Proposed Form ATS–N, affiliates of the broker-dealer operator would only include any person that, 601 Exhibit I of Current Form ATS requires ATS to provide a list with the full legal name of those direct owners reported on Schedule A of Form BD, but not a copy of Schedule A. 602 Exhibit D of Form ATS requires an ATS to provide a copy of its constitution, articles of incorporation or association, with all amendments, and of the existing bylaws or corresponding rules or instruments, whatever the name. 603 Compliance Clerk at 0.5 hours × 46 NMS Stock ATSs = 23 burden hours. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 directly or indirectly, controls, is under common control with, or is controlled by, the broker-dealer operator. The affiliates of the broker-dealer operator that might operate non-ATS trading centers under this proposal would thus be ‘‘control affiliates’’ that are either controlled by the broker-dealer operator or under common control with another entity. Consequently, because the broker-dealer operator would control all affiliates or would be under common control with those affiliates, the brokerdealer operator should be aware of whether its affiliates operate a non-ATS trading center or in most instances, should otherwise be able to readily obtain such information from its affiliates.604 To the extent the operation of a nonATS trading center operated or controlled by the broker-dealer operator or any of its affiliates does not interact with the NMS Stock ATS (e.g., the two platforms do not share order flow or route trading interest between one another), the proposed disclosure requirement in Part III, Item 1, would require only that the NMS Stock ATS identify the non-ATS trading center in Item 1(a) and note that that there is no interaction between the non-ATS trading center and the NMS Stock ATS in Item 1(b). To the extent the operation of a non-ATS trading center of the broker-dealer operator or its affiliates interacts with the NMS Stock ATS, the Commission preliminarily believes that the NMS Stock ATS would likely already be aware of how such operation may interact with the NMS Stock ATS. If there is substantial interaction between the non-ATS trading center and the NMS Stock ATS, the burden related to this disclosure would be higher. The Commission understands that most, but not all, broker-dealer operators of NMS Stock ATSs currently, either by themselves or through their affiliates, operate or control a non-ATS trading center. The Commission preliminarily estimates that, on average, preparing Part III, Item 1 for a Form ATS–N would add 10 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 460 hours above the baseline for all NMS Stock ATSs to complete Part III, Item 1 of proposed Form ATS– N.605 604 To the extent the broker-dealer operator is currently unaware of whether its affiliates operate a non-ATS trading center, the Commission preliminarily believes that the broker-dealer operator could readily obtain this information from its affiliates. 605 (Attorney at 8 hours + Compliance Manager at 2 hours) × 46 NMS Stock ATSs = 460 burden hours. PO 00000 Frm 00099 Fmt 4701 Sfmt 4702 81095 Part III, Item 2 of proposed Form ATS–N would require an NMS Stock ATS to state whether the broker-dealer operator, or any of its affiliates, operates one or more NMS Stock ATSs other than the NMS Stock ATS named on the Form ATS–N, and, if so, to (1) identify the NMS Stock ATS(s) and provide its MPID(s); and (2) describe any interaction or coordination between the NMS Stock ATS(s) identified and the NMS Stock ATS named on the Form ATS–N including: (i) The circumstances under which subscriber orders or other trading interest received by the brokerdealer operator or any of its affiliates to be sent to the NMS Stock ATS named in the Form ATS–N may be sent to any identified NMS Stock ATS(s); (ii) circumstances under which subscriber orders or other trading interest to be sent to the NMS Stock ATS named on the Form ATS–N are displayed or otherwise made known in any other identified NMS Stock ATS(s); and (iii) the circumstances under which a subscriber order received by the NMS Stock ATS named on the Form ATS–N may be removed and sent to any other identified NMS Stock ATS(s). Brokerdealer operators of multiple NMS Stock ATSs would already be aware of how their NMS Stock ATSs may interact with one another and those of its affiliates by, for example, sharing order flow between each other.606 Further, as noted above, affiliates under this proposed disclosure requirement would be control affiliates that are either controlled by the broker-dealer operator or under common control with another entity. Consequently, the NMS Stock ATS should already be aware through its control or common control of whether its affiliates operate another NMS Stock ATS. Based on the currently filed Forms ATS reviewed by the Commission during the third quarter of 2015, the Commission estimates that there are 6 broker-dealer operators that operate, by themselves or through an affiliate, multiple ATSs that trade NMS stocks. The Commission notes that brokerdealer operators operating multiple NMS Stock ATSs, by themselves or with their affiliates, would be required to complete Part III, Item 2 of proposed Form ATS–N for each NMS Stock ATS. The Commission preliminarily believes that it would not be a significant burden for a broker-dealer operator to identify all of the NMS Stock ATSs operated by 606 To the extent the broker-dealer operator or its affiliates operate multiple NMS Stock ATSs but there is no possibility of interaction between such NMS Stock ATSs, proposed Form ATS–N would only require that this fact be noted in Part III, Item 2(b). E:\FR\FM\28DEP3.SGM 28DEP3 81096 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 either itself or its affiliates because, among other reasons, FINRA maintains an updated list of ATSs that trade equity securities on its public Web site.607 Furthermore, the disclosure requirement in Part III, Item 2(b) to describe the interaction of the various NMS Stock ATSs should generally be the same for each NMS Stock ATS, reducing the overall hour burden for completing multiple Forms ATS–N.608 The Commission also notes that the disclosure requirement in Part III, Item 2 would not impose any significant burden on broker-dealer operators that, by themselves or with their affiliates, do not operate multiple NMS Stock ATSs. For broker-dealer operators operating multiple NMS Stock ATSs, by themselves or with their affiliates, the Commission preliminarily estimates that, on average, preparing Part III, Item 2 for a Form ATS–N would add 4 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial hourly burden on such broker-dealer operators of 24 hours above the current baseline.609 Part III, Item 3 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether or not the broker-dealer operator or any of its affiliates offer subscribers of the NMS Stock ATS any products or services used in connection with trading on the NMS Stock ATS (e.g., algorithmic trading products, market data feeds). If so, the NMS Stock ATS would be required to describe the products and services and identify the types of subscribers (e.g., retail, institutional, professional) to which such services or products are offered, and if the terms and conditions of the services or products are not the same for all subscribers, describe any differences. These products and services may vary widely across NMS Stock ATSs, some of which may offer no additional products or services in connection with access to the NMS Stock ATS and others that may offer a wide array of other products or services such as trading algorithms, order management systems, or market data services. Because the broker-dealer 607 See FINRA Equity ATS Firm List, https:// www.finra.org/file/finra-equity-ats-firms-list. 608 In other words, a broker-dealer operator that operates NMS Stock ATSs ‘‘A’’ and ‘‘B’’ would likely be able to use the disclosure in A’s Form ATS–N for Part III, Item 2 for B as well. 609 As noted above, the Commission estimates that there are currently approximately 6 brokerdealer operators that operate, by themselves or through an affiliate, multiple ATSs that trade NMS stocks. As such the increased burden would be calculated as follows: 6 operators of multiple NMS Stock ATSs × (Attorney at 2 hours + Senior Systems Analyst 2 hours) = 24 burden hours. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 operator controls all aspects of the NMS Stock ATS, it should already be aware of all the products and services that it or its affiliates provide to subscribers in connection with subscribers’ access to the ATS. Accordingly, the Commission preliminarily believes that listing and describing these products and services in Part III, Item 3 would not impose a substantial burden on respondents. In addition, Part III, Item 3 would also require the NMS Stock ATS to describe which products and services are offered to which type of subscriber and any differences in the terms or conditions of the services or products among subscribers. Depending on the extent to which the terms and conditions of the services or products vary among subscribers, the hourly burden related to completing Part III, Item 3 would likely vary. The Commission preliminarily estimates that, on average, preparing Part III, Item 3 for a Form ATS–N would add 3 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 138 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 3 of proposed Form ATS–N.610 Part III, Item 4 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether or not the broker-dealer operator or any of its affiliates have any formal or informal arrangement with an unaffiliated person(s), or affiliate(s) of such person, that operates a trading center regarding access to the NMS Stock ATS, including preferential routing arrangements, and, if so, to identify the person(s) and the trading center(s) and describe the terms of the arrangement(s). The Commission understands from discussions with ATSs that some ATSs that currently trade NMS stock have arrangements with other ATSs to provide mutual access to the each other’s respective ATSs. The Commission recognizes that an NMS Stock ATS could also have arrangements with other trading centers such as a non-ATS trading center or a national securities exchange. In addition, there may be NMS Stock ATSs that have no arrangements with any other trading center. As the brokerdealer operator controls all aspects of the operation of the NMS Stock ATS, the broker-dealer operator should already be aware of any such arrangements providing for mutual access or preferential routing that it has with other trading centers. Accordingly, the Commission preliminarily estimates 610 (Compliance Manager at 2 hours + Senior Marketing Manager at 1 hour) × 46 NMS Stock ATSs = 138 burden hours. PO 00000 Frm 00100 Fmt 4701 Sfmt 4702 that, on average, preparing Part III, Item 4 for a Form ATS–N would add 4 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 184 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 4 of proposed Form ATS–N.611 Part III, Item 5 of proposed Form ATS–N would require certain disclosures related to the trading activity of the broker-dealer operator or its affiliates on the NMS Stock ATS. Specifically, Part III, Item 5 would require the NMS Stock ATS to disclose whether or not the broker-dealer operator or any of its affiliates enters orders or other trading interest on the NMS Stock ATS, and, if so, to provide detailed disclosures describing such trading activity.612 As the broker-dealer operator controls all aspects of the operation of the NMS Stock ATS, the broker-dealer operator should already know all of the subscribers to the NMS Stock ATS, including any affiliates that trade on the ATS, whether the brokerdealer operator itself trades on the NMS Stock ATS, and how the broker-dealer operator or its affiliates trade on the NMS Stock ATS.613 The Commission preliminarily believes that this knowledge should allow NMS Stock ATSs to readily identify and list all affiliates that trade on the NMS Stock ATS pursuant to Part III, Item 5(a) without a significant burden. The broker-dealer operator may have to inquire as to the capacity in which each of its affiliates trade, the means by 611 (Attorney at 2 hours + Compliance Manager at 2 hours) × 46 NMS Stock ATSs = 184 burden hours. 612 Specifically, the NMS Stock ATS would be required to: (a) Identify each affiliate and business unit of the broker-dealer operator that may enter orders or other trading interest on the NMS Stock ATS; (b) describe the circumstances and capacity in which each identified affiliate and business unit enters orders or trading interest on the NMS Stock ATS (e.g., proprietary or agency); (c) describe the means by which each identified affiliate and business unit enters orders or other trading interest on the NMS Stock ATS (e.g., directly through a FIX connection to the NMS Stock ATS, or indirectly, by way of the broker-dealer operator’s SOR (or similar functionality), algorithm, intermediate application, or sales desk); and (d) describe any means by which a subscriber can be excluded from interacting or trading with orders or other trading interest of the broker-dealer operator or its affiliates on the NMS Stock ATS. 613 There may be some NMS Stock ATSs for which neither the broker-dealer operator nor its affiliates trade on the NMS Stock ATS at all, and thus, for which the disclosures required under Part III, Item 5 would impose no significant burden. However, based on the review of Forms ATS by the Commission and its staff and discussions with broker-dealer operators, the Commission understands that a majority of ATSs that trade NMS stocks currently either trade in their own ATSs, either by themselves or with or through their affiliates. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 which they enter orders or other trading interest to the ATS, and any means by which a subscriber can be excluded from interacting with the orders or other trading interest of the broker-dealer operator or its affiliates pursuant to Items 5(b), (c), and (d). However, as previously noted, because the disclosure requirements with respect to affiliates would only apply to control affiliates, which would either be controlled by the broker-dealer operator or under common control with the broker-dealer operator, the broker-dealer operator may already have this information or would likely be able to obtain the information required under Items 5(b) and (c) without a significant burden. Accordingly, the Commission preliminarily estimates that, on average, preparing Part III, Item 5 for a Form ATS–N would add 5 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 230 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 5 of proposed Form ATS–N.614 Part III, Item 6 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether the brokerdealer operator, or any of its affiliates, use a SOR(s) (or similar functionality), an algorithm(s), or both to send or receive subscriber orders or other trading interest to or from the NMS Stock ATS.615 The Commission and its staff understand from conversations with ATSs that nearly every ATS that trades NMS stocks currently uses some form of SOR (or similar functionality) or algorithm. The Commission recognizes that the SOR(s) (or similar functionality) of the broker-dealer operator or its affiliates and any algorithm(s) employed by the broker-dealer operator or its affiliates to enter orders onto the NMS Stock ATS may vary widely among ATSs with respect to the manner in which they operate, the information they send or receive, and how the SOR(s) (or similar functionality) and/or algorithm(s) may determine to route certain orders to the NMS Stock ATS as 614 (Attorney at 2 hours + Compliance Manager at 3 hours) × 46 NMS Stock ATSs = 230 burden hours. 615 Specifically, Part III, Item 6 of proposed Form ATS–N would require the NMS Stock ATS to: (a) Identify the SOR(s) (or similar functionality) or algorithm(s) and identify the person(s) that operates the SOR(s) (or similar functionality) or algorithm(s), if other than the broker-dealer operator; and (b) describe the interaction or coordination between the identified SOR(s) (or similar functionality) or algorithm(s), including any information or messages about orders or other trading interest (e.g., IOIs) that the SOR(s) (or similar functionality) or algorithm(s) send or receive to or from the NMS Stock ATS and the circumstances under which such information may be shared with any person. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 opposed to other venues. Accordingly, the Commission preliminarily believes that the burdens associated with the disclosures in Part III, Item 6 of proposed Form ATS–N are likely to vary depending on the complexity of the SOR(s) (or similar functionality) and/or algorithm(s), its significance to the operation of the NMS Stock ATS, and the functions and roles that it performs. For example, in responding to Part III, Item 6(b), which would require an NMS Stock ATS to describe, among other things, any information or messages about orders or other trading interest that the SOR(s) (or similar functionality) and algorithm(s) send or receive to or from the NMS Stock ATS, an NMS Stock ATS that uses IOIs to facilitate trades on the NMS Stock ATS and that uses its SOR(s) (or similar functionality) and/or algorithm(s) to facilitate the sending of those IOIs to relevant persons would likely have a substantially greater burden in responding to Item 6(b) due to the number of messages that may be associated with an IOI and the subsequent responses to that IOI than an NMS Stock ATS that does not use IOIs. Accordingly, the Commission preliminarily estimates that, on average, preparing Part III, Item 6 for a Form ATS–N would add 10 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 460 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 6 of proposed Form ATS–N.616 Part III, Item 7 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether it has any shared employees,617 and identify the business unit(s) and/or the affiliate(s) of the broker-dealer operator to which the shared employee(s) provides services and identify the position(s) or title(s) that the shared employee(s) holds in the business unit(s) and/or affiliate(s) of the broker-dealer operator; and (2) describe the roles and responsibilities of the shared employee(s) at the NMS Stock ATS and the business unit(s) and/or affiliate(s) of the broker-dealer operator. As the broker-dealer operator controls all aspects of the NMS Stock ATS, it should already be aware of all of its employees and likely aware of any other roles or functions that such employees provide to other business units or affiliates of the broker-dealer operator. The Commission therefore preliminarily 616 (Attorney at 4 hours + Compliance Manager at 3 hours + Sr. Systems Analyst at 3 hours) × 46 NMS Stock ATSs = 460 burden hours. 617 See supra Section VII.B.8 describing who would be considered a shared employee of the broker-dealer operator. PO 00000 Frm 00101 Fmt 4701 Sfmt 4702 81097 believes that the NMS Stock ATS should be able to obtain this information readily. The extent of this disclosure burden would likely vary depending on the number of employees of the NMS Stock ATS and the extent to which such employees’ roles are solely dedicated to operating the NMS Stock ATS versus also servicing other business unit(s) of the broker-dealer operator or its affiliates. Accordingly, the Commission preliminarily estimates that, on average, preparing Part III, Item 7 for a Form ATS–N would add 4 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 184 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 7 of proposed Form ATS–N.618 Part III, Item 8 of proposed Form ATS–N would require an NMS Stock ATS to disclose whether any operation, service, or function of the NMS Stock ATS is performed by any person(s) other than the broker-dealer operator of the NMS Stock ATS, and if so to: (1) Identify the person(s) (in the case of a natural person, to identify only the person’s position or title) performing the operation, service, or function and note whether this service provider(s) is an affiliate of the broker-dealer, if applicable; (2) describe the operation, service, or function that the identified person(s) provides and describe the role and responsibilities of that person(s); and (3) state whether the identified person(s), or any of its affiliates, may enter orders or other trading interest on the NMS Stock ATS and, if so, describe the circumstances and means by which such orders or other trading interest are entered on the NMS Stock ATS. The Commission notes that this proposed disclosure requirement is similar to the Exhibit E disclosure requirement under the current Form ATS.619 The only additional disclosure requirement beyond that required currently by Exhibit E to Form ATS would be Item 8(c), which would require the NMS Stock ATS to state whether or not the service provider or the service provider’s affiliate may transact on the NMS Stock ATS, and if so, the circumstances and means by which they may do so. The Commission preliminarily believes based on its 618 (Attorney at 2 hours + Compliance Manager at 2 hours) × 46 NMS Stock ATSs = 184 burden hours. 619 Exhibit E of Form ATS requires an ATS to provide the name of any entity, other than the ATS, that is involved in the operation of the ATS, including the execution, trading, clearing, and settling of transactions on behalf of the ATS, and to provide a description of the role and responsibilities of each entity. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81098 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules review of Form ATS Exhibit E disclosures that most, but not all, service providers to ATSs are not typically entities that would transact on the ATS by themselves. Based on Commission experience, affiliates of service providers to some ATSs that transact in NMS stock may subscribe to that ATS. An NMS Stock ATS may have to ask the service provider about the nature of the service provider’s affiliates to ensure that such affiliates are not subscribers to the NMS Stock ATS or may otherwise be able to transact on the NMS Stock ATS to complete this disclosure. Accordingly, the Commission preliminarily estimates that, on average, preparing Part III, Item 8 for a Form ATS–N would add 3 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 138 hours above the baseline for all NMS Stock ATSs to complete Part III, Item 8 of proposed Form ATS– N.620 Part III, Item 9 of proposed Form ATS–N would require an NMS Stock ATS to identify and describe any service, functionality, or procedure of the NMS Stock ATS available to the broker-dealer operator or its affiliates that is not available or does not apply to a subscriber(s) to the NMS Stock ATS. The Commission is not currently aware of any NMS Stock ATS that provides services, functionalities, or procedures to itself or its affiliates and not to subscribers, although the Commission recognizes that an NMS Stock ATS could do so. To the extent that the services, functionalities, or procedures of the NMS Stock ATS provided to the broker-dealer operator or its affiliates on the NMS Stock ATS differ from those provided to nonaffiliated subscribers, the NMS Stock ATS would have to describe all such differences in Item 9. Depending on the extent of such differences, the hourly burden for providing these disclosures would vary. Conversely, if there are no differences between the services, functionalities, or procedures of the NMS Stock ATS that are provided to the broker-dealer operator or its affiliates relative to subscribers, Part III, Item 9 would only require the NMS Stock ATS to note this fact. Accordingly, the Commission preliminarily estimates that, on average, preparing Part III, Item 9 for a Form ATS–N would add 2 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 92 hours above the current 620 (Attorney at 1 hour + Compliance Manager at 2 hours) × 46 NMS Stock ATSs = 138 burden hours. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 baseline for all NMS Stock ATSs to complete Part III, Item 9 of proposed Form ATS–N.621 Part III, Item 10 of proposed Form ATS–N would require certain disclosures related to the NMS Stock ATS’s written safeguards and written procedures to protect the confidential trading information of subscribers pursuant to Rule 301(b)(10) of Regulation ATS.622 As previously discussed, NMS Stock ATSs would be required under the proposed amendments to Regulation ATS to write their policies and procedures under Rule 301(b)(10) of Regulation ATS. Part III, Item 10 of proposed Form ATS–N would require a description of these policies and procedures. Because NMS Stock ATSs would have already incurred an hourly burden in connection with writing its policies and procedures pursuant to Rule 301(b)(10) of Regulation ATS, the Commission preliminarily believes that Item 10 would impose only a minimal burden on NMS Stock ATSs to describe such written policies and procedures. Part III, Item 10(b) of proposed Form ATS–N would also require an NMS Stock ATS to identify the positions or titles of any persons that can access the confidential trading information of subscribers, a description of what information such persons can access, and the circumstances under which such persons can access the confidential trading information. The Commission preliminarily believes that NMS Stock ATSs should, pursuant to their existing obligations under Rule 301(b)(10), be aware of all persons that can access the confidential trading information of subscribers, the circumstances under which such persons can access that information, and what information they can access. As NMS Stock ATSs should already have this knowledge, the Commission preliminarily believes that the proposed disclosures of Item 10(b) would not be overly burdensome for an 621 (Attorney at 1.5 hours + Compliance Manager at 0.5 hour) × 46 NMS Stock ATSs = 92 burden hours. 622 Specifically, an NMS Stock ATS would be required to: (1) Describe the means by which a subscriber may consent or withdraw consent to the disclosure of confidential trading information to any persons (including the broker-dealer operator and any of its affiliates); (2) identify the positions or titles of any persons that have access to confidential trading information, describe the confidential trading information to which the persons have access, and describe the circumstances under which the persons can access confidential trading information; (3) describe the written standards controlling employees of the NMS Stock ATS that trade for employees’ accounts; and (4) describe the written oversight procedures to ensure that the safeguards and procedures are implemented and followed. PO 00000 Frm 00102 Fmt 4701 Sfmt 4702 NMS Stock ATS to complete. Accordingly, the Commission preliminarily estimates that, on average, preparing Part III, Item 10 for a proposed Form ATS–N would add 2 hours above the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 92 hours above the current baseline for all NMS Stock ATSs to complete Item 10 of Part III of proposed Form ATS–N.623 Part IV, Item 1 of proposed Form ATS–N would require an NMS Stock ATS to disclose, among other things, information regarding: (1) Any eligibility requirements to access the NMS Stock ATS; (2) the terms and conditions of any contractual agreements for granting access to the NMS Stock ATS for the purpose of effecting transactions in securities or for submitting, disseminating, or displaying orders on the NMS Stock ATS; (3) the types of subscribers and other persons that use the services of the NMS Stock ATS; (4) any formal or informal arrangement the NMS Stock ATS has with liquidity providers; and (5) any circumstances by which access to the NMS Stock ATS can be limited or denied and the procedures or standards that are used to determine such action. For each disclosure, the NMS Stock ATS would also be required to explain whether there are any differences in how these requirements, terms, conditions, criteria, procedures, and/or standards are applied among subscribers and persons. The Commission notes that the proposed disclosure requirements of Part IV, Item 1 of proposed Form ATS–N are, in large part, already required under current Form ATS. Exhibit A of current Form ATS requires an ATS to describe its classes of subscribers (e.g., broker-dealer, institutional, or retail) and any differences in access to services offered by the ATS to different groups or classes of subscribers. Part IV, Item 1 of proposed Form ATS–N requires the disclosure of similar information to Exhibit A, but Part IV, Item 1 would expressly require significantly more detail, and a greater number of disclosures, than Exhibit A of current Form ATS including with respect to the terms and conditions of use and eligibility to become a subscriber. The Commission notes that ATSs currently vary in the depth of their discussion of subscribers in Exhibit A of their Forms ATS, with some providing a fulsome description that would likely include 623 (Attorney at 1 hour + Compliance Manager at 1 hour) × 46 NMS Stock ATSs = 92 burden hours. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules most of the express disclosures proposed under Part IV, Item 1 of proposed Form ATS–N, while other ATSs might not, for example, provide details surrounding differing eligibility requirements among subscribers. Depending on the complexity of the NMS Stock ATS, the different types of subscribers, and, most significantly, the extent to which the terms and conditions vary among subscribers, the disclosure burden related to Part IV, Item I of proposed Form ATS–N would likely vary. For example, an NMS Stock ATS with two classes of subscribers with identical terms and conditions of use, eligibility criteria, and the same circumstances and process regarding limiting and denying services of the NMS Stock ATS would likely have less of a burden than an NMS Stock ATS with five groups of subscribers with varying terms and conditions of use, eligibility criteria, and differing circumstances and processes for which they may be limited or denied the services of the NMS Stock ATS. Accordingly, the Commission preliminary estimates that, on average, preparing Part IV, Item 1 of a Form ATS–N would add 6 hours to the current baseline for an initial operation report on current Form ATS to respond to the more detailed questions regarding subscribers to the NMS Stock ATS. This would result in an aggregate initial burden of 276 hours above the current baseline for all NMS Stock ATSs to complete Part IV, Item 1 of proposed Form ATS–N.624 Part IV, Item 2 of proposed Form ATS–N would require an NMS Stock ATS to provide the days and hours of operation of the NMS Stock ATS, including the times when orders or other trading interest are entered on to the NMS Stock ATS and the time when pre-opening or after-hours trading may occur. It would also require the NMS Stock ATS to explain differences, if any, among subscribers and persons in the times when orders or other trading interest are entered on the NMS Stock ATS. Current Form ATS does not specify similar disclosures, so the Commission preliminarily estimates that respondents would incur additional burdens above the current baseline when preparing the disclosures required under Part IV, Item 2 of proposed Form ATS–N. The NMS Stock ATS should already be aware of the hours during which it operates and whether and when it permits pre-opening or afterhours trading. Based on the experience of the Commission and its staff 624 (Attorney at 4 hours + Compliance Manager at 2 hours) × 46 NMS Stock ATSs = 276 burden hours. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 reviewing Form ATS and ATS–R filings, the Commission preliminarily believes that most ATSs that currently trade NMS stocks do not provide for afterhours or pre-opening trading of NMS stock. For NMS Stock ATSs for which the times when orders or other trading interest may be sent to the NMS Stock ATS are not the same for all subscribers and persons, the disclosure burden related to Part IV, Item 2 would likely increase. Accordingly, the Commission preliminarily estimates that, on average, preparing Part IV, Item 2 for a Form ATS–N would add 0.5 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 23 hours above the current baseline for all NMS Stock ATSs to complete Part IV, Item 2 of proposed Form ATS–N.625 Part IV, Item 3 of proposed Form ATS would require an NMS Stock ATS to provide a detailed disclosure of the order types available on the NMS Stock ATS. Part IV Item 3(a) would require an NMS Stock ATS to describe any types of orders that are entered to the NMS Stock ATS, their characteristics, operations, and how they are handled on the NMS Stock ATS.626 Part IV, Item 3(b) would require the NMS Stock ATS to describe any differences if the availability of its order types, and their terms and conditions, are not the same for all subscribers and persons. Part IV, Item 3(c) would require an NMS Stock ATS to describe any requirements and handling procedures for minimum order sizes, odd-lot orders, and mixed-lot orders and to describe any differences if the requirements and handling procedures for minimum order sizes, odd-lot, or mixed-lot orders are not the same for all subscribers and persons. Part IV, Item 3(d) would require an NMS Stock ATS to describe any messages sent to or received by the NMS Stock ATS indicating trading interest (e.g., IOIs, actionable IOIs or conditional 625 Compliance Manager at 0.5 hours × 46 NMS Stock ATSs = 23 burden hours. 626 This would include: (i) Priority for each order type; (ii) conditions for each order type; (iii) order types designed not to remove liquidity (e.g., postonly orders); (iv) order types that adjust their price as changes to the order book occur (e.g., price sliding orders or pegged orders) or have a discretionary range; (v) the time-in-force instructions that can be used or not used with each order type; (vi) the availability of order types across all forms of connectivity to the NMS Stock ATS and differences, if any, between the availability of an order type across these forms of connectivity; (vii) whether an order type is eligible for routing to other trading centers; and (viii) the circumstances under which order types may be combined with a timein-force or another order type, modified, replaced, canceled, rejected, or removed from the NMS Stock ATS. PO 00000 Frm 00103 Fmt 4701 Sfmt 4702 81099 orders), including the information contained in the message, the means under which messages are transmitted, the circumstances in which messages are transmitted (e.g., automatically by the NMS Stock ATS, or upon the subscriber’s request), and the circumstances in which they may result in an execution on the NMS Stock ATS; the NMS Stock ATS would also be required to describe any differences among subscribers and persons if the terms and conditions regarding these messages, IOIs, and conditional orders are not the same for all subscribers and persons. The Commission notes that some of the proposed disclosure requirements of Part IV, Item 3 of proposed Form ATS–N are already required under current Form ATS. Exhibit F of current Form ATS requires an ATS to describe, among other things, the manner of operation and the procedures governing order entry and execution of the ATS. Part IV, Item 3 of proposed Form ATS– N would require significantly more detail, and a greater number of disclosures, in regard to types of orders than Exhibit F of current Form ATS. ATSs that trade NMS stocks currently vary in the extent of their disclosures relating to order types as provided in Exhibit F. Some provide a relatively fulsome discussion of different order types and to whom they are made available, while other ATSs that trade NMS stocks do not provide substantial detail in this area. Depending on the extent to which an ATS that trades NMS stocks already discloses most of the information regarding order types and trading interest on Exhibit F of its Form ATS, as well as the variety and complexity of different order types available, the proposed disclosure burden of Part IV, Item 3 of proposed Form ATS–N will likely vary among NMS Stock ATSs. For example, those NMS Stock ATSs that send and receive actionable IOIs and/or conditional orders would be required to draft a detailed explanation regarding those order types for Part IV, Item 3(d), whereas NMS Stock ATSs without such order types would simply state that they do not send and receive IOIs and conditional orders. Accordingly, the Commission preliminarily estimates that, on average, preparing Part IV, Item 3 of a Form ATS–N would add 6 hours to the current baseline for an initial operation report on current Form ATS, depending on such factors as described above. This would result in an aggregate initial burden of 276 hours above the current baseline for an initial operation report on current Form ATS for all NMS E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81100 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Stock ATSs to complete Part IV, Item 3 of proposed Form ATS–N.627 Part IV, Item 4 of proposed Form ATS–N would require an NMS Stock ATS to disclose the means by which subscribers or other persons connect and send orders to the NMS Stock ATS. Part IV, Item 4(a) would require the NMS Stock ATS to describe the means by which subscribers or other persons connect to the NMS Stock ATS and enter orders or other trading interest on the NMS Stock ATS (e.g., via a direct FIX connection to the ATS or an indirect connection via the brokerdealer operator’s SOR, any intermediate functionality, algorithm, or sales desk). This item would also require the NMS Stock ATS to describe any differences if the terms and conditions for connecting and entering orders or other trading interest are not the same for all subscribers and persons. Part IV, Item 4(b) would require the NMS Stock ATS to describe any co-location services or any other means by which any subscriber or other persons may enhance the speed by which to send or receive orders, trading interest, or messages to or from the NMS Stock ATS, the terms and conditions of such co-location services, and to describe any differences if the terms and conditions of the co-location services are not the same for all subscribers and persons. The Commission notes that some of the proposed disclosure requirements of Part IV, Item 4 of proposed Form ATS–N are already required under current Form ATS. Exhibit F of current Form ATS requires an ATS to describe, among other things, the means of access to the ATS. Part IV, Item 4 of proposed Form ATS–N would expressly require significantly more detail, and a greater number of disclosures, in regard to order entry, connectivity, and colocation services than Exhibit F of current Form ATS. ATSs that currently trade NMS stocks vary in the depth of their disclosures related to order entry. Currently, most ATSs that trade NMS stocks do not provide much or any detail regarding the extent to which they provide co-location services or other speed advantages to subscribers or persons trading on the ATS. Accordingly, the Commission preliminarily estimates that respondents would incur an additional burden above the current baseline when preparing the disclosures required under Part IV, Item 4 of proposed Form ATS–N. The Commission preliminarily estimates that, on average, preparing Part IV, Item 4 for a Form ATS–N would add 5 hours to the current baseline for an initial operation report on current Form ATS to provide a more detailed description of the connection and order entry procedures, a description of any colocation or speed-advantage services, as well as any differences among subscribers and other persons with respect to these disclosures. This would result in an aggregate initial burden of 230 hours above the current baseline for all NMS Stock ATSs to complete Item 4 of Part IV of proposed Form ATS– N.628 Part IV, Item 5 of proposed Form ATS–N would require an NMS Stock ATS to explain if and how it segments order flow, the type of notice about such segmentation that it provides to subscribers, and whether subscribers, the broker-dealer operator, or its affiliates may submit order preferencing instructions. Part IV, Item 5(a) would require an NMS Stock ATS to describe any segmentation of orders or other trading interest on the NMS Stock ATS (e.g., classification by type of participant, source, nature of trading activity), and to describe the segmentation categories, the criteria used to segment these categories, and procedures for determining, evaluating, and changing segmented categories. This item would require an NMS Stock ATS to describe any differences if the segmented categories, the criteria used to segment these categories, and any procedures for determining, evaluating, or changing segmented categories are not the same for all subscriber and persons. Part IV, Item 5(b) would require the NMS Stock ATS to state whether it notifies subscribers or persons about the segmentation category that a subscriber or a person is assigned and to describe any notice provided to subscribers or persons about the segmented category that they are assigned and the segmentation identified in Item 5(a), including the content of any notice and the means by which any notice is communicated. If the notice is not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. Part IV, Item 5(c) would require an NMS Stock ATS to describe any means and the circumstances by which a subscriber, the broker-dealer operator, or any of its affiliates may designate an order or trading interest submitted to the NMS Stock ATS to interact or not to interact with specific orders, trading interest, or persons on 627 (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. Systems Analyst at 3 hours) × 46 NMS Stock ATSs = 276 burden hours. 628 (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. Systems Analyst at 2 hours) × 46 NMS Stock ATSs = 230 burden hours. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00104 Fmt 4701 Sfmt 4702 the NMS Stock ATS (e.g., designating an order or trading interest to be executed against a specific subscriber) and how such designations affect order priority and interaction. The Commission notes that some of the proposed disclosure requirements of Part IV, Item 5 of proposed Form ATS– N are already required under current Form ATS. Exhibit F of current Form ATS requires an ATS to describe, among other things, the manner of operation and the procedures governing order entry and execution of the ATS. However, Exhibit F of current Form ATS does not expressly enumerate the level of detail that an ATS must provide in regard to its segmentation of order flow and does not expressly ask for an ATS to describe any notice to subscribers regarding segmentation or explain any means and circumstances for order preferencing, whereas Part IV, Item 5 of proposed Form ATS–N would require detailed disclosures in regard to these subjects.629 Based on its review of Exhibit F disclosures, the Commission understands that most, but not all, ATSs that currently trade NMS stocks segment orders in some manner and that many NMS Stock ATSs allow subscribers to enter some order preferencing criteria or limits. These ATSs vary in the depth of their description as to how they segment order flow and order preferencing. For instance, most ATSs that currently trade NMS stocks do not expressly provide the Commission with a description of the means by which persons might be notified about segmentation, as would be required by Part IV, Item 5(b) of proposed Form ATS–N. Accordingly, the Commission preliminarily estimates that respondents would incur an additional burden above the current baseline when preparing the disclosures required under Part IV, Item 5 of proposed Form ATS–N. The Commission preliminarily estimates that, on average, preparing Part IV, Item 5 for a Form ATS–N would add 7 hours to the current baseline for an initial operation report on current Form ATS to provide a detailed description of how, if at all, the NMS Stock ATS segments order flow, provides any notice to those trading on the NMS Stock ATS regarding segmentation, and allows order preferencing. This would result in an aggregate initial burden of 322 hours above the current baseline for 629 Though Exhibit F of current Form ATS, unlike Item 5(b) of Part IV of proposed Form ATS–N, does not expressly require ATSs to describe the content of any notice to subscribers regarding segmentation, Exhibit F does require a copy of any materials currently provided to subscribers, which could include such a notice. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules all NMS Stock ATSs to complete Part IV, Item 5 of proposed Form ATS–N.630 Part IV, Item 6(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any means and circumstances by which orders or other trading interest on the NMS Stock ATS are displayed or made known outside the NMS Stock ATS and the information about the orders and trading interest that are displayed. If the display of orders or other trading interest is not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. Part IV, Item 6(b) of proposed Form ATS–N would require the NMS Stock ATS to identify the subscriber(s) or person(s) (in the case of a natural person, the NMS Stock ATS would only identify the person’s position or title) to whom the orders and trading interest are displayed or otherwise made known. Although Exhibit F of current Form ATS requires an ATS to describe, among other things, the manner of operation and the procedures governing order entry and execution of the ATS, Exhibit F does not expressly state that an ATS must explain if and how order information is displayed or otherwise made known outside the NMS Stock ATS. The Commission understands from its review of Forms ATS filings that a majority of ATSs that trade NMS stocks provide some form of IOI or conditional order that would likely need to be described in Part IV, Item 6 of proposed Form ATS–N.631 Depending on the variety of trading interest that shares some trading information outside of the NMS Stock ATS and the complexity of such information sharing, the disclosure burden in responding to Part IV, Item 6 would likely vary among NMS Stock ATSs. The Commission also notes that there is currently one ATS that trades NMS stocks that operates as an ECN. This ATS would have to describe in Part IV, Item 6 how it displays orders and other information about trading interest on the ATS. Accordingly, the Commission preliminarily estimates that, on average, preparing Part IV, Item for a Form ATS–N would add 5 hours to the current baseline for an initial operation report on current Form ATS, depending on such factors as described above. This would result in an aggregate initial burden of 230 hours above the current baseline for all NMS Stock ATSs 630 (Attorney at 2 hours + Compliance Manager at 2.5 hours + Sr. Systems Analyst at 2.5 hours) × 46 NMS Stock ATSs = 322 burden hours. 631 See supra Part IV, Item 6 of proposed Form ATS–N. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 to complete Part IV, Item 6 of proposed Form ATS–N.632 Part IV, Item 7 of proposed Form ATS–N would require an NMS Stock ATS to describe its trading services in detail. Part IV, Items 7(a) and 7(b) of proposed Form ATS–N would require an NMS Stock ATS to disclose the means or facilities used by the NMS Stock ATS to bring together the orders of multiple buyers and sellers, as well as the established, non-discretionary methods that dictate the terms of trading among multiple buyers and sellers on the facilities of the NMS Stock ATS, including rules and procedures governing the priority, pricing methodologies, allocation, matching, and execution of orders and other trading interest. Part IV, Item 7(c) would require the NMS Stock ATS to describe any trading procedures related to price protection mechanisms, short sales, locked-crossed markets, the handling of execution errors, time-stamping of orders and executions, or price improvement functionality. For all disclosures required under Item 7, the NMS Stock ATS would also be required to describe any differences in the availability of a functionality regarding its trading services among subscribers and persons. The Commission notes that some of the proposed disclosure requirements of Part IV, Item 7 of proposed Form ATS– N are already required under current Form ATS. Exhibit F of current Form ATS requires an ATS to describe, among other things, the manner of operation and the procedures governing order entry and execution of the ATS. These required disclosures in Exhibit F of Form ATS are similar to those set forth in Item 7 of proposed Form ATS–N, which would require disclosures relating to matching methodology, order interaction rules, and execution procedures of the NMS Stock ATS. Consequently, the Commission preliminarily believes that NMS Stock ATSs already have some experience completing Exhibit F that would lessen the burden related to responding to the more detailed disclosures in Items 7(a), (b), and (c) of Part IV of proposed Form ATS–N. Furthermore, Part IV, Item 7 of proposed Form ATS–N would require an NMS Stock ATS to describe how the NMS Stock ATS meets the two prongs necessary to meet the Exchange Act’s definition of ‘‘exchange’’ pursuant to Rule 3b–16(a) under the Exchange Act 632 (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. Systems Analyst at 2 hours) × 46 NMS Stock ATSs = 230 burden hours. PO 00000 Frm 00105 Fmt 4701 Sfmt 4702 81101 in Items 7(a) and (b).633 Based on reviews of Form ATS submissions, the Commission understands that ATSs that currently trade NMS stocks generally do not explicitly explain how their systems meet the requirements of each prong under Rule 3b–16, which are necessary in order to constitute an ATS. Those systems seeking to operate as NMS Stock ATSs would be required to draft those explanations, or modify existing descriptions of their current system as they may provide currently in Form ATS, to meet the disclosure requirements of Part IV, Item 7 of proposed Form ATS–N. Accordingly, the Commission preliminarily estimates that respondents would incur an additional burden above the current baseline when preparing the disclosures required under Part IV, Item 7 of proposed Form ATS–N. The Commission preliminarily estimates that, on average, preparing Part IV, Item 7 for a Form ATS–N would add 6 hours to the current baseline for an initial operation report on current Form ATS to provide a description of the NMS Stock ATS’s trading services. This would result in an aggregate initial burden of 276 hours above the current baseline for all NMS Stock ATSs to complete Part IV, Item 7 of proposed Form ATS–N.634 Part IV, Item 8 of proposed Form ATS–N would require an NMS Stock ATS to describe any procedures governing trading in the event the NMS Stock ATS suspends trading or experiences a system disruption or system malfunction. If the procedures governing trading during a suspension or system disruption or malfunction are not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. Exhibit G of Form ATS requires ATSs to describe the ATS’s procedures for reviewing system capacity, security, and contingency planning procedures. The Commission preliminarily believes that the proposed disclosures in Part IV, Item 8 of proposed Form ATS–N relating to system disruptions, malfunctions, or other suspensions relate, in part, to the Exhibit G disclosures on current Form ATS. The Commission notes that some ATSs that trade NMS stocks currently provide 633 See 17 CFR 240.3b–16 providing, among other things, that an entity must (1) bring together the orders for securities of multiple buyers and sellers; and (2) use 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). 634 (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. Systems Analyst at 3 hours) × 46 NMS Stock ATSs = 276 burden hours. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81102 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules some disclosures relating to system disruptions, malfunctions, and other suspensions in their Exhibit F, Exhibit G, or in subscriber manuals (or other materials provided to subscribers) that are required to be provided to the Commission under Exhibit F of current Form ATS. Consequently, the Commission preliminarily believes that NMS Stock ATSs should be able to provide the proposed disclosures in Part IV, Item 8 of proposed Form ATS–N without a significant burden over the current baseline as they should already be aware of how the ATS operates, handles system disruptions, malfunctions or other suspensions. The Commission recognizes, however, that Item Part IV, Item 8 is significantly more specific and detailed in its proposed disclosure requirements than current Form ATS. Accordingly, the Commission preliminarily estimates that respondents would incur an additional burden above the current baseline when preparing the disclosures required under Part IV, Item 8 of proposed Form ATS–N. The Commission preliminarily estimates that, on average, preparing Part IV, Item 8 for a Form ATS–N would add 2.5 hours to the current baseline for an initial operation report on current Form ATS to provide a detailed description of the NMS Stock ATS’s procedures for system disruptions, malfunctions, or other suspensions. This would result in an aggregate initial burden of 115 hours above the current baseline for all NMS Stock ATSs to complete Part IV, Item 8 of proposed Form ATS–N.635 Part IV, Item 9 of proposed Form ATS–N would require an NMS Stock ATS to describe any opening, reopening and closing processes, and any procedures for after-hours trading. Part IV, Item 9(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any opening and reopening processes, including how orders or other trading interest are matched and executed prior to the start of regular trading hours or following a stoppage of trading in a security during regular trading hours and how unexecuted orders or other trading interest are handled at the time the NMS Stock ATS begins regular trading at the start of regular trading hours or following a stoppage of trading in a security during regular trading hours. The NMS Stock ATS would also be required to describe any differences between pre-opening executions, executions following a stoppage of trading in a security during 635 (Attorney at 1 hour + Compliance Manager at .5 hours + Sr. Systems Analyst at 1 hour) × 46 NMS Stock ATSs = 115 burden hours. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 regular trading hours, and executions during regular trading hours. Part IV, Items 9(b) and (c) would require an NMS Stock ATS to describe any closing process and after-hours trading procedures, respectively, the manner in which unexecuted orders or other trading interest are handled at the close of regular trading, and how orders and trading interest are matched and executed during after-hours trading. The NMS Stock ATS would also be required to describe any differences between the closing and after-hours executions versus executions during regular trading hours. The Commission notes that some of the proposed disclosure requirements of Part IV, Item 9 of proposed Form ATS– N are incorporated by some ATSs that trade NMS stocks into Exhibit F of their current Forms ATS, which requires an ATS to describe, among other things, the manner of operation and the procedures governing order entry and execution of the ATS. Currently, ATSs that trade NMS stocks vary in the depth of their disclosures relating to opening, reopening, or closing processes, and after-hours trading procedures. The Commission notes that these opening, reopening, or closing processes, and after-hours trading procedures, may vary widely across different NMS Stock ATSs, with some, for example, allowing for pre-opening executions and routing and after-hours trading and routing, while others may not have an opening process and simply commence with regular trading without any option for after-hours trading. In any case, NMS Stock ATSs should already be aware of any opening, reopening or closing processes, and after-hours trading procedures, they may have as well as any differences in trading and execution during the opening, reopening, or closing processes, and during afterhours trading. Accordingly, the Commission preliminarily believes that preparing Part IV, Item 9 of proposed Form ATS–N for a Form ATS–N would not impose a significant additional burden above the current baseline for an initial operation report on current Form ATS. The Commission preliminarily estimates that, on average, preparing Part IV, Item 9 for a Form ATS–N would add 3 hours to the current baseline for an initial operation report on current Form ATS to describe its opening, reopening, or closing processes, and after-hours trading procedures. This would result in an aggregate initial burden of 138 hours above the current baseline for all NMS Stock ATSs to PO 00000 Frm 00106 Fmt 4701 Sfmt 4702 complete Part IV, Item 9 of proposed Form ATS–N.636 Part IV, Item 10 of proposed Form ATS–N would require an NMS Stock ATS to describe its outbound routing functions. Part IV, Item 10(a) of proposed Form ATS–N would require an NMS Stock ATS to describe the circumstances under which orders or other trading interest are routed from the NMS Stock ATS to another trading center, including whether outbound routing occurs at the affirmative instruction of the subscriber or at the discretion of the broker-dealer operator, and the means by which routing is performed (e.g., a third party or order management system, or a SOR (or similar functionality) or algorithm of the broker-dealer operator or any of its affiliates). Part IV, Item 10(b) of proposed Form ATS–N would require an NMS Stock ATS to describe any differences if the means by which orders or other trading interest are routed from the NMS Stock ATS are not the same for all subscribers and persons. Exhibit F of current Form ATS requires an ATS to describe, among other things, the manner of operation and the procedures governing order execution of the ATS, but it does not specifically state the level of detail an ATS must provide when describing its outbound routing procedures. Additionally, the Commission understands based on disclosures in Form ATS submissions, some ATSs that currently trade NMS stocks do not route orders out of the ATS. Consequently, the disclosure burden related to Part IV, Item 10 of proposed Form ATS–N would likely vary among NMS Stock ATSs depending on whether they route orders at all, the variety of circumstances under which they may route orders, and the variety of destinations or criteria to determine such destinations to which an order or other trading interest may route. Accordingly, the Commission preliminarily believes that the average additional burden above the baseline imposed by Part IV, Item 10 of proposed Form ATS–N may vary significantly among NMS Stock ATSs. Accordingly, the Commission preliminarily estimates that, on average, preparing Part IV, Item 10 for a Form ATS–N would add 6 hours to the current baseline for an initial operation report on current Form ATS, depending on such factors as described above. This would result in an aggregate initial burden of 276 hours above the current baseline for all NMS 636 (Compliance Manager at 2 hours + Sr. Systems Analyst at 1 hour) × 46 NMS Stock ATSs = 138 burden hours. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Stock ATSs to complete Part IV, Item 10 of proposed Form ATS–N.637 Part IV, Item 11 of proposed Form ATS would require an NMS Stock ATS to describe its sources and uses of market data. Part IV, Item 11(a) would require an NMS Stock ATS to describe the market data used by the NMS Stock ATS and the source of that market data (e.g., market data feeds disseminated by the SIP and market data feeds disseminated directly by an exchange or other trading center or third-party vendor of market data). Part IV, Item 11(b) would require the NMS Stock ATS to describe the specific purpose for which market data is used by the NMS Stock ATS, including how market data is used to determine the NBBO, protected quotes, pricing of orders and executions, and routing destinations. Form ATS does not specifically require an ATS to describe its sources of market data, though, this information is often important to understanding the execution of orders on an ATS. The Commission is aware based on Form ATS filings that many ATSs that trade NMS stocks provide descriptions related to their use of market data, including providing the name of their market data vendor. The Commission preliminarily believes that the proposed disclosures under Part IV, Item 11 would not impose any significant additional burden on NMS Stock ATSs, which should already be aware of the market data that they use and the manner in which they use it. Accordingly, the Commission preliminarily estimates that, on average, preparing Part IV, Item 11 for a Form ATS–N would add 4 hours to the current baseline for an initial operation report on current Form ATS to describe the sources of market data and the manner in which the NMS Stock ATS uses market data. This would result in an aggregate initial burden of 184 hours above the current baseline for all NMS Stock ATSs to complete Part IV, Item 11 of proposed Form ATS– N.638 Part IV, Item 12 of proposed Form ATS–N would require an NMS Stock ATS to make certain disclosures regarding its fees, rebates, and other charges. Part IV, Item 12(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any fees, rebates, or other charges of the NMS Stock ATS (e.g., connectivity fees, subscription fees, execution fees, volume discounts) and provide the range (e.g., high and 637 (Attorney at 1 hour + Compliance Manager at 2 hours + Sr. Systems Analyst at 3 hours) × 46 NMS Stock ATSs = 276 burden hours. 638 (Compliance Manager at 2 hours + Sr. Systems Analyst at 2 hours) × 46 NMS Stock ATSs = 184 burden hours. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 low) of such fees, rebates, or other charges. Part IV, Item 12(b) of proposed Form ATS–N would require the NMS Stock ATS to describe any differences if the fees, rebates, or other charges of the NMS Stock ATS are not the same for all subscribers and persons. Current Form ATS does not require an ATS to disclose and explain its fee structure, and based on Commission experience, few, if any, do so in their current Form ATS filings. The Commission recognizes that, like national securities exchanges, NMS Stock ATSs may adopt a variety of fee structures that may include rebates, incentives for subscribers to bring liquidity to the NMS Stock ATS, more traditional transaction-based fee structures, and other fees such as a monthly subscriber access fee. Depending on the complexity and variety of an NMS Stock ATS’s fee structure and the extent to which these fees are not the same for all subscribers and persons, the proposed disclosure burden related to Part IV, Item 12 of proposed Form ATS–N will likely vary. Accordingly, the Commission preliminarily estimates that, on average, preparing Part IV, Item 12 for a Form ATS–N would add 5 hours to the current baseline for an initial operation report on current Form ATS to describe the NMS Stock ATS’s fee structure and any differences among subscribers and persons relating to fees, rebates, or other charges. This would result in an aggregate initial burden of 230 hours above the current baseline for all NMS Stock ATSs to complete Part IV, Item 12 of proposed Form ATS–N.639 Part IV, Item 13 of proposed Form ATS would require an NMS Stock ATS to describe any arrangements or procedures for trade reporting, clearance, and settlement on the NMS Stock ATS. Part IV, Item 13(a) of proposed Form ATS–N would require an NMS Stock ATS to describe any arrangements or procedures for reporting transactions on the NMS Stock ATS and if the trade reporting procedures are not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. Part IV, Item 13(b) of proposed Form ATS–N would require an NMS Stock ATS to describe any arrangements or procedures undertaken by the NMS Stock ATS to facilitate the clearance and settlement of transactions on the NMS Stock ATS (e.g., whether the NMS Stock ATS becomes a counterparty, whether it submits trades to a registered clearing agency, or 639 (Attorney at 1 hour + Compliance Manager at 3 hours + Sr. Systems Analyst at 1 hour) × 46 NMS Stock ATSs = 230 burden hours. PO 00000 Frm 00107 Fmt 4701 Sfmt 4702 81103 whether it requires subscribers to have arrangements with a clearing firm). If the clearance and settlement procedures are not the same for all subscribers and persons, the NMS Stock ATS would be required to describe any differences. The Commission notes that some of the proposed disclosure requirements of Part IV, Item 13 of proposed Form ATS– N are already required under current Form ATS. Exhibit F of current Form ATS requires ATSs to describe, among other things, their procedures governing execution, reporting, clearance, and settlement of transactions effected through the ATS. Consequently, ATSs that currently trade NMS stocks already have experience providing disclosures related to how they report, clear, and settle transactions on the ATS. Accordingly, the Commission preliminarily believes that preparing Part IV, Item 13 for a Form ATS–N would not impose a significant additional burden above the current baseline for an initial operation report on current Form ATS. The Commission preliminarily estimates that, on average, preparing Part IV, Item 13 for a Form ATS–N would add 0.5 hours to the current baseline for an initial operation report on current Form ATS to provide a more detailed description of the NMS Stock ATS’s trade reporting, clearance, and settlement arrangements or procedures. This would result in an aggregate initial burden of 23 hours above the current baseline for all NMS Stock ATSs to complete Part IV, Item 13 of proposed Form ATS–N.640 Part IV, Item 14 of proposed Form ATS–N would require an NMS Stock ATS to provide the following information if the NMS Stock ATS displays orders in an NMS stock to any person other than employees of the NMS Stock ATS and executed 5% or more of the average daily trading volume in that NMS stock as reported by an effective transaction reporting plan for four of the preceding six calendar months: (a) The ticker symbol for each NMS stock for each of the last 6 calendar months; (b) a description of the manner in which the NMS Stock ATS displays such orders on a national securities exchange or through a national securities association; and (c) a description of how the NMS Stock ATS provides access to such orders displayed in the national market system equivalent to the access to other orders displayed on that exchange or association. Part IV, Item 15 of proposed Form ATS–N would require an NMS Stock ATS to provide the following 640 Compliance Manager at 0.5 hours × 46 NMS Stock ATSs = 23 burden hours. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81104 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules information if the NMS Stock ATS executed 5% or more of the average daily trading volume in an NMS stock as reported by an effective transaction reporting plan for four of the preceding six calendar months: (a) The ticker symbol for each NMS stock for each of the last 6 calendar months; and (b) a description of the written standards for granting access to trading on the NMS Stock ATS. Current Form ATS does not require an ATS to disclose the information that would be required under Part IV, Items 14 and 15 of proposed Form ATS–N. However, based on the experience of the Commission and its staff, the Commission preliminarily believes that no ATSs currently executed 5% or more of the average daily volume in an NMS Stock as reported by an effective transaction reporting plan for four of the preceding six calendar months, and the Commission preliminarily believes that most—if not all—ATSs that currently trade NMS stocks already have procedures in place to prevent that threshold from being crossed on the ATS’s system. Historically, ATSs have crossed these thresholds very rarely, with at most three ATSs that trade NMS stocks crossing either of the thresholds in any given year. If, however, an NMS Stock ATS were to cross these 5% thresholds, a disclosure burden related to amending a Form ATS–N to complete Part IV, Items 14 and 15 of proposed Form ATS–N would result. Because Items 14 and 15 of Part IV are tied to existing obligations that arise from crossing the 5% thresholds pursuant to Rule 301(b)(3) and Rule 301(b)(5)(ii)(A) of Regulation ATS, respectively, the Commission preliminarily believes that NMS Stock ATSs should already be generally aware of the procedures they would follow if the 5% thresholds were crossed, which should reduce the burden associated with the disclosures that would be required under Items 14 and 15. The Commission notes that an NMS Stock ATS would only have to respond to Part IV, Items 14 or 15 of a Form ATS–N if the NMS Stock ATS previously operated as an ATS and triggered the applicable 5% thresholds. The Commission further notes that NMS Stock ATSs would be less likely to have to complete Item 14 as compared to Item 15 because Item 14 requires as an additional precondition that the NMS Stock ATS displays orders in an NMS stock to a person other than employees of the NMS Stock ATS. For new NMS Stock ATSs (i.e., NMS Stock ATSs that did not previously operate as an ATS), the NMS Stock ATS would not have been in operation for at least four VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 months to trigger the applicable thresholds, meaning that such NMS Stock ATSs would only be required to complete Item 14 or 15 (or both) in a Form ATS–N Amendment. The Commission preliminarily estimates that completion of Part IV, Item 14 or 15 in a Form ATS–N Amendment (or in a Form ATS–N in the case of an NMS Stock ATS that previously operated as an ATS), would be 5 hours per item. As explained above, the Commission notes that triggering the 5% threshold, a precondition necessary to require completion of Part IV, Items 14 and 15 of proposed Form ATS–N, currently occurs, and the Commission preliminarily estimates would continue to occur, very infrequently. Based on the review of Form ATS and Form ATS–R disclosures by the Commission and its staff, the Commission preliminarily estimates that 1 NMS Stock ATS would have to complete Item 14 and 2 NMS Stock ATSs would have to complete Item 15 in any given year. Accordingly, the Commission preliminarily estimates that the disclosures that would be required under Part IV, Items 14 and 15 of proposed Form ATS–N would result in an aggregate initial burden of 15 hours above the current baseline.641 Part IV, Item 16 of proposed Form ATS–N would require an NMS Stock ATS to explain and provide certain aggregate platform-wide market quality statistics that it publishes or otherwise provides to subscribers regarding the NMS Stock ATS. Under Item 16, if the NMS Stock ATS publishes or otherwise provides to one or more subscribers aggregate platform-wide order flow and execution statistics of the NMS Stock ATS that are not otherwise required disclosures under Exchange Act Rule 605 of Regulation NMS, it would be required to: (i) List and describe the categories of the aggregate platformwide order flow and execution statistics published or provided; (ii) describe the metrics and methodology used to calculate the aggregate platform-wide order flow and execution statistics; and (iii) attach as Exhibit 5 the most recent disclosure of the aggregate platformwide order flow and execution statistics published or provided to one or more subscribers for each category or metric as of the end of the calendar quarter. An NMS Stock ATS would not be required to develop or publish any new statistics for purposes of making the required disclosures under Item 16; it would only be required to make the disclosures for statistics it already otherwise collects 641 (Attorney at 2 hours + Compliance Manager at 1 hour + Sr. Systems Analyst at 2 hours) × 3 NMS Stock ATSs = 15 burden hours. PO 00000 Frm 00108 Fmt 4701 Sfmt 4702 and publishes in the course of its operations. Thus, NMS Stock ATSs that do not publish or otherwise provide aggregate platform-wide market quality statistics would not incur any additional burden due to the proposed disclosure requirements of Item 16. For NMS Stock ATSs that do provide such statistics, Item 16 would impose an additional burden above the baseline because current Form ATS does not require the disclosure of market quality statistics. The Commission preliminarily estimates that preparing Part IV, Item 16 for a Form ATS–N would add 7 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 322 hours above the current baseline for all NMS Stock ATSs to complete Part IV, Item 16 of proposed Form ATS–N.642 ii. Estimated Burden above the Current Baseline for a Form ATS–N, Form ATS– N Amendment, and Notice of Cessation on Form ATS–N A. Proposed Form ATS–N Based on the above analysis of the estimated additional burden for a proposed Form ATS–N, the Commission preliminarily estimates that a proposed Form ATS–N will, on average, require an estimated 121.3 burden hours above the current baseline for an initial operation report on current Form ATS. This results in an estimated 141.3 hours in total, including the current baseline.643 The Commission notes that ATSs that trade NMS stocks vary in terms of their structure and the manner in which they operate. ATSs that currently trade NMS stocks also vary with respect to the depth and extent of their disclosures on Form ATS. Consequently, the Commission preliminarily believes that the estimated hour burdens herein regarding proposed Form ATS–N would likely vary among NMS Stock ATSs, depending on such 642 (Attorney at 1 hour + Compliance Manager at 1 hour + Senior Systems Analyst at 5 hours) × 46 NMS Stock ATSs = 322 burden hours. 643 (Current Baseline at 20 hours) + (Parts I and II at 0.5 hours) + (Part III at an average of 47 hours) + (Part IV at an average of 73.5 hours) + (Access to EFFS at 0.3 hours, see infra, Section XII.D.2.b.iv) = 141.3 burden hours. The aggregate totals by professional, including the baseline, are estimated to be approximately 54.8 hours for an Attorney, 43.5 hours for a Compliance Manager, 34.5 hours for a Sr. Systems Analyst, 1 hour for a Sr. Marketing Manager, and 7.5 hours for a Compliance Clerk. This preliminary estimated burden for a Form ATS–N includes the hour burden associated with completing Part III, Item 2 and Part IV, Items 14 and 15 of proposed Form ATS–N. As explained above, however, the Commission preliminarily believes that the majority of NMS Stock ATSs would not be required to complete those items of the proposed form. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules factors as the extent of their current disclosures on Form ATS, the complexity and structure of their system, and the extent of their other broker-dealer activities. B. Form ATS–N Amendments mstockstill on DSK4VPTVN1PROD with PROPOSALS3 As previously noted, the Commission currently estimates that ATSs that trade NMS stocks submit 2 amendments, on average, each year.644 The Commission preliminarily estimates that the 46 respondents will file 3 Form ATS–N Amendments each year, for an estimated total of 138 Form ATS–N Amendments. The Commission notes that proposed Rule 304(a)(2) of Regulation ATS will contain the same three general categories of required amendments for proposed Form ATS–N as Rule 301(b)(2) of Regulation ATS currently requires for current Form ATS.645 However, due to the greater detail and number of disclosures required by proposed Form ATS–N, the Commission preliminarily believes that respondents may find it necessary to file a greater number of amendments to proposed Form ATS–N than ATSs that trade NMS stocks currently do on Form ATS. For example, many of the disclosures related to the broker-dealer operator of the NMS Stock ATS contained in Part III of proposed Form ATS–N, which are not required disclosures under current Form ATS, would require an NMS Stock ATS to file Form ATS–N Amendments if the information provided on Form ATS–N changed. As noted above, the Commission currently estimates that the hourly burden related to an amendment to Form ATS is 6 hours.646 The Commission preliminarily estimates that the average hourly burden above this current baseline of 6 hours for each Form ATS–N Amendment would be 3 hours to accommodate the more voluminous and detailed disclosures required by Form ATS–N as compared to Form ATS.647 An NMS Stock ATS would also be required to provide a brief narrative description of the amendment at the top of Form ATS–N and a redline(s) showing changes to Part III and/or Part IV of proposed Form 644 See supra note 594 and accompanying text. During the fiscal year of 2014, the Commission received 101 amendments from ATSs that trade NMS stocks, of which there were approximately 45 at any given time during 2014. Some ATSs that trade NMS stocks filed as many as 3 amendments while others did not file any amendments in 2014. 645 See 17 CFR 242.301(b)(2). 646 See supra note 595 and accompanying text. 647 Attorney at 1 hour + Compliance Manager at 2 hours = 3 burden hours above the baseline. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 ATS–N.648 The Commission preliminarily estimates that this requirement would add an additional burden of 0.5 hours to draft the summary and prepare the redline version(s) showing the amendments the NMS Stock ATS is making.649 This would result in a total estimated hourly burden, including the baseline, of 9.5 hours for a Form ATS–N Amendment,650 and an aggregate annual burden on all NMS Stock ATSs of 1,311 hours.651 The Commission notes that the frequency and scope of Form ATS– N Amendments would likely vary, similar to amendments to Form ATS, depending on whether the NMS Stock ATS is implementing a significant change requiring substantial revisions to its Form ATS–N or whether the changes are less significant, such as updating the address of the NMS Stock ATS. Some NMS Stock ATSs might not file any Form ATS–N Amendments in a given year, while others—such as NMS Stock ATSs that publish or otherwise provide to one or more subscribers aggregate platform-wide market quality statistics that would be covered by Part IV, Item 16 of proposed Form ATS–N 652—may file several Form ATS–N Amendments per year. C. Notice of Cessation on Proposed Form ATS–N As previously noted, from 2012 through the first half of 2015, there have been an average of 6 ATSs that trade NMS stocks that cease operations each year.653 Although it is unclear how many NMS Stock ATSs might cease operations each year going forward, for purposes of making a PRA burden estimate, the Commission is estimating that this average would generally remain the same for NMS Stock ATSs using Form ATS–N as economic conditions, business reasons, and other factors may cause some NMS Stock ATSs to cease operations. Accordingly, the Commission preliminarily estimates that 6 respondents may to file a 648 See Exhibits 3A and 4A to proposed Form ATS–N. 649 Compliance Clerk at 0.5 hours. The Commission notes that most word processing software provides for this functionality. 650 Attorney at 5.5 hours + Compliance Manager at 2 hours + Compliance Clerk at 2 hours = 9.5 burden hours. 651 138 amendments per year × 9.5 hours = 1,311 aggregate burden hours. The Commission further estimates that gaining access to EFFS for one additional person on an annual basis would require 0.15 burden hours for each NMS Stock ATS, or 7 hours annually for all NMS Stock ATSs (46 × 0.15 hours = 6.9 hours). Therefore, the aggregate burden hours equals 1,317.9 hours (1,311 hours + 6.9 hours). 652 See supra Section VIII.P. 653 See supra Section XII.C. PO 00000 Frm 00109 Fmt 4701 Sfmt 4702 81105 cessation of operation report on proposed Form ATS–N each year. The Commission preliminarily believes that the burden for filing a cessation of operation report on proposed Form ATS–N will not be significantly greater than that for filing a cessation of operation report on current Form ATS because proposed Form ATS–N does not contain any additional requirements for a cessation of operation report. For both Form ATS and proposed Form ATS–N, the primary requirement is to check the appropriate box indicating that the ATS is ceasing operations. Accordingly, the Commission preliminarily estimates that the average compliance burden for each response would be 2 hours.654 This would result in an aggregate annual burden of 12 hours for NMS Stock ATSs that choose to cease operations and submit a cessation of operation report on Form ATS–N.655 iii. ATSs That Transact in Both NMS and Non-NMS Stocks Under proposed Rule 301(b)(2)(viii) of Regulation ATS, an ATS that effects trades in both NMS stocks and nonNMS stocks would have to submit a Form ATS–N with respect to its trading of NMS stocks and a revised Form ATS that removes discussion of those aspects of the ATS related to the trading of NMS stocks. Under the proposed amendments to Rule 301(b)(9), an ATS that effects trades in both NMS stocks and non-NMS stocks would also be required to file separate Forms ATS–R— one disclosing trading volume in NMS stocks and one disclosing trading volume in non-NMS stocks. Therefore, ATSs that are subject to these proposed requirements would incur: (1) the above baseline burdens related to filing a Form ATS–N and Form ATS–N Amendments; 656 (2) the additional burden of filing a new Form ATS to only disclose information related to non-NMS stock trading activity on the ATS; 657 and (3) the burden of completing and filing two Forms ATS– R.658 Accordingly, the Commission estimates that the total hourly burden for an ATS to separately file a Form ATS for its non-NMS stock trading 654 Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 4 burden hours. See supra note 597, and accompanying text. 655 2 burden hours × 6 NMS Stock ATSs = 12 aggregate annual burden hours. 656 See supra Sections XII.D.2.b.ii.A and B. 657 See supra Section XII.D.2.a and accompanying text for the baseline estimates for submitting an IOR for Form ATS and amendments to Form ATS. 658 See supra note 598 and accompanying text for the baseline estimate for submitting a Form ATS– R. E:\FR\FM\28DEP3.SGM 28DEP3 81106 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules activity and Form ATS–N for its NMS stock trading activity would be 20 burden hours for the initial operation report on Form ATS for its non-NMS stock trading activity and 141.3 burden hours for its Form ATS–N. The Commission notes that the estimated hour burden related to the initial operation report submission on Form ATS for non-NMS stock trading activity might be less than the estimated 20 burden hours, as, to the extent the NMS Stock ATS in question is currently operating, the description of its nonNMS stock trading activity should already be contained in its existing Form ATS.659 As previously noted, there are currently 11 ATSs that trade, or have indicated that they expect to trade in Exhibit B to their Form ATS, both NMS stocks and non-NMS stocks on the ATS. Consequently, the Commission preliminarily estimates that the aggregate initial burden on ATSs to file these separate forms would be 1,774.3 hours, and the aggregate annual burden for filing amendments to both forms would be 445.5 hours.660 The Commission estimates that the total burden for completing and filing two Form ATS–R would be 4.5 hours, which is 0.5 hours 661 above the current baseline burden of 4 hours for filing a Form ATS–R.662 The Commission preliminarily believes that ATSs required to file two Forms ATS–R would incur an additional burden above the baseline because they would be required to divide their trading statistics between two forms and file each form separately. The Commission does not believe that those ATSs would incur any additional burden to collect the required information because they currently assemble that information when preparing their current Form ATS–R filings. As previously noted, there are currently 11 ATSs that trade, or have indicated that they expect to trade in Exhibit B to their Form ATS, mstockstill on DSK4VPTVN1PROD with PROPOSALS3 659 The hourly burden related to amendments to its Form ATS and Form ATS–N would remain unchanged: 6 estimated burden hours for amendments to Form ATS, and 9.5 estimated burden hours for Form ATS–N Amendments. See supra notes 646–650 and accompanying text. 660 (Form ATS initial operation report at 20 hours + Form ATS–N at 141.3 hours) × 11 ATSs = 1,774.3 aggregate burden hours. Using the estimates of 2 amendments each year to Form ATS, see supra Section XII.D.2.a, and 3 amendments each year to Form ATS–N, see supra Section XII.D.2.b.ii.B, the ongoing aggregate burden for these bifurcated ATSs would be ((2 Form ATS Amendments per year × 6 hours) + (3 Form ATS–N Amendments per year × 9.5 hours)) × 11 respondents = 445.5 aggregate ongoing burden hours per year relating to amendments. 661 Attorney at .5 hours = .5 burden hours. 662 See supra note 598 and accompanying text for the baseline estimate for submitting a Form ATS– R. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 both NMS stocks and non-NMS stocks on the ATS; those ATSs would be required to file a pair of Forms ATS–R four times annually. Consequently, the Commission estimates that the aggregate annual burden of filing two Forms ATS– R for those ATS that effect transactions in both NMS stocks and non-NMS stocks would be 198 hours.663 iv. Access to EFFS The Commission proposes that Form ATS–N would be submitted electronically in a structured format and require an electronic signature.664 Currently, ATSs that transact in NMS stock do not have the ability to access and submit an electronic form. The proposed amendments to Regulation ATS would require that every NMS Stock ATS have the ability to submit forms electronically with an electronic signature. The Commission’s proposal contemplates the use of an online filing system, the EFFS. Based on the widespread use and availability of the Internet, the Commission preliminarily believes that filing Form ATS–N in an electronic format would be less burdensome and a more efficient filing process for NMS Stock ATSs and the Commission, as it is likely to be less expensive and cumbersome than mailing and filing paper forms to the Commission. To access EFFS, an NMS Stock ATS would have to submit to the Commission an External Account User Application (‘‘EAUA’’) to register each individual at the NMS Stock ATS who would access the EFFS system on behalf of the NMS Stock ATS. The Commission is including in its burden estimates the burden for completing the EAUA for each individual at an NMS Stock ATS who would request access to EFFS. The Commission estimates that initially, on average, two individuals at each NMS Stock ATS would request access to EFFS through the EAUA, and each EAUA would take 0.15 hours to complete and submit. Therefore, each NMS Stock ATS would require a total of 0.3 hours to complete the requisite EAUAs,665 or approximately 13.8 hours 663 ((Attorney at 3.5 hours + Compliance Clerk at 1 hour) × (4 filings annually)) × 11 ATSs = 198 aggregate burden hours. 664 The Commission notes that all estimated burden hours with regard to completing Parts I–V of proposed Form ATS–N, which are explained above and herein, include the estimated burden associated with the proposed requirement that NMS Stock ATSs file proposed Form ATS–N in a structured format, including narrative responses that are block-text tagged. 665 0.15 hours per EAUA × 2 individuals = 0.3 burden hours per NMS Stock ATS. These estimates are based on the Commission and its staff’s experience with EFFS and EAUAs pursuant to Rule PO 00000 Frm 00110 Fmt 4701 Sfmt 4702 for all NMS Stock ATSs.666 The Commission also preliminarily estimates that annually, on average, one individual at each NMS Stock ATS will request access to EFFS through the EAUA.667 Therefore, the ongoing burden to complete the EAUA would be 0.15 hours annually for each NMS Stock ATS,668 or approximately 6.9 hours annually for all NMS Stock ATSs.669 In addition, the Commission estimates that each NMS Stock ATS will designate 2 individuals to sign Form ATS–N each year. An individual signing a Form ATS–N must obtain a digital ID, at the cost of approximately $25 each year. Therefore, each NMS Stock ATS would pay approximately $50 annually to obtain digital IDs for the individuals with access to EFFS for purposes of signing Form ATS–N,670 or approximately $2,300 for all NMS Stock ATSs.671 v. Public Posting on NMS Stock ATS’s Web Site Proposed Rule 304(b)(3) would require each NMS Stock ATS to make public via posting on the NMS Stock ATS’s Web site a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2). The Commission preliminarily estimates that each NMS Stock ATS would incur an initial, one-time burden to program and configure its Web site in order to post the required direct URL hyperlink pursuant to proposed Rule 304(b)(3). The Commission preliminarily estimates that this initial, one-time burden would be approximately 2 hours.672 Because the Commission preliminarily believes that many brokerdealer operators currently maintain a Web site for their NMS Stock ATSs, the Commission preliminarily estimates that the aggregate initial, one-time 19b–4 under the Exchange Act. The 0.3 hours represents the time spent by two attorneys. The Commission believes it is appropriate to estimate that, on average, each NMS Stock ATS will submit two EAUAs initially. 666 0.30 hours × 46 NMS Stock ATSs = 13.8 burden hours. 667 The Commission estimates that annually, on average, one individual at each NMS Stock ATS will request access to EFFS through EAUA to account for the possibility that an individual who previously had access to EFFS may no longer be designated as needing such access. 668 0.15 hours per EAUA × 1 individual = 0.15 burden hours. 669 0.15 hours × 46 NMS Stock ATSs = 6.9 burden hours. 670 $25 per digital ID × 2 individuals = $50 per NMS Stock ATS. 671 $50 per NMS Stock ATS × 46 NMS Stock ATSs = $2,300. 672 Senior Systems Analyst at 2 burden hours. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules burden would be approximately 92 hours.673 vi. Recordkeeping Requirements As noted above, the Commission proposes to amend Rule 303(a)(2)(ii) 674 of Regulation ATS to provide that all ATSs must preserve copies of all reports filed pursuant to proposed Rule 304 for the life of the enterprise and any successor enterprise. Rule 303(a)(ii) currently requires an ATS to preserve copies of reports filed pursuant to Rule 301(b)(2), which include all Form ATS filings, for the life of the enterprise and any successor enterprise. Because NMS Stock ATSs that solely trade NMS stocks would be filing Form ATS–N in lieu of Form ATS under this proposal, the Commission believes that the proposed amendment to Rule 303(a)(ii) would not result in any burden for those ATSs that is not already accounted for under the current baseline burden estimate for Rule 303.675 For the 11 ATSs that trade, or have indicated in Exhibit B to their Form ATS that they expect to trade both NMS stocks and non-NMS stocks on the ATS, the Commission preliminarily estimates that the burden above the current baseline estimate for preserving records relating to compliance with the proposed amendment to Rule 303(a)(ii) would be approximately 3 hours annually per ATS for a total annual burden above the current baseline burden estimate of 33 hours for all respondents.676 Accordingly, the Commission proposes to modify the current PRA burden for Rule 303 to account for the increased burden on ATSs that trade both NMS stocks and non-NMS stocks. E. Collection of Information Is Mandatory All collections of information pursuant to the proposed rules would be mandatory for entities that meet the definition of NMS Stock ATS. proposed Form ATS–N, the Commission would make publicly available on its Web site all Forms ATS–N upon being declared effective. The Commission would also make publicly available on its Web site all properly filed Form ATS–N Amendments, and notices of cessation on Form ATS–N. The Commission would not make publicly available on its Web site Forms ATS–N that the Commission has declared ineffective, but these forms would be available for examination by the Commission and its staff, state securities authorities, and self-regulatory organizations. The proposed Form ATS amendments would also require each NMS Stock ATS that has a Web site to post on the NMS Stock ATS’s Web site a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2). The collection of information required by the proposed amendments to Rules 301(b)(10), 303(a)(1)(v), 301(b)(9), and 303(a)(2)(ii) would not be made public, but would be used for regulatory purposes by the Commission and the SRO(s) of which the ATS’s broker-dealer operator is a member. In Part III, Item 10 of Form ATS–N, however, NMS Stock ATSs would be required to describe the written safeguards and written procedures to ensure confidential treatment of trading information that would be required under the proposed amendment to Rule 301(b)(10); as explained above, the Commission would make certain Form ATS–N filings publicly available. To the extent that the Commission receives confidential information pursuant to this collection of information, such information would be kept confidential, subject to the provisions of applicable law. G. Retention Period for Recordkeeping Requirements mstockstill on DSK4VPTVN1PROD with PROPOSALS3 F. Confidentiality of Responses to Collection of Information With respect to the proposed amendments to Rules 301(b)(2)(viii) and 304 of Regulation ATS, including 673 Senior Systems Analyst at 2 hours × 46 NMS Stock ATSs = 92 burden hours. 674 17 CFR 242.303(a)(2)(ii). 675 To comply with all of the record preservation requirements of Rule 303, the Commission currently estimates that ATSs spend approximately 1,380 hours per year. See Rule 303 PRA Update, supra note 580, 78 FR 43943. At an average cost per burden hour of $104.20, the resultant total related cost of compliance is $143,796 per year (1,380 burden hours × $104.20/hour). See id. 676 3 additional burden hours × 11 ATSs = 33 aggregate burden hours. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 All reports required to be made under proposed Rules 301(b)(2)(viii), 301(b)(9), and 304 of Regulation ATS, including Proposed Form ATS–N, would be required to be preserved during the life of the enterprise and any successor enterprise, pursuant to the proposed amendment to Rule 303(a)(2) of Regulation ATS. ATSs would be required to preserve a copy of their written safeguards and written procedures to protect subscribers’ confidential trading information under proposed Rule 301(b)(10) of Regulation ATS for not less than 3 years, the first 2 years in an easily accessible place, pursuant to proposed Rule 303(a)(1)(v) of Regulation ATS. PO 00000 Frm 00111 Fmt 4701 Sfmt 4702 81107 H. Request for Comments Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comment to: 1. Evaluate whether the proposed collection of information is necessary for the proper performance of our functions, including whether the information shall have practical utility; 2. Evaluate the accuracy of our estimate of the burden of the proposed collection of information; 3. Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and 4. Evaluate whether there are ways to minimize the burden of collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. Persons submitting comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090, with reference to File Number S7–23–15. Requests for materials submitted to OMB by the Commission with regard to this collection of information should be in writing, with reference to File Number S7–23–15 and be submitted to the Securities and Exchange Commission, Office of FOIA/PA Services, 100 F Street NE., Washington, DC 20549–2736. As OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. XIII. Economic Analysis A. Background The Commission is concerned that the current regulatory requirements relating to operational transparency for NMS Stock ATSs may no longer fully meet the goals of furthering the public interest and protecting investors. The market for NMS stock execution services consists of registered national securities exchanges, NMS Stock ATSs, and non-ATS broker-dealers that effect OTC transactions. As of the second quarter of 2015, NMS Stock ATSs account for approximately 15.4% of the total dollar volume in NMS stocks and compete with, and operate similar to, registered national securities exchanges. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81108 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules However, relative to registered national securities exchanges, there is limited and differential information publicly available to market participants about how NMS Stock ATSs operate, including how orders interact, match, and execute, and the activities of the broker-dealer operators and their affiliates. Not only is there a lack of consistency with respect to the quality of information that market participants receive from different NMS Stock ATSs, there are also differences due to the fact that for a given NMS Stock ATS, some subscribers might have more detailed information relative to other subscribers about how orders interact, match, and execute on the ATS. Currently, NMS Stock ATSs provide the Commission with notice of their initial operations and changes to their operations on Form ATS. Although some NMS Stock ATSs voluntarily make their Form ATS publicly available on their Web site, they are not required to do so, as Form ATS is ‘‘deemed confidential when filed.’’ 677 In light of this, subscribers to these NMS Stock ATSs may have more information about the operations of these NMS Stock ATSs relative to subscribers to NMS Stock ATSs that do not make their Form ATS public. Moreover, an NMS Stock ATS may also make different information available to certain market participants about its operations than it does to other market participants. The Commission is concerned that this limited and differential level of operational transparency around NMS Stock ATSs may impede market participants’ ability to adequately discern how their orders interact, match, and execute on NMS Stock ATSs, or fully understand the activities of an NMS Stock ATS’s broker dealer-operator and its affiliates, and the conflicts that may arise from such activities. This could thereby impede a market participant’s ability to evaluate whether submitting order flow to a particular NMS Stock ATS aligns with its business interests and would help it achieve its investing or trading objectives. In addition, the Commission is concerned that the current lack of transparency around the potential conflicts of interest that arise from the activities of the broker-dealer operator and its affiliates hinders market participants’ abilities to protect their interests when doing business on the NMS Stock ATS. The Commission is concerned that the current market for NMS stock execution services does not address the problems described above. Rather, when demanding services that are typically offered by NMS Stock ATSs— particularly, dark pools—some market participants trade off the less stringent transparency requirements applicable to NMS Stock ATSs, as compared to national securities exchanges, in exchange for obtaining some perceived advantages of trading on these venues, such as keeping their orders dark prior to execution.678 Furthermore, the difficulty involved in comparing the operations and execution quality of an NMS Stock ATS to the operations and execution quality of national securities exchanges or other NMS Stock ATSs may limit the ability of market participants to judge whether that tradeoff actually benefits either themselves or their customers when sending orders to a particular NMS Stock ATS. For example, as noted above, a certain category of subscribers may have access to services offered by an NMS Stock ATS that are not offered to another category of subscribers, but subscribers that fall under the latter category may not be fully aware of any potential disadvantages when submitting orders to that NMS Stock ATS.679 Furthermore, the Commission preliminarily believes that the NMS Stock ATS would generally not have a strong incentive to fully reveal how it operates to either category of subscriber under the current regulatory regime. The Commission is proposing to amend Regulation ATS to adopt new Rule 304, which would provide a process for the Commission to determine if an NMS Stock ATS qualifies for the exemption from the definition of ‘‘exchange’’ pursuant to Rule 3a1–1(a)(2) and declare an NMS Stock ATS’s Forms ATS–N either effective or ineffective. The proposal would also provide a process for the Commission to suspend, limit, or revoke an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ under certain circumstances. The Commission is also proposing to amend Regulation ATS to require NMS Stock ATSs to file Form ATS–N, which would require NMS Stock ATSs to provide detailed disclosures about their trading operations and the activities of their broker-dealer operators and their affiliates. The Commission is proposing to make certain Form ATS–N filings public by posting them on the Commission’s Web site and requiring each NMS Stock ATS that has a Web site to post on the NMS Stock ATS’s Web site a direct URL hyperlink to the Commission’s Web site that contains the 678 See supra notes 123–126 and accompanying text. 677 See 17 CFR 242.301(b)(2)(vii). VerDate Sep<11>2014 14:26 Dec 24, 2015 679 See Jkt 238001 PO 00000 supra Section VII.B.4. Frm 00112 Fmt 4701 Sfmt 4702 documents enumerated in proposed Rule 304(b)(2). The Commission is also proposing to amend Rule 301(b)(10) of Regulation ATS to require that all ATSs have their procedures and safeguards to protect subscribers’ confidential trading information in writing. The proposed amendments seek to improve and make more consistent the information available to market participants regarding different NMS Stock ATSs’ operations and the activities of their broker-dealer operators and their affiliates. The proposed amendments also aim to make the level and type of disclosures more consistent between NMS Stock ATSs. The Commission preliminarily believes that making publicly available a more consistent level of information to all market participants would help them to better evaluate NMS Stock ATSs as potential routing destinations for their orders. The Commission is sensitive to the economic consequences and effects, including the costs and benefits, of its rules. The following economic analysis identifies and considers the costs and benefits—including the effects on efficiency, competition, and capital formation—that may result from the amendments to Regulation ATS being proposed. These costs and benefits are discussed below and have informed the policy choices described throughout this release.680 B. Baseline The enhanced transparency and oversight of NMS Stock ATSs that the Commission preliminarily believes would result from the proposed amendments to Regulation ATS would increase the amount of information and improve the quality of information available to all market participants about the operations of NMS Stock ATSs and the activities of their brokerdealer operators and their affiliates. As a result, this information should better inform market participants making decisions about which trading venue to route their orders to. The proposed amendments would also affect the 680 Exchange Act Section 3(f) requires the Commission, when it is engaged in rulemaking pursuant to the Exchange Act and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition and capital formation. See 15 U.S.C. 78c(f). In addition, Exchange Act Section 23(a)(2) requires the Commission, when making rules pursuant to the Exchange Act, to consider among other matters the impact that any such rule would have on competition and not to adopt any rule that would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2). E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules competitive dynamics between trading venues that compete for order flow. The numerous parties that would be affected by the proposed amendments include: Existing NMS Stock ATSs; potential new NMS Stock ATSs; current and potential subscribers of NMS Stock ATSs; broker-dealers that are affiliated with NMS Stock ATSs and their customers; non-ATS affiliated brokerdealers and their customers; brokerdealers that do not operate NMS Stock ATSs but send order flow to NMS Stock ATSs; institutional investors that periodically transact large trades on NMS Stock ATSs; other persons that seek to effect transactions in NMS stocks on ATSs; and registered national securities exchanges that compete for order flow with NMS Stock ATSs. The baseline against which economic costs and benefits, as well as the impact of the proposed amendments on efficiency, competition, and capital formation, are measured is the current market and regulatory framework for trading NMS stocks. The baseline, discussed in further detail below, includes statistics on the number of NMS Stock ATSs; current reporting requirements for NMS Stock ATSs; the lack of public disclosure of NMS Stock ATSs’ operations, as well as disparate levels of information available to market participants about NMS Stock ATSs’ operations and the activities of their broker-dealer operators and their affiliates; and the competitive environment between registered national securities exchanges and NMS Stock ATSs, among NMS Stock ATSs, and between broker-dealers that operate NMS Stock ATSs and broker-dealers that do not operate NMS Stock ATSs. 1. Current NMS Stock ATSs mstockstill on DSK4VPTVN1PROD with PROPOSALS3 In a concept release on equity market structure in 2010, the Commission stated that in the third quarter of 2009 there were 37 dark pools and ECNs that traded NMS stocks, and that they accounted for 18.7% of total NMS share volume.681 From mid-May to midSeptember 2014, the trading volume of ATSs accounted for approximately 18% of the total dollar volume in NMS 681 The Commission used data from the third quarter of 2009. Of these 37 ATSs that traded NMS stocks, 32 were classified as dark pools and 5 were classified as ECNs. These dark pools accounted for 7.9% of total NMS share volume and the ECNs accounted for 10.8% of total NMS share volume. Of the 10.8% attributable to ECNs, 9.8% was attributable to two ECNs that were operated by Direct Edge, which subsequently registered as national securities exchanges. See 2010 Equity Market Structure Release, supra note 124, at 3598– 3599. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 stocks.682 During the second quarter in 2015, 38 ATSs traded NMS stocks 683 and these 38 ATSs accounted for approximately 59 billion shares traded in NMS stocks (approximately $2.5 trillion in dollar volume), representing approximately 15.0% of total share trading volume (15.4% of total dollar trading volume) on all registered national securities exchanges, ATSs, and non-ATS OTC trading venues in the second quarter of 2015.684 There have been several changes in the market for NMS stocks execution services that may explain the volatility in fraction of share and dollar volume executed on NMS Stock ATSs since 2009. First, two ECNs have now registered as national securities exchanges.685 Second, there has been a rise in the number of ATSs operating as dark pools. Since the third quarter of 2009, the number of ATSs operating as dark pools has increased from 32 686 to more than 40 today.687 In 2009, dark pools accounted for 7.9% of NMS share volume 688 and by the 682 See SCI Adopting Release, supra note 17, at 72266 n.148 and accompanying text and n.150. 683 See infra Table 1, ‘‘NMS Stock ATSs Ranked by Dollar Trading Volume—March 30, 2015 to June 26, 2015.’’ 684 See infra Table 1 ‘‘NMS Stock ATSs Ranked by Dollar Trading Volume—March 30, 2015 to June 26, 2015.’’ Total dollar trading volume on all exchanges and off-exchange trading in the second quarter of 2015 was approximately $16.3 trillion and approximately 397 billion shares. See id. 685 EDGA Exchange, Inc. and EDGX Exchange, Inc. (f/k/a Direct Edge ECN) previously operated as ECNs and are now registered national securities exchanges. See In the Matter of the Applications of EDGX Exchange, Inc., and EDGA Exchange, Inc. for Registration as National Securities Exchanges: Findings, Opinion, and Order of the Commission, Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (File Nos. 10–194 and 10–196). Prior to 2009, there were other ECNs that also became national securities exchanges. BATS Exchange Inc. (f/k/a BATS ECN) previously operated as an ECN and is now a registered national securities exchange. See In the Matter of the Application of BATS Exchange Inc. for Registration as National Securities Exchange: Findings, Opinion, and Order of the Commission, Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10–198). NYSE Arca, Inc., (f/k/a Archipelago) previously operated as an ECN and was acquired by the New York Stock Exchange LLC. See Order Granting Approval of Proposed Rule Change and Amendment Nos. 1, 3, and 5 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment Nos. 6 and 8 Relating to the NYSE’s Business Combination With Archipelago Holdings, Inc., Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77). Finally, The Nasdaq Stock Market LLC, prior to becoming a national securities exchange, acquired Brut ECN and INET ECN. See In the Matter of the Application of the Nasdaq Stock Market LLC for Registration as National Securities Exchange: Findings, Opinion, and Order of the Commission, Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550, n.137 (January 23, 2006) (File No. 10–131). 686 See supra note 133 and accompanying text. 687 See supra note 134 and accompanying text. 688 See supra note 135 and accompanying text. PO 00000 Frm 00113 Fmt 4701 Sfmt 4702 81109 second quarter of 2015, they accounted for 14.9% of NMS share volume.689 In summary, in recent years, the number of NMS Stock ATSs has increased, and the percentage of NMS stocks executed in dark pools has also increased. 2. Current Reporting Requirements for NMS Stock ATSs Even though ATSs directly compete for order flow in NMS stocks with national securities exchanges, ATSs are exempt from the definition of ‘‘exchange’’ and therefore are not required to register as national securities exchanges with the Commission. An ATS qualifies for an exemption from the definition of ‘‘exchange’’ provided by Exchange Act Rule 3a1–1(a)(2) on the condition that it complies with Regulation ATS, including registering as a broker-dealer, which includes joining a self-regulatory organization, such as FINRA. Thus, ATSs can collect and execute orders in securities electronically without registering as a national securities exchanges under Section 6 of the Exchange Act. A broker-dealer can become an ATS by filing an initial operation report on Form ATS at least 20 days before commencing operations. Form ATS requires, among other things, that the 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; the 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 execution; and trade reporting and clearance and settlement of trades on the ATS. Form ATS is not approved by the Commission; 690 rather, it provides the Commission with notice of an ATS’s operations prior to commencing operations.691 An ATS must notify the Commission of any changes in its operations by filing an amendment to its Form ATS initial operation report under three circumstances. First, an ATS must amend Form ATS at least 20 days prior to implementing any material change to the operation of the ATS.692 Second, if any information contained in the initial operation report becomes inaccurate and has not already been reported to the 689 See infra Table 1 ‘‘NMS Stock ATSs Ranked by Dollar Trading Volume—March 30, 2015 to June 26, 2015’’ and based on data compiled from Forms ATS submitted to the Commission as of the end of the second quarter of 2015. 690 See supra Section II.B. 691 See Instruction A.1 to Form ATS. 692 See 17 CFR 242.301(b)(2)(ii). E:\FR\FM\28DEP3.SGM 28DEP3 81110 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Commission as an amendment, the ATS must file an amendment on Form ATS within 30 calendar days after the end of each calendar quarter.693 Third, an ATS must also promptly file an amendment on Form ATS correcting information that it previously reported on Form ATS after discovery that the information was inaccurate when filed.694 Regulation ATS also requires ATSs to report certain information about transactions on the ATS and information about certain activities on Form ATS–R within 30 days after the end of each calendar quarter.695 Form ATS–R requires that ATSs report both total unit volume and dollar volume of their transactions over the quarter, as well as a list of all subscribers that were participants during the quarter and a list of all securities traded on the ATS at any time during the quarter.696 In addition to the reporting requirements of Form ATS and Form ATS–R, there are other conditions under Regulation ATS, including those that address order display and access; fees and fair access; capacity, integrity, and security of automated systems; examinations, inspections, and investigations; recordkeeping; procedures to protect subscribers’ confidential treatment of trading information; and limitations on the name of the ATS.697 All ATSs are currently members of FINRA and must therefore comply with all FINRA rules applicable to brokerdealers. FINRA rules require ATSs to report transaction volume. For instance, FINRA Rule 4552 requires each ATS to report to FINRA aggregate weekly trading volume on a security-by-security basis.698 FINRA publishes the information regarding NMS stocks in the S&P500 Index or the Russell 1000 Index and certain exchange-traded products on a two-week delayed basis, and the information on all other NMS stocks and OTC equity securities on a four-week delayed basis.699 In addition to FINRA Rule 4552, other rules pertaining to the operations of NMS Stock ATSs include FINRA Rules 6160 and 6170, which pertain to the use of a Market Participant Identifier (‘‘MPID’’) for trade reporting purposes.700 693 See 17 CFR 242.301(b)(2)(iii). 17 CFR 242.301(b)(2)(iv). 695 See 17 CFR 242.301(b)(9). 696 See Form ATS–R. 697 See supra Section II.B; see also 17 CFR 242.301(b). 698 See FINRA Rule 4552. 699 See id. 700 See FINRA Rules 6160 and 6170. 694 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 3. Lack of Public Disclosure of NMS Stock ATS Operations and the Activities of the Broker-Dealer Operator and the Broker-Dealer Operator’s Affiliates Regulation ATS states that information on Form ATS is ‘‘deemed confidential when filed.’’ 701 In the Regulation ATS Adopting Release, the Commission stated that preserving confidentiality of information on Form ATS would provide ATSs ‘‘with the necessary comfort to make full and complete filings,’’ and noted that information required on Form ATS ‘‘may be proprietary and disclosure of such information could place alternative trading systems in a disadvantageous competitive position.’’ 702 Although the Commission does not require information provided on Form ATS to be made publicly available, the Commission has observed that some NMS Stock ATSs voluntarily make publicly available their Forms ATS.703 However, even when ATSs publicly disclose their Form ATS filings, it is often not easy for market participants to systematically compare one NMS Stock ATS to another based on these disclosures because the level of detail and the format in which it is presented on these Form ATSs may vary among the NMS Stock ATSs. In addition, the Commission notes that some of these NMS Stock ATSs do not make public the full version of the Form ATS that has been filed with the Commission. Also, NMS Stock ATSs are under no legal obligation to keep current a Form ATS they have made publicly available, so market participants cannot immediately confirm whether a publicly posted Form ATS is the most recent filing of the NMS Stock ATS. Furthermore, different information is made available to different market participants regarding the operations of NMS Stock ATSs and the activities of NMS Stock ATSs’ broker-dealer operators and their affiliates. NMS Stock ATSs that either voluntarily make their Form ATS publicly available, or publish summary information of their operations, may provide to market participants more information about their operations than NMS Stock ATSs that do not make their Forms ATS or 701 See 17 CFR 242.301(b)(2)(vii). While FINRA Rule 4552 requires dissemination of aggregate weekly trading volume on the ATS by stock, this data does not reveal any information about the ATSs trading operations. Some ATSs such as IEX Trading have voluntarily made public information about order size and fill rates, as well as volume that is matched and routed, on a monthly basis. See, e.g., IEX ATS Statistics, https://www.iextrading.com/ stats/. 702 See Regulation ATS Adopting Release, supra note 7, at 70864. 703 See supra note 156. PO 00000 Frm 00114 Fmt 4701 Sfmt 4702 information about their operations publicly available. Furthermore, subscribers to an NMS Stock ATS may have greater access to information about the NMS Stock ATS than other market participants, including the NMS Stock ATS’s subscriber manual and access to other subscriber quotes. NMS Stock ATSs also disclose some execution quality metrics. Exchange Act Rule 605(a) requires every market center, including ATSs, to make publicly available for each calendar month a report containing standardized data on the covered orders in NMS stocks that it receives for execution from any market participant.704 Data on execution quality required under Exchange Act Rule 605(a) includes order sizes, execution sizes, effective spreads, price improvement, and quarterly volume of shares traded. As such, market participants have access to actual market quality statistics of execution quality on NMS Stock ATSs. The Commission recognizes that some NMS Stock ATSs may publish or otherwise disclose to subscribers market quality statistics that may be useful to those subscribers in addition to what is currently required by Exchange Act Rule 605. However, the Commission does not believe that such market quality statistics are standardized in terms of how they are calculated, and it does not know how much information subscribers that receive these market quality statistics have about how the NMS Stock ATS calculates the statistics. The Commission preliminarily believes that some subscribers may have access to more information about a given NMS Stock ATS than other ATSs, and also may have more information about that NMS Stock ATS than non-subscribers. The differences in information that certain subscribers have about an NMS Stock ATS’s operations may be manifested through channels other than having differential access to Form ATS, an NMS Stock ATS’s subscriber manual, or being granted access to certain market quality statistics as provided by an NMS Stock ATS in addition to what is 704 A covered order shall mean any market order or any limit order (including immediate-or-cancel orders) received by a market center during regular trading hours at a time when a consolidated best bid and offer is being disseminated, and, if executed, is executed during regular trading hours, but shall exclude any order for which the customer requests special handling for execution, including, but not limited to, orders to be executed at a market opening price or a market closing price, orders submitted with stop prices, orders to be executed only at their full size, orders to be executed on a particular type of tick or bid, orders submitted on a ‘‘not held’’ basis, orders for other than regular settlement, and orders to be executed at prices unrelated to the market price of the security at the time of execution. See Rule 605(a)(8). E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules currently publicly disclosed under Exchange Act Rule 605. To the extent that the NMS Stock ATS provides access to services to certain subscribers and not others, the subscribers with greater access to the services of an NMS Stock ATS could be in a position to obtain more knowledge and information about the operations of NMS Stock ATSs than those subscribers who have limited access to the services of the NMS Stock ATS. Therefore, subscribers who have greater access to services offered by the NMS Stock ATS may be able to make more informed choices about their trading decisions relative to subscribers who have limited access to the services of the NMS Stock ATS. For instance, a broker-dealer operator may offer products or services in connection with a subscriber’s use of the NMS Stock ATS, and, as a result, these subscribers may receive more favorable terms from the broker-dealer operator with respect to their use of the NMS Stock ATS. Such favorable terms could include preferential routing arrangements, access to certain order types, or access to a faster connection line to the ATS via a co-location service, as opposed to through the broker-dealer operator’s SOR (or similar functionality) or algorithm. Granting access to these favorable terms can result in these subscribers having more detailed information about how their orders will interact, match, and execute relative to those of other subscribers. With this detailed information, these subscribers can make more nuanced decisions about which trading venue suits their trading purposes relative to other subscribers who do not have access to these services, and thus do not possess an informational advantage. Even if having greater access to the services of an NMS Stock ATS yields additional information about the operations of the NMS Stock ATS to certain subscribers, it is possible that subscribers that do not have full access to services of the NMS Stock ATS, and the resulting additional information, may still want to trade on NMS Stock ATSs in spite of their relative informational disadvantage. It is possible that had these subscribers possessed more detailed information about the operations of the NMS Stock ATS, they may have been able to make more informed—and therefore potentially different—decisions about where to route their orders for execution. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 4. NMS Stock ATS Treatment of Subscriber Confidential Trading Information Under current Rule 301(b)(10) of Regulation ATS,705 all ATSs must establish adequate safeguards and procedures to protect subscribers’ confidential trading information, and, to ensure that those safeguards and procedures are followed, the ATS must also establish adequate oversight procedures.706 Furthermore, all ATSs are required to preserve certain records pursuant to Rule 303(a)(1).707 However, neither Rule 301(b)(10) nor Rule 303(a)(1) of Regulation ATS currently require that an ATS have in writing and preserve their safeguards and procedures to protect subscribers’ confidential trading information, or their related oversight procedures. Based on the experience of the Commission and its staff from periodic examinations or investigations of ATSs, the Commission preliminarily believes that ATSs—in particular, ATSs whose broker-dealer operators are large, multiservice broker-dealers—currently have and maintain in writing their safeguards and procedures to protect subscribers’ confidential trading information, as well as the oversight procedures to ensure such safeguards and procedures are followed. Nevertheless, under the current regulatory environment for ATSs, absent specific questions in an examination by the Commission or its staff, the Commission is not able to determine the specific ATSs that currently have written safeguards and written procedures to protect subscribers’ confidential trading information based on the disclosure requirements of current Form ATS. 5. Current State of Competition Between NMS Stock ATSs and Registered National Securities Exchanges In the market for NMS stock execution services, NMS Stock ATSs not only compete with other NMS Stock ATSs, but they also compete with registered national securities exchanges. As noted previously, while registered national securities exchanges compete with NMS Stock ATSs for order flow, NMS Stock ATSs and registered national securities exchanges are subject to different regulatory regimes, including different obligations to disclose information about their trading operations and activities.708 For example, ATSs that operate pursuant to the exemption from the definition of ‘‘exchange’’ under Rule 3a1–1(a)(2) must register as broker-dealers,709 and provide notice of their operations on Form ATS.710 This notice of operations is not approved or disapproved by the Commission. Form ATS requires ATSs to disclose only limited aspects of their operations, and ATSs are not required to publicly disclose Form ATS, which is ‘‘deemed confidential when filed.’’ 711 In addition, ATSs need not publicly disclose changes to their operations and trading functionality because amendments to Form ATS are not publicly disclosed.712 Some market participants therefore have limited access to information about NMS Stock ATSs, including information related to the types of subscribers, means of access, order types, market data, and procedures governing the interaction and execution of orders on the NMS Stock ATS. On the other hand, national securities exchanges, with which NMS Stock ATSs compete for order flow, must register with the Commission on Form 1, must file proposed rule changes with the Commission under Section 19(b) of the Exchange Act, and are SROs. The proposed rule changes of national securities exchanges must be made available for public comment,713 and in general, these proposed rule changes publicly disclose, among other things, details relating to the exchange’s operations, procedures, and fees. National securities exchanges and other SROs also have regulatory obligations, such as enforcing their rules and the federal securities laws with respect to their members, which do not apply to market participants such as ATSs.714 While national securities exchanges have more regulatory burdens than NMS Stock ATSs, they also enjoy certain unique benefits that are not afforded to NMS Stock ATSs. While national securities exchanges are SROs, and are thus subject to surveillance and oversight by the Commission, they can still establish norms regarding conduct, trading, and fee structures for external access. ATSs on the other hand are regulated as broker-dealers, and must comply with the rules of FINRA, which is the SRO to which all ATSs currently belong. Trading venues that elect to register as national securities exchanges may gain added prestige by establishing 709 See 17 CFR 242.301(b)(1). 17 CFR 242.301(b)(2). 711 See 17 CFR 242.301(b)(2)(vii). 712 Id. 713 See 15 U.S.C. 78s(b)(1). 714 See, e.g., Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b)(1), and Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b). 710 See 705 17 CFR 242.301(b)(10). CFR 242.301(b)(10). 707 See supra Section X. 708 See supra Section I (discussing the different mix of obligations and benefits applicable to ATSs and registered national securities exchanges). 706 17 PO 00000 Frm 00115 Fmt 4701 Sfmt 4702 81111 E:\FR\FM\28DEP3.SGM 28DEP3 81112 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules listing standards for their securities. Additionally, national securities exchanges can be direct participants in the NMS plans, such as the ITS, the CTA Plan, Consolidated Quotation System, and the OTC/UTP Plan. Direct participation in these systems may provide a higher degree of transparency and execution opportunity than on NMS Stock ATSs. Furthermore, national securities exchanges are entitled to share in market data revenue generated by the CTA 715 and enjoy limited immunity from private liability with respect to their regulatory functions. Since the adoption of Regulation NMS in 2005, the market for NMS stock execution services has become more and more fragmented and competitive. Currently there are 11 registered national securities exchanges that effect transactions in NMS stocks, namely, NYSE MKT LLC (formerly NYSE AMEX and the American Stock Exchange), BATS Exchange, Inc. (‘‘BATS–Z Exchange’’), BATS Y- Exchange, Inc. (‘‘BATS–Y Exchange’’) (‘‘BATS–Z Exchange and BATS–Y Exchange, collectively ‘‘the BATS Exchanges’’), NASDAQ OMX BX, Inc. (formerly the Boston Stock Exchange), Chicago Stock Exchange, Inc., EDGA Exchange, Inc. (‘‘EDGA’’), EDGX Exchange, Inc. (‘‘EDGX’’), The Nasdaq Stock Market LLC (‘‘Nasdaq’’), New York Stock Exchange LLC (‘‘NYSE’’), NYSE Arca, Inc. (‘‘NYSE Arca’’), and NASDAQ OMX PHLX, Inc. (formerly Philadelphia Stock Exchange).716 Several of these national securities exchanges (NYSE Arca, Nasdaq, BATS Z-Exchange, EDGA and EDGX) previously operated as ECNs or acquired ECNs as part of their trading mstockstill on DSK4VPTVN1PROD with PROPOSALS3 715 See Regulation ATS Adopting Release, supra note 7, at 70880, 70902–70903 (discussing generally some of the obligations and benefits of registering as a national securities exchange). 716 As noted above, National Stock Exchange, Inc. ceased trading on its system as of the close of business on May 30, 2014. See supra note 118. VerDate Sep<11>2014 15:37 Dec 24, 2015 Jkt 238001 platforms.717 A reason why an ECN might want to register as a national securities exchange is so that it can participate in and earn market data fees from U.S. tape plans, reduce clearing costs and operate a primary listings business.718 Over the past decade, with the increase in fragmentation in the market for execution services, there has been a shift in the market share of trading volume in NMS stocks across trading venues. For example, there has been a decline in market share of trading volume for exchange-listed stocks of the two traditionally dominant trading venues, NYSE and Nasdaq. The market share of the NYSE in NYSE-listed stocks fell dramatically from approximately 80% in 2005 to 20% in 2013, and for Nasdaq-listed stocks, Nasdaq’s market share fell by approximately half, from 50% in 2005 to 25% in 2013.719 Over the same time period, there has been an increase in market share on other newer national securities exchanges such as NYSE Arca, BATS–Z, BATS–Y, EDGA and EDGX, and an increase in the market share of off-exchange trading, which includes both internalization by dealers and trading on NMS Stock ATSs.720 As discussed above, there has also been an increase in the number of NMS Stock ATSs that operate as dark pools, and the market share for these NMS Stock ATSs has increased.721 Thus, greater fragmentation in the market for NMS stock execution services over the past decade has 717 See supra note 685 and accompanying text. BATS Global Markets, Inc., Amendment to Form S–1 Registration Statement, https:// www.sec.gov/Archives/edgar/data/1519917/ 000119312512125661/d179347ds1a.htm. 719 See Angel, James, Lawrence Harris, and Chester Spatt (2013), ‘‘Equity Trading in the 21st Century: An Update,’’ working paper, https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=1584026. 720 See id. 721 See supra Section XIII.B.1. 718 See PO 00000 Frm 00116 Fmt 4701 Sfmt 4702 resulted in trading volume being executed on different venues, some of which include NMS Stock ATSs, particularly NMS Stock ATSs that operate as dark pools. As discussed above, NMS Stock ATSs face lower regulatory burdens than national securities exchanges. Because national securities exchanges are SROs, they are subject to certain regulatory obligations, such as enforcing their own rules and the federal securities laws with respect to their members. NMS Stock ATSs do not have such oversight and enforcement responsibilities.722 The Commission recognizes that the growth in the number of NMS Stock ATSs could be driven by these less stringent regulatory obligations. 6. Competition Among NMS Stock ATSs NMS Stock ATSs also compete amongst each other in a niche in the market for NMS stock execution services. The rise in the number of NMS Stock ATSs has not only affected competition between national securities exchanges and ATSs for order flow of NMS stocks, it has also impacted competition among NMS Stock ATSs. Table 1 depicts the market share of total dollar volume for NMS stocks, and the total share volume for NMS stocks for individual ATSs, based on data collected from ATSs pursuant to FINRA Rule 4552 for 13 weeks of trading from late March 2015 to late June 2015. Even though there are many NMS Stock ATSs, much of the NMS stock dollar volume on ATSs is transacted by only a handful of venues. Table 1 shows that the top eight NMS Stock ATSs ranked by dollar volume accounted for 61.1% of total dollar volume transacted on ATSs and 58.9% of total share volume transacted on ATSs from late March 2015 to late June 2015. BILLING CODE 8011–01–P 722 See E:\FR\FM\28DEP3.SGM supra note 714. 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules (March 30, 2015 to June 26, 2015) This table shows the 38 ATSs that effected transactions in NMS stocks from March 30, 2015 to June 26, 2015, ranked in descending order by dollar volume transacted. ATS data is reported weekly, and these dates approximately correspond to the second quarter of 2015. Dollar volume transacted on an ATS is calculated by multiplying the share volume for a given NMS stock on the ATS in a given week by the average VerDate Sep<11>2014 15:37 Dec 24, 2015 Jkt 238001 trade price for that week. Dollar volume for each NMS stock is then aggregated across all NMS stocks that traded on the given ATS in that week. Also reported in this table is the number of trades, share volume, each NMS Stock ATS’s market share of all NMS Stock ATS dollar volume and NMS Stock ATS share volume in that quarter. Table 2, which is based on data collected from NMS Stock ATSs pursuant to FINRA Rule 4552 for 13 weeks of trading from late March 2015 to late June 2015, shows the average PO 00000 Frm 00117 Fmt 4701 Sfmt 4702 trade size, which is share volume divided by the number of trades on each of the NMS Stock ATSs. The table reveals marked differences in the average trade size of transactions executed on the various NMS Stock ATSs. Six NMS Stock ATSs had average trade sizes in excess of 10,000 shares. This suggests that some NMS Stock ATSs may receive large block orders and execute large trades.723 One of the 723 For purposes of this analysis we considered block orders as orders of more than 10,000 shares, E:\FR\FM\28DEP3.SGM Continued 28DEP3 EP28DE15.000</MATH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Table 1—NMS Stock ATSs Ranked by Dollar Trading Volume 81113 81114 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules vast majority of NMS Stock ATSs have average trade sizes between 150 and 450 shares. The two NMS Stock ATSs with the highest market shares (measured either in dollar volume or share volume) have average trade sizes of 181 and 157 shares, respectively. Though NMS Stock ATSs compete with each other in a niche in the market for NMS stock execution services, the trade sizes in Table 2 actually suggest that this niche market may not be very different from the market as a whole. The average trade size on NMS Stock ATSs is 214 shares, which is not significantly different from the average trade size of 181 shares on registered national securities exchanges.725 Thus, on average, the trade size for executions on NMS Stock ATSs and national securities exchanges appears similar. which is the traditional definition for block orders. See supra note 126. 724 See supra notes 124–125 and accompanying text. 725 These results are consistent with prior findings that average trade sizes on ‘‘lit’’ national securities exchanges are similar to those taking place on ‘‘dark ATSs.’’ See Tuttle: ATS Trading in NMS Stocks, supra note 126. Unlike ‘‘lit’’ national securities exchanges, dark ATSs do not publicly disseminate top of the limit-order book information. See id. See also supra note 123 and accompanying text. VerDate Sep<11>2014 15:37 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00118 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.001</MATH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 advantages for market participants of trading on block crossing networks is the ability to execute large block orders while minimizing the movement of prices against their trading interest.724 While these NMS Stock ATSs on average execute large size trades, the combined market share of these NMS Stock ATSs is only 7.8% when measured in dollar volume, and 3.7% when measured in share volume. The Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Table 2: NMS Stock ATSs Ranked by Average Trade Size (March 30, 2015 to June 26, 2015) This table shows 38 ATSs that effected transactions in NMS stocks from March 30, 2015 to June 26, 2015, ranked in descending order by average trade size. ATS data is reported weekly, and these dates correspond approximately to the second quarter of 2015. Also reported in this table is the raw number of trades, share volume, dollar volume, and each NMS Stock ATS’s market share of all NMS Stock ATS dollar volume and NMS Stock ATS share volume. Dollar volume transacted on an ATS is calculated by multiplying the share volume for a given NMS stock on the ATS in a given week by the average trade price for that week. Dollar volume for each NMS stock is then aggregated across all NMS stocks that traded on the given ATS in that week. While many NMS Stock ATSs operating today are similar with respect to the limited transparency they provide with respect to their trading model, the Commission understands that the services offered vary significantly across NMS Stock ATSs. Some NMS Stock ATSs offer mid-point matching services exclusively while others may have more complex matching algorithms. Some other NMS Stock ATSs offer preferential treatment in execution priority to some groups of subscribers, but not others, and some NMS Stock ATSs may allow subscribers to avoid trading with specific counterparties. Additionally, order types and their characteristics can also vary significantly across NMS Stock ATSs, including with respect to how particular order types interact with other order types, which could affect execution priorities. Even though an NMS Stock ATS might not be privy to detailed information about the operations of other NMS Stock ATSs, it may be able to garner general information about the differential services offered by its competitors through Web sites and forums,726 enabling it to modify its products and services to better compete within the market for NMS stock execution services. Thus, while an NMS Stock ATS may currently make available certain information about its products and services in an attempt to enable market participants to differentiate the 726 Furthermore, a broker-dealer that operates an ATS may also be a subscriber to one or more ATSs that are owned or operated by other broker-dealers, and in this capacity, may obtain information about how such unaffiliated ATS(s) operate. For example, the broker-dealer operator of an ATS that is a subscriber to an unaffiliated ATS may obtain information about order types and priority rules of the unaffiliated ATS. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 ATS’s products and services from those of its competitors, an NMS Stock ATS may not be incented to fully reveal how orders interact, match and execute on its platform, because revealing such information may adversely impact the ATS’s position within the market by also informing its competitors. 7. Competition Between Broker-Dealers That Operate NMS Stock ATSs and Broker-Dealers That Do Not Operate NMS Stock ATSs Competition for NMS stock order flow not only exists between national securities exchanges and NMS Stock ATSs and among NMS Stock ATSs, but also exists between the broker-dealers that operate NMS Stock ATSs and those broker-dealer operators that do not operate NMS Stock ATSs. As discussed above, most ATSs that currently transact in NMS stocks are operated by multiservice broker-dealers that engage in significant brokerage and dealing activities in addition to their ATS operations.727 These multi-service broker-dealers operate one or more NMS Stock ATS as a complement to the broker-dealer’s other service lines, often using the ATS(s) as an opportunity to execute customer orders ‘‘in house’’ before seeking contra-side interest at outside execution venues. They may also execute orders in NMS stocks internally on non-ATS trading centers by trading as principal against such orders, or crossing orders as agent in a riskless principal capacity, before routing the orders to an ATS that they operate. The current competitive environment in which NMS Stock ATSs operate suggests that broker-dealers who operate their own NMS Stock ATS(s) may have certain trading advantages relative to broker-dealers that do not operate their own NMS Stock ATS. Broker-dealer owned NMS Stock ATSs may provide their business units or affiliates, that are also subscribers to the NMS Stock ATS, access to certain services, which may result in trading advantages, such as providing faster access to the ATS or priority in executions over other subscribers, such as broker-dealers that do not have their own ATS platform and may route their orders to these ATSs. 8. Effect of NMS Stock ATSs on the Current Market for NMS Stock Execution Services As discussed above, the current market for NMS stock execution services consists of competition for order flow among national securities exchanges, NMS Stock ATSs, and 727 See PO 00000 supra Section III.B. Frm 00119 Fmt 4701 Sfmt 4702 81115 broker-dealers who operate or control non-ATS trading centers.728 This section specifically discusses the impact that this current market for NMS stock execution services has on trading costs to market participants; the process by which the price of NMS stocks are determined in the market (‘‘price discovery’’); and market efficiency. a. Trading Costs Since the adoption of Regulation ATS in 1998 and the implementation of Regulation NMS in 2005, trading costs have, on average, declined significantly in the U.S. Institutional trading costs— particularly for large capitalization stocks—are amongst the lowest in the world.729 Since 1998, share and dollar trading volume, has generally increased, and with the exception of the financial crisis, bid-ask spreads (both quoted and effective spreads) have narrowed significantly.730 Some research has suggested that these lower trading costs can, in part, be driven by the rising fragmentation of trading volume and competition for order flow, through the proliferation of new trading venues such as NMS Stock ATSs.731 NMS Stock ATSs provide an environment whereby certain market participants can trade at low costs relative to national securities exchanges. For instance, if market participants submit to a national securities exchange a block order or a large ‘‘parent’’ order shredded into smaller ‘‘child’’ orders, they may experience ‘‘price impact’’ when others observe their trading and infer the presence of a large order. That is, the price at which these child orders execute may get subsequently worse from the time of the initial order submission to the time of the final execution of the order. Thus, when working these child orders, the order originator may seek to keep their executions ‘‘quiet’’ to minimize adverse price moves that may otherwise occur as other market participants infer that order originator is an institutional 728 See supra Section XIII.A. See also supra note 123 (describing dark pools that are not ATSs) and note 387 (describing non-ATS trading centers). 729 See ‘‘View Point: US Equity Market Structure: An Investor Perspective,’’ BlackRock, April 2014, https://www.blackrock.com/corporate/en-us/ literature/whitepaper/viewpoint-us-equity-marketstructure-april-2014.pdf; and Angel, supra note 719. 730 See BlackRock, supra note 729; and Angel, supra note 719. 731 See Foucault, Thierry and A.J. Menkveld, 2008, ‘‘Competition for Order Flow and Smart Order Routing Systems,’’ Journal of Finance 63, 19– 58; O’Hara, M. and M. Ye, 2011, ‘‘Is Market Fragmentation Harming Market Quality?’’ Journal of Financial Economics 100, 459–74; and Colliard, J.E. and Thierry Foucault (2012), ‘‘Trading Fees and Efficiency in Limit Order Markets,’’ Review of Financial Studies 25, 3389–421. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81116 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules investor that is a large buyer or seller. As such, trading on NMS Stock ATSs may provide a useful tool whereby institutional investors may be able to reduce the extent to which their own trading signals additional trading intentions and obtain enhanced execution quality for their orders. The current market for NMS stock execution services—which includes NMS Stock ATSs—provides value to market participants. If all NMS Stock ATSs were to cease operations, market participants may incur costs associated with not being able to find an adequate trading venue that offers benefits similar to those that NMS Stock ATSs provide. For example, certain market participants may be unable to find a trading center that adequately minimizes the revelation of their trading interest. Therefore, some of the trades by these market participants, which would have been executed on NMS Stock ATSs, may no longer be executed at all if NMS Stock ATSs cease operations. Even though NMS Stock ATSs provide value to some market participants by allowing them to trade on a venue that mitigates the signaling of information regarding their trading interest while keeping their trading costs at a low level, NMS Stock ATSs are characterized by a lack of transparency regarding their operations and the activities of their broker-dealer operators and the broker-dealer operator’s affiliates. Currently, disclosures on Form ATS are not required to be made public, and even when an NMS Stock ATS voluntarily discloses its Form ATS, the information provided tends to be limited. The Commission has also observed that NMS Stock ATSs vary with respect to the depth and extent of their disclosures on Form ATS, including basic aspects of their operations. This heterogeneity in terms of the level of disclosure pertaining to NMS Stock ATS operations has resulted in certain costs for market participants, in that currently a market participant has to expend some effort searching for a trading venue that would serve its investing or trading objectives. A by-product of these search costs for some market participants is uncertainty pertaining to how their orders will be handled. Because there is no current requirement for NMS Stock ATSs to disclose information about their operations to the public, some subscribers to NMS Stock ATSs— particularly subscribers to those NMS Stock ATSs that have not made their Form ATS public—may not fully know how their orders are handled. Furthermore, for a specific NMS Stock ATS, some subscribers may have been VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 provided more information regarding how their orders will interact, match, and execute on the NMS Stock ATS, exacerbating this uncertainty. b. Price Discovery The current market for NMS stock execution services has resulted in the fragmentation of trading volume. While this fragmentation—which has in part been due to the rise in NMS Stock ATSs—has been a factor in currently providing low trading costs for market participants,732 the contributions that this current market for NMS stock execution services provides in terms of price discovery has been mixed. Some academic studies imply that while national securities exchanges and NMS Stock ATSs are regulated differently, their coexistence in the current market has had a positive contribution to price discovery, as it has led to more aggressive competition among market participants in providing liquidity, which in turn has improved price discovery.733 Other academic studies have suggested that because some NMS Stock ATSs are crossing networks and often derive their prices from national securities exchanges, price impact costs that result from trading on a national securities exchange harm prices on NMS Stock ATSs, resulting in less trading and harming price discovery.734 Some academic studies have also suggested that the coexistence of national securities exchanges and NMS Stock ATSs has led to market segmentation, i.e. to the extent that certain subscribers of NMS Stock ATSs have information regarding how orders will interact, match, and execute on an NMS Stock ATS, these subscribers may be able to make more informed decisions about where to route their orders, and, therefore, such subscribers may congregate and trade on either NMS Stock ATSs or national securities exchanges based on that information. These academic studies further suggest that this market segmentation, whereby certain subscribers of NMS Stock ATSs have information regarding how orders will interact, match and execute and, therefore, trade on NMS Stock ATSs or national securities exchanges, can improve price discovery.735 732 See supra note 731. Boulatov, Alex, and T.J. George, 2013, ‘‘Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers,’’ Review of Financial Studies 26, 2095–2137. 734 See Ye, Mao, 2011, ‘‘A Glimpse into the Dark: Price Formation, Transaction Cost and Market Share of the Crossing Network,’’ working paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=1521494. 735 See Zhu, Haoxiang, 2014, ‘‘Do Dark Pools Harm Price Discovery?’’ Review of Financial 733 See PO 00000 Frm 00120 Fmt 4701 Sfmt 4702 The theory that market segmentation of market participants leads to price discovery relies on the assumption that because trade executions on some NMS Stock ATSs are determined by matching orders, orders of informed market participants are more likely to cluster on one side of the market (either the buyside or the sell-side).736 For instance, if informed market participants believe that a security is undervalued, they will be more likely to submit a buy-order; and vice-versa if they believe a security is overvalued. This means that if these informed market participants trade on an NMS Stock ATS, their trading interest will likely cluster towards one side of the market and there will not be enough orders to take the opposite side of their trades. As a result, some orders will not be matched and there would be low rates of execution on NMS Stock ATSs. In contrast, orders by uninformed market participants are less likely to be correlated with one another because the reasons for their trading are somewhat idiosyncratic to the market participant.737 These orders by uninformed market participants are, therefore, less likely to cluster on one side of the market, because trades by uninformed market participants are not grounded on fundamental information about the stock. As such, the orders from uniformed market participants will likely have higher rates of execution on NMS Stock ATSs relative to rates of executions for informed participants.738 Accordingly, this academic literature predicts that the set of market participants entering orders on national securities exchanges will contain a proportionately higher level of informed market participants.739 This segmentation of market participants on NMS Stock ATSs and national securities exchanges potentially could result in informed market participants trading on national securities exchanges, and uninformed market participants trading on NMS Stock ATSs.740 Because Studies 27, 747–789. This academic study specifically examines dark pools. 736 See id. 737 Uninformed market participants trade for noninformational reasons. In some cases, they are termed ‘‘noise traders,’’ since their trades are based on their beliefs and sentiments, and are not grounded on fundamental information. See Vishwanath, Ramanna. and Chandrasekhar Krishnamurti, 2009, ‘‘Investment Management: A Modern Guide to Security Analysis and Stock Selection,’’ Springer Publishing. 738 See supra note 735. 739 See id. 740 It should be noted that this academic literature posits one theory regarding how the coexistence of national securities exchanges and NMS Stock ATSs results in segmented trading of informed and uninformed market participants. See supra note 735. Contrary to this theory regarding how market E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 informed market participants have better knowledge about the value of a security than uninformed market participants, this segmentation can improve price discovery on national securities exchanges.741 Several academic studies suggest that the presence of NMS Stock ATSs in the current trading environment deteriorates price discovery 742 and liquidity.743 When trading, informed market participants often balance two types of costs, namely price impact costs and execution costs. On a national securities exchange, an informed market participant’s order experiences lower execution risk, but because of price impact, each order is subsequently executed at a worse price.744 On an NMS Stock ATS, price impact costs are smaller due to there being less informational dissemination than on national securities exchanges, however, the probability of execution decreases as order size increases, due to the increased difficulty in finding a counterparty to take the opposite side of a large trade.745 Because trading on a national securities exchange generates price impact, the cost associated with this price impact also could affect a market participant’s profit on trades executed on an NMS Stock ATS. The reason for this is that NMS Stock ATSs often match orders at prices derived from national securities exchanges, and if trading on these national securities exchanges generates worse prices due to price impact, this could therefore spill over and affect a market participant’s profit on trades executed on the NMS segmentation of national securities exchanges and NMS Stock ATSs can affect price discovery, a motivation for informed market participants to trade on NMS Stock ATSs is to minimize the price impact of large trades. Thus, it could be the case that the decision by informed market participants of where to trade is reduced to whether the value of minimizing the price impact of their trades outweighs the heightened execution risk (due to the difficulty in finding a counterparty to take the opposite side of the trade, perhaps because a market participant places a large order) they might incur if they trade on NMS Stock ATSs See supra note 734. 741 See Zhu, supra note 736; Comerton-Forde, Carole and T.J. Putnins, 2015, ‘‘Dark Trading and Price Discovery,’’ working paper, https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=2183392. Both these studies specifically examine dark pools. 742 See Ye, Mao, 2011, ‘‘A Glimpse into the Dark: Price Formation, Transaction Cost and Market Share of the Crossing Network,’’ working paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=1521494; Degryse, Hans, Frank de Jong and Vincent van Kervel, 2015, ‘‘The Impact of Dark Trading and Visible Fragmentation on Market Quality,’’ Review of Finance 19, 1587–1622. Both these studies specifically examine dark pools. 743 See Zhu, supra note 736. 744 See Ye, supra note 742. 745 See Ye, supra note 742. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Stock ATS. This spillover could result in informed market participants trading less aggressively, which could in turn reduce price discovery.746 Finally, while low levels of trading on NMS Stock ATSs are not harmful, price discovery is harmed for high levels of trading on NMS Stock ATSs (i.e., when trading on NMS Stock ATSs in a given NMS stock exceeds approximately 10% of dollar volume).747 This implies that when most orders are filled on NMS Stock ATSs, market participants may withdraw displayed quotes because of the reduced likelihood of those orders being filled.748 Another element that may affect market quality is order internalization by broker-dealers. Academic literature has previously proposed theoretical models where broker-dealer operators have an incentive to internalize uninformed orders, by trading as principal against such orders or crossing orders as agent in a riskless principal capacity, before routing the orders to their respective ATSs.749 The literature has also argued that internalization of order flow reduces market depth and price informativeness.750 According to this literature, the internalization of order flow by broker-dealers, some of whom operate NMS Stock ATSs, is associated with wider spreads (quoted, effective, and realized), higher price impact per trade, and increased volatility of trades on the registered national securities exchanges, which translates into an increased cost for market participants, where market participants pay approximately $3.9 million more per security per year.751 In 746 See Ye, supra note 742 (for theoretical work on this topic). See also Comerton-Forde and Putnins, supra note 741, for empirical work on this topic. Specifically, using Australian data, the latter paper finds that the migration of order flow into dark pools removes valuable information from the price formation process, and leads to increased adverse selection, larger bid-ask spreads (lower liquidity) and larger price impacts on the exchange (lower market quality). Both of these studies specifically examine dark pools. 747 See also Comerton-Forde and Putnins, supra note 741. 748 See CFA Institute, 2012, ‘‘Dark Pools, Internalization, and Equity Market Quality,’’ https://www.cfapubs.org/doi/pdf/10.2469/ ccb.v2012.n5.1. This study specifically examines dark pools. 749 See Chordia, Tarun and Avanidhar Subrahmanyam, 1995, ‘‘Market making, the tick size, and payment-for-order flow: Theory and evidence,’’ Journal of Business 68, 543–75; Easley, Kiefer and O’Hara, 1996, ‘‘Cream-skimming or profit-sharing? The curious role of purchased order flow,’’ Journal of Finance 51, 811–33. 750 See Chakravarty, Sugato and Asani Sarkar, 2002, ‘‘A model of broker’s trading, with applications to order flow internalization,’’ Review of Financial Economics 11, 19–36. 751 See Weaver, Daniel G., 2014, ‘‘The Trade-At Rule, Internalization, and Market Quality,’’ working PO 00000 Frm 00121 Fmt 4701 Sfmt 4702 81117 the current operational environment of NMS Stock ATSs, based on the Commission’s experience, subscribers’ orders or other trading interest could be removed from the broker-dealer’s NMS Stock ATS and routed to, among other destinations, another trading center operated by the broker-dealer operator for internalization. Thus, the fact that some broker-dealers operate their own NMS Stock ATS, and yet internalize some order flow rather than executing it on their own NMS Stock ATS, may have a deleterious effect on market quality. c. Market Efficiency Currently, the coexistence of national securities exchanges and NMS Stock ATSs seems to have beneficial effects on market efficiency. One academic study suggests that while not all trades that execute on NMS Stock ATSs are large block trades, those that are have been seen to be beneficial to market efficiency.752 If NMS Stock ATSs were not a viable trading venue for market participants, market participants might not execute large orders at all because of the price impact costs of executing on a national securities exchange. Therefore, the ability for market participants to execute large trades on NMS Stock ATSs generates liquidity. The same study also suggests that small trades that execute on NMS Stock ATSs are beneficial in that they also generate market efficiency.753 C. Economic Effects and Effects on Efficiency, Competition, and Capital Formation The Commission has considered the economic effects of the proposed amendments to Rule 3a1–1(a) and Regulation ATS. This section provides an overview of the broad economic considerations relevant to the proposed amendments to Rule 3a1–1(a) and Regulation ATS, and the economic effects, including the costs, benefits, and the effects on efficiency, competition, and capital formation. Additional economic effects, including benefits and costs related to specific requirements of the proposed amendments to Rule 3a1– 1(a) and Regulation ATS, are also discussed. The proposed amendments to Rule 3a1–1(a) and Regulation ATS 754 are designed to generate greater transparency about the operations of NMS Stock ATSs and the activities of their broker-dealer operators and their paper, https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1846470. 752 See Comerton-Forde and Putnins, supra note 741. 753 See id. 754 See supra Section IV. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81118 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules affiliates. By requiring NMS Stock ATSs to provide detailed, public disclosures about their operations and the activities of their broker-dealer operators and their broker-dealer operators’ affiliates, the Commission preliminarily believes that the proposal would reduce the discrepancy in information that different market participants receive about NMS Stock ATS operations and provide market participants— particularly those that have access to less information about NMS Stock ATS operations—with more information about the means by which orders and trading interest interact, match, and execute on NMS Stock ATSs. The Commission preliminarily believes that the proposal would help market participants make better-informed decisions about where to route their orders in order to achieve their trading or investment objectives, improve the efficiency of capital allocation, and enhance execution quality. The Commission further understands that the proposed amendments to Regulation ATS may generate some uncertainty for NMS Stock ATSs in that, under the proposal, the Commission would declare a Form ATS–N effective or ineffective (which is not currently the case with respect to Form ATS), and this may act as a potential deterrent for ATSs wishing to transact NMS stocks, or legacy NMS Stock ATSs that would be required to file Form ATS–N. Moreover, the proposed amendments to Rule 3a1–1(a) and Regulation ATS could be costly, because NMS Stock ATSs would have to disclose detailed information about their operations and the activities of their broker-dealer operators and their affiliates. Together, these could harm the competitive dynamics in the market for NMS stock execution services, which includes competition between national securities exchanges and NMS Stock ATSs, among NMS Stock ATSs themselves, and between broker-dealers that operate NMS Stock ATSs and those that do not.755 Increased costs associated with disclosure requirements for NMS Stock ATSs could result in some NMS Stock ATSs exiting the market or could create a disincentive for potential NMS Stock ATSs to enter the market. However, in spite of these costs, and as discussed in more detail below, the Commission preliminarily believes that the NMS Stock ATSs that remain in the market may propagate greater interaction between buyers and sellers who trade on these venues, fostering not only trading between one and another, but also facilitating the price discovery process and capital formation. The consistent set of information that is proposed to be disclosed in Form ATS– N may impact how market participants react in terms of their trading, which may improve market efficiency.756 Moreover, the Commission notes that increased transparency regarding the operations of NMS Stock ATSs may impact competition between brokerdealers that operate NMS Stock ATSs and broker-dealers who trade NMS stocks but do not operate an NMS Stock ATS. Because broker-dealers who transact in NMS stocks but do not operate ATSs are not subject to the proposed operational transparency requirements, these broker-dealers may be at a competitive advantage and attract and internalize order flow that would otherwise be entered and executed on NMS Stock ATSs. Furthermore, greater operational transparency of NMS Stock ATSs could also impact competition between NMS Stock ATSs and national securities exchanges, resulting in a larger amount of order flow being executed on national securities exchanges. Further, the Commission preliminarily believes that the proposed amendments to Rule 301(b)(10) and 303(a)(1) that would require ATSs to establish and preserve written safeguards and written procedures to protect subscribers’ confidential trading information, as well as the oversight procedures to ensure such safeguards and procedures are followed should strengthen the effectiveness of those safeguards and procedures and better enable an NMS Stock ATS to protect confidential subscriber trading information and implement and monitor the adequacy of, and the ATS’s compliance with, its safeguards and procedures.757 The Commission also preliminarily believes that requiring ATSs to adopt written safeguards and written procedures will benefit the Commission by helping it better understand, monitor, and evaluate how each ATS protects subscribers’ confidential trading information from unauthorized disclosure and access.758 The Commission also expects that this proposed requirement will help oversight by the SRO of which the NMS Stock ATS’s broker-dealer operator is a member. The Commission has attempted, where possible, to quantify the benefits and costs anticipated by the proposed amendments to Rule 3a1–1(a) and Regulation ATS. The Commission notes, 756 See id. supra Section IX. 758 See id. however, that many of the costs and benefits of the proposed amendments are difficult to quantify with any degree of certainty. For instance, it is unclear how many NMS Stock ATSs might cease operations (or, less likely, switch to trading in a different class of securities) if they are required to publicly disclose information about their operations on proposed Form ATS–N. It is also unclear how many NMS Stock ATSs may decide to register as national securities exchanges, as some ECNs have in previous years, as a result of the proposed amendments to Rule 3a1–1(a) and Regulation ATS.759 Therefore, quantifying the effects that the expanded disclosure requirements would have on market liquidity and capital formation is difficult. As the decision for an NMS Stock ATS to continue operating or to exit the market depends on numerous factors, one of which being the extent to which its competitive advantage is driven by its matching methodology or other operational characteristics, the Commission is unable to fully determine the extent to which the proposal would affect this decision. Furthermore, the decision to exit is idiosyncratic to the NMS Stock ATS and the Commission cannot ascertain whether large or small ATSs will be more prone to leaving the market. Additionally, the Commission cannot estimate the fraction of order flow that would be routed to other NMS Stock ATSs or national securities exchanges if some ATSs ceased operations. In light of all of these limitations on available information, the Commission is unable to make reasonable assumptions regarding the number of NMS Stock ATSs that may cease operations and exit the market; the number of NMS Stock ATSs that may register as national securities exchanges; or the fraction of order flow that would be routed to other NMS Stock ATSs or national securities exchanges if some ATSs ceased operations. Given that the Commission is unable to make these assumptions, it is unable to quantify the effect of the proposed amendments to Rule 3a1–1(a) and Regulation ATS on trading volume on the NMS Stock ATS as well as quantify the effects on price discovery and market efficiency. 1. Costs and Benefits of Proposed Enhanced Filing Requirements As discussed above, the Commission is proposing to amend Rule 3a1–1(a) and Regulation ATS to require ATSs that effect transactions in NMS stocks comply with the requirements of 757 See 755 See infra Section XIII.C.2. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00122 Fmt 4701 759 See Sfmt 4702 E:\FR\FM\28DEP3.SGM supra note 685 and accompanying text. 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 proposed Rule 304 in order to qualify for exemption from the definition of ‘‘exchange.’’ 760 The proposed amendments would require an NMS Stock ATS to file reports and amendments pursuant to proposed Rule 304, which includes the requirement to file proposed Form ATS–N, in lieu of current Form ATS, to disclose information about its operations and the activities of its broker-dealer operator and its affiliates. As noted above, an NMS Stock ATS may provide some subscribers access to certain trading information or services that it does not provide to others.761 For example, an NMS Stock ATS may offer certain order types or special fees or rebates to particular subscribers, which might result in those subscribers obtaining an advantage when trading on the ATS. The proposed amendments would require NMS Stock ATSs to describe any such differentiation of services or information among subscribers, which would include certain disclosures related to the operations of their broker-dealer operators. The Commission preliminarily believes that those disclosures would help market participants assess potential conflicts of interest that may adversely impact their trading on the NMS Stock ATS. Proposed Rule 304 would also provide a process by which the Commission would declare Form ATS– N filings effective or ineffective, and a process by which the Commission would review Form ATS–N Amendments and declare ineffective a Form ATS–N Amendment if it finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors. The Commission is also proposing a process by which the Commission could suspend, limit, or revoke an NMS Stock ATS’s exemption from the definition of an ‘‘exchange’’ under Rule 3a1– 1(a)(2).762 An NMS Stock ATS would not qualify for the exemption from the definition of ‘‘exchange’’ unless the 760 See supra Section IV (discussing the proposed amendments). See also proposed Rules 3a1–1(a)(2) and (3), 300, 301, and 304. 761 See supra Section VII.B.10. 762 Pursuant to proposed Rule 304(b)(2), the Commission would publicly post on its Web site each: order of effectiveness of a Form ATS–N; order of ineffectiveness of a Form ATS–N; effective Form ATS–N; filed Form ATS–N Amendment; order of ineffectiveness of a Form ATS–N Amendment; notice of cessation; and order suspending, limiting, or revoking the exemption from the definition of an ‘‘exchange’’ pursuant to Rule 3a1–1(a)(2). Proposed Rule 304(b)(3) would also require an NMS Stock ATS that has a Web site to post on its Web site a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2). See supra Section IV.D. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 NMS Stock ATS files Form ATS–N with the Commission and the Commission declares the Form ATS–N effective.763 a. Better Regulatory Oversight and Increased Investor Protection The Commission preliminarily believes that the proposed amendments to Rule 3a1–1(a) and Regulation ATS would result in better regulatory oversight of NMS Stock ATSs and increased investor protection. Form ATS discloses only limited aspects of an ATS’s operations as compared to the information that would be provided on Form ATS–N by NMS Stock ATSs. Form ATS requires, for example, 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 execution; and trade reporting, clearance and settlement of trades on the ATS. On the other hand, Form ATS– N would require an NMS Stock ATS to disclose information about the manner of operations of the ATS, including: subscribers; hours of operation; types of orders; connectivity, order entry, and co-location procedures; segmentation of order flow and notice about segmentation; display of order and other trading interest; trading services, including matching methodologies, order interaction rules, and order handling and execution procedures; procedures governing suspension of trading or trading during a system disruption or malfunction; opening, closing, and after hours procedures; outbound routing services; fees; market data; trade reporting; clearance and settlement; order display and execution access (if applicable); fair access (if applicable); and market quality statistics published or provided to one or more subscribers. In addition, current Form ATS does not require an ATS to disclose information about the activities of the broker-dealer operator and the brokerdealer operator’s affiliates in connection with the ATS whereas the enhanced disclosure requirements under proposed Form ATS–N would require an NMS Stock ATS to disclose information about the activities of its broker-dealer operator and the broker-dealer operator’s affiliates that may give rise to potential conflicts of interest, including: their operation of non-ATS trading 763 See PO 00000 supra Section IV.C.5. Frm 00123 Fmt 4701 Sfmt 4702 81119 centers and other NMS Stock ATSs; products and services offered to subscribers; arrangements with unaffiliated trading centers; trading activities on the NMS Stock ATS; smart order router (or similar functionality) and algorithms used to send or receive orders or other trading interest to or from the ATS; personnel and third parties used to operate the NMS Stock ATS; differences in the availability of services, functionalities, or procedures; and safeguards and procedures to protect subscribers’ confidential trading information. Accordingly, the Commission preliminarily believes that the enhanced disclosure requirements under proposed Form ATS–N would result in better regulatory oversight of NMS Stock ATSs and increased investor protection by providing the Commission, relevant SROs, and market participants with significantly more information with which to analyze and evaluate how orders are handled and executed on NMS Stock ATSs. The Commission is proposing that Form ATS–N and Form ATS–N Amendments be filed electronically in a text-searchable format. The Commission preliminarily believes that requiring Form ATS–N and Form ATS–N Amendments to be filed in a textsearchable format, coupled with the enhanced disclosure requirements under the proposal, will facilitate a more effective and thorough review and analysis of NMS Stock ATSs by regulators, which should yield greater insights into the operations of NMS Stock ATSs and the activities of their broker-dealer operators and their affiliates. For example, under the proposal, examiners at the Commission and the SRO of which an NMS Stock ATS is a member would be able to run automated processes to review information disclosed on filed Forms ATS–N and Form ATS–N Amendments in order to select NMS Stock ATSs for examination based on certain criteria for the examination. Additionally, examiners would be better able to assemble and review a larger pool of data regarding NMS Stock ATSs to better inform their examinations. Both such benefits could increase investor protection by improving the effectiveness and efficiency of the examination process. Furthermore, the Commission preliminarily believes that the proposed process of declaring a Form ATS–N effective or ineffective and the process to review and declare, if necessary, Form ATS–N Amendments ineffective would improve the quality of the information regulators receive from NMS Stock ATSs and increase the E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81120 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules protection of investors. The proposed effectiveness process for a Form ATS–N is designed to provide an opportunity for the Commission to review Form ATS–N filings before an NMS Stock ATS commences operations (in the case of new NMS Stock ATSs), or while it continues operations under its Form ATS filing (in the case of legacy NMS Stock ATSs). The Commission preliminarily believes that the proposed process would allow the Commission to evaluate the adequacy of NMS Stock ATSs’ disclosures for compliance with the Form ATS–N requirements before declaring the Form ATS–N effective or ineffective. As a result, once the Commission has made an effectiveness or ineffectiveness determination, only an NMS Stock ATS for which a Form ATS–N has been declared effective would be allowed to transact in NMS stocks without registering as a national securities exchange. The Commission would make Form ATS–N Amendments public upon filing. As a result, a publicly disclosed Form ATS–N Amendment could contain potentially inaccurate or incomplete disclosures at the time it is posted on the Commission’s Web page. Prior to the conclusion of its review of a Form ATS–N Amendment, the Commission would make the public aware of the fact that, though the amendment is posted on the Commission’s Web site, it is still pending Commission review and could still be declared ineffective. The Commission preliminarily believes that this process would provide transparency to market participants about the operations of these ATSs and also provide market participants with information about forthcoming changes to the NMS Stock ATS while the Commission’s review is pending. The Commission preliminarily believes that the proposed review and public disclosure process for a Form ATS–N and Form ATS–N Amendments would allow the Commission to better protect investors from potentially inaccurate or incomplete disclosures that could misinform market participants about the operations of an NMS Stock ATS or the activities of its broker-dealer operator, including how their orders may be handled and executed, and thereby impact market participants’ decisions about where they should route their orders. If the Commission declares ineffective a Form ATS–N or Form ATS–N Amendment of an entity, that entity would have the opportunity to address deficiencies in the previously filed form by filing a new Form ATS–N or Form ATS–N Amendment. However, the VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Commission recognizes that an ineffectiveness declaration could impose costs on that entity—such as costs from having to cease operations, roll back a change in operations, or delay the start of operations—and could impose costs on the overall market for NMS stock execution services resulting from a potential reduction in competition or the removal of a sole provider of a niche service within the market. Furthermore, the removal of a sole provider of a niche service from the market could also impose costs on individual market participants, as they may have to subscribe to another NMS Stock ATS, or they may have to incur the cost of making changes to their SOR (or similar functionality) or algorithm in order to submit their orders for execution. However, NMS Stock ATSs and market participants would not incur these costs unless the Commission declares a Form ATS–N or a Form ATS– N Amendment ineffective. The Commission preliminarily believes that NMS Stock ATSs would be incentivized to comply with the requirements of Form ATS–N, as well as federal securities laws, including the other requirements of Regulation ATS, to avoid an ineffectiveness declaration, which produces benefits to the market. Therefore, the Commission preliminarily believes that there would be no undue burden imposed in connection with resubmitting Form ATS–N for these entities or from an ineffective declaration in general. b. Implementation and Ongoing Costs The Commission understands that both new and existing NMS Stock ATSs would incur implementation costs in order to comply with the proposed amendments to Regulation ATS. Regardless of their size and transaction volume, all NMS Stock ATSs would need to ensure that their disclosures meet the requirements of proposed Form ATS–N and that they correctly file their Form ATS–N. NMS Stock ATSs may develop internal processes to ensure correct and complete reporting on Form ATS–N, which can be viewed as a fixed setup cost, which NMS Stock ATSs may have to incur, regardless of the amount of trading activity that takes place on them. As a result, these implementation costs may fall disproportionately on lower-dollar volume NMS Stock ATSs (as opposed to ATSs transacting greater dollar volume), since all ATSs would likely incur these fixed implementation costs. However, 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 PO 00000 Frm 00124 Fmt 4701 Sfmt 4702 addition to their NMS Stock ATSs would likely incur lower implementation costs because certain sections of proposed Form ATS–N (such as several items of Part III) would not be applicable to these NMS Stock ATSs. Relative to the baseline, the proposed amendments to Regulation ATS would also impose implementation costs for all NMS Stock ATSs, including legacy ATSs, in that they would require NMS Stock ATSs to adhere to heightened disclosure and reporting requirements regarding their operations. Existing NMS Stock ATSs should already comply with the current requirements of Regulation ATS. Therefore, the compliance costs of the proposed amendments should be incremental relative to the costs associated with the existing requirements. Specifically, the Commission preliminarily believes that the incremental costs would consist largely of providing new disclosures and updating records and retention policies necessary to comply with the proposed amendments. Based on the analysis for purposes of the PRA, the Commission preliminarily estimates that the proposed amendments to Regulation ATS relating to Rules 301(b)(2)(viii) and 304 of Regulation ATS, including Proposed Form ATS–N, could result in a one-time burden of 141.3 hours for each NMS Stock ATS,764 which would result in an estimated onetime paperwork compliance cost to an NMS Stock ATS of approximately $42,838.50.765 This would result in an aggregate estimated initial hour burden for all NMS Stock ATSs to complete Form ATS–N and comply with proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS of 6,499.8 hours at an estimated cost of $1,970,571.00.766 764 See supra note 643 and accompanying text. at $380 × 54.8 hours) + (Compliance Manager at $283 × 43.5 hours) + (Senior Systems Analyst at $260 × 34.5 hours) + (Senior Marketing Manager at $254 × 1 hour) + (Compliance Clerk at $64 × 7.5 hours) = $42,838.50. This preliminary compliance cost estimate for a Form ATS–N includes the estimated costs associated with completing Part III, Item 2 and Part IV, Items 14 and 15 of proposed Form ATS–N, but as explained above, the Commission preliminarily believes that the majority of NMS Stock ATSs would not be required to complete those items of the proposed form. See supra Section XII.D.2.b. 766 141.3 burden hours × 46 NMS Stock ATSs = 6,499.8 burden hours. $42,838.50 × 46 NMS Stock ATSs = $1,970,571.00. This preliminary aggregate compliance cost estimate assumes that all NMS Stock ATSs would be required to complete Part III, Item 2 and Part IV, Items 14 and 15 of proposed Form ATS–N. However, as noted above, the Commission preliminarily estimates that only 6 NMS Stock ATSs would be required to complete Part III, Item 2, see supra note 609, only 1 NMS Stock ATS would be required to complete Part IV, Item 14, see supra note 641 and accompanying text, and only 2 NMS Stock ATSs would be required to complete Part IV, Item 15, see id. 765 (Attorney E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Furthermore, the Commission preliminarily believes that there would be implementation costs for ATSs that have not reduced to writing their safeguards and procedures to protect subscribers’ confidential trading information and their oversight procedures to ensure that those safeguards and procedures are followed, which are required under Rule 301(b)(10) of Regulation ATS.767 Based on the analysis for purposes of the PRA, the Commission preliminarily estimates that, in order to comply with the proposed amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS,768 it could take approximately 15 ATSs an estimated one-time burden of up to 10 hours each,769 resulting in an estimated one-time paperwork cost for each of those 15 ATSs of $3,484.00 and an aggregate estimated hour burden of 150 hours at an estimated cost of $52,260.00.770 In addition to the implementation costs mentioned above, there are also expected ongoing costs for NMS Stock ATSs to comply with the proposed amendments to Rule 3a1–1(a) and Regulation ATS. For instance, NMS Stock ATSs would incur ongoing costs associated with amending their Forms ATS–N prior to material changes in their operations, or to correct any information that has become inaccurate. Regardless of the reason for filing a Form ATS–N Amendment, the Commission preliminarily estimates for the purposes of the PRA that it could take an NMS Stock ATS approximately 28.5 hours annually 771 to prepare and file its Form ATS–N Amendments at an estimated annual cost of $8,352.00.772 This would result in an estimated aggregate ongoing hour burden for all NMS Stock ATSs to amend their Forms ATS–N and comply with proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS of 1,311 hours at an estimated cost of $384,192.00 annually.773 Furthermore, the proposed amendments to Rules 301(b)(10) and 767 See 17 CFR 242.301(b)(10). supra Section IX. 769 See supra notes 583–585. 770 (Attorney at $380 × 9 hours) + (Compliance Clerk at $64 × 1 hour) = $3,484.00. $3,484.00 × 15 ATSs = $52,260.00. 771 See supra notes 644–651 and accompanying text. As explained above, the Commission preliminarily estimates that each NMS Stock ATS would file 3 Form ATS–N Amendments per year, and the hourly burden per amendment would be 9.5 hours. 772 (Attorney at $380 × 16.5 hours) + (Compliance Manager at $283 × 6 hours) + (Compliance Clerk at $64 × 6 hours) = $8,352.00. 773 28.5 hours × 46 NMS Stock ATSs = 1,311 hours. $8,352.00 × 46 NMS Stock ATSs = $384,192.00. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 768 See VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 303(a)(1)(v) relating to written safeguards and written procedures to protect subscribers’ confidential trading information would impose ongoing costs for all ATSs. For the purposes of the PRA, the Commission preliminarily estimates it could take approximately 4 hours annually for each ATS to update and maintain these safeguards and procedures,774 resulting in an estimated annual paperwork cost for each ATS of $888.00.775 This would result in an estimated aggregate ongoing hour burden for all ATSs to maintain and update their safeguards and procedures pursuant to proposed Rules 301(b)(10) and 303(a)(1)(v) of 336 hours at an estimated cost of $74,592.00 annually.776 Some existing NMS Stock ATSs that also transact in non-NMS stocks might incur additional costs due to the proposed amendments. As discussed above,777 pursuant to the proposed amendments to Regulation ATS, an ATS that effects transactions in both NMS stocks and non-NMS stocks would be subject to the requirements of Rule 304 with respect to its NMS stock trading operations and Rule 301(b)(2) with respect to its non-NMS stock trading operations. Accordingly, NMS Stock ATSs that also transact in non-NMS stocks would incur additional implementation costs when compared to ATSs that only trade NMS stocks because the former group would be required to file both Form ATS–N and a revised Form ATS that removes discussion of those aspects of the ATS related to the trading of NMS stocks. Those NMS Stock ATSs would also be required to file a pair of Forms ATS–R four times annually. For the purposes of the PRA, the Commission preliminarily estimates that the aggregate initial burden for those ATSs to file a Form ATS–N in regard to their NMS stock trading activity and a current Form ATS in regard to their non-NMS stock trading activity would be 1,774.3 hours 778 at an aggregate estimated cost of $530,491.50.779 The Commission also 774 See supra notes 586–587 and accompanying text. 775 (Attorney at $380 × 2 hours) + (Compliance Clerk at $64 × 2 hours) = $888.00 annual paperwork cost per ATS. 776 4 annual burden hours × 84 ATSs = 336 annual burden hours. $888.00 annual paperwork cost per ATS × 84 NMS Stock ATSs = $74,592.00 aggregate annual paperwork cost. 777 See supra Section IV.C.2. 778 See supra notes 659–663 and accompanying text. 779 ((Attorney for Form ATS at $380 × 13 hours) + (Attorney for Form ATS–N at $380 × 54.8 hours) + (Compliance Manager for Form ATS–N at $283 × 43.5 hours) + (Senior Systems Analyst for Form ATS–N at $260 × 34.5 hours) + (Senior Marketing PO 00000 Frm 00125 Fmt 4701 Sfmt 4702 81121 preliminarily estimates that that the aggregate annual burden to file separate Forms ATS–R for those ATSs that effect transactions in both NMS stocks and non-NMS stocks would be 198 hours 780 at an aggregate estimated cost of $1,394.781 Furthermore, the Commission preliminarily estimates that these ATSs that facilitate transactions in both NMS stocks and non-NMS stocks would incur an additional estimated recordkeeping burden of 3 hours annually per ATS, resulting in an estimated cost of $312.60 per ATS 782 and an aggregate estimated hour burden of 33 hours at an estimated cost of $3,438.60, due to the proposed amendments to Rule 303(a)(2)(ii).783 Currently, ATSs that transact in NMS stocks do not have the ability to access and file the Form ATS electronically. The Commission proposes that proposed Form ATS–N would be filed electronically in a structured format and would require an electronic signature. These proposed amendments to Regulation ATS would require that every NMS Stock ATS have the ability to file forms electronically with an electronic signature. The Commission’s proposal contemplates the use of an online filing system, the EFFS. Based on the widespread use and availability of the Internet, the Commission preliminarily believes that filing Form ATS–N in an electronic format would be less burdensome and a more efficient filing process than the current paper process for NMS Stock ATSs and the Commission, as it is likely to be less expensive and cumbersome than mailing and filing paper forms to the Commission. To access EFFS, an NMS Stock ATS would need to submit to the Commission an EAUA to register each individual at the NMS Stock ATS who will access the EFFS system on behalf of the NMS Stock ATS. The Manager for Form ATS–N at $254 × 1 hour) + (Compliance Clerk for Form ATS at $64 × 7 hours) + (Compliance Clerk for Form ATS–N at $64 × 7.5 hours)) × 11 ATSs = $530,491.50 This preliminary aggregate compliance cost estimate includes the estimated costs associated with completing Part III, Item 2 and Part IV, Items 14 and 15 of proposed Form ATS–N, but as explained above, the Commission preliminarily believes that the majority of NMS Stock ATSs would not be required to complete those items of the proposed form. See supra Section XII.D.2.b. 780 See supra notes 663 and accompanying text. 781 (Attorney at $380 × 3.5 hours) + (Compliance Clerk at $64 × 1 hours) = $1,394. 782 At an average cost per burden hour of $104.20, see Rule 303 PRA Update, supra note 580, 78 FR 43943, the resultant total related cost of compliance for each ATS would be $312.60 ((3 burden hours) × $104.20/hour). 783 3 hours × 11 ATSs = 33 burden hours. $312.60 × 11 ATSs = $3,438.60. See supra Section XII.D.2.b.vi. E:\FR\FM\28DEP3.SGM 28DEP3 81122 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Commission is including in its estimates the burden for completing the EAUA for each individual at an NMS Stock ATS that will request access to EFFS.784 For the purposes of the PRA, the Commission preliminarily estimates that initially, on average, two individuals at each NMS Stock ATS will request access to EFFS through the EAUA, and each EAUA would require 0.15 hours to complete and submit.785 Therefore, each NMS Stock ATS would require 0.3 hours to complete the requisite EAUAs 786 at a cost of $114.00,787 and the aggregate initial burden would be approximately 13.8 hours for all NMS Stock ATSs 788 at a cost of $5,244.00.789 The Commission also preliminarily estimates that annually, on average, one individual at each NMS Stock ATS will request access to EFFS through the EAUA.790 Therefore, the ongoing burden to complete the EAUA would be 0.15 hours annually for each NMS Stock ATS 791 at a cost of $57.00,792 and the aggregate ongoing burden would be approximately 6.9 hours for all NMS Stock ATSs 793 at a cost of $2,622.00.794 In addition, the Commission preliminarily estimates that each NMS Stock ATS will designate two individuals to sign Form ATS–N each year. An individual signing a Form ATS–N must obtain a digital ID, at the cost of approximately $25.00 each year. Therefore, each NMS Stock ATS would require approximately $50.00 annually to obtain digital IDs for the individuals 784 For the purpose of completeness, the Commission has also included the initial estimated burden and costs related to completing the EAUA in its burden and cost estimates for the initial ATS– N filings by NMS Stock ATSs. See supra note 643. 785 See supra note 665 and accompanying text. 786 0.15 hours per EAUA × 2 individuals = 0.3 burden hours per NMS Stock ATS. These preliminary estimates are based on the Commission and its staff’s experience with EFFS and EAUAs pursuant to Rule 19b–4 under the Exchange Act. The 0.3 hours represents the time spent by two attorneys. The Commission believes it is appropriate to estimate that, on average, each NMS Stock ATS will submit two EAUAs initially. 787 Attorney at $380 × 0.3 hours per EAUA = $114.00. 788 0.30 hours per EAUA × 46 NMS Stock ATSs = 13.8 burden hours. 789 $114 cost per NMS Stock ATS × 46 NMS Stock ATSs = $5,244.00. 790 The Commission estimates that annually, on average, one individual at each NMS Stock ATS will request access to EFFS through EAUA to account for the possibility that an individual who previously had access to EFFS may no longer be designated as needing such access. 791 0.15 hours per EAUA × 1 individual = 0.15 hours. 792 Attorney at $380 × 0.15 hours per EAUA = $57.00. 793 0.15 hours × 46 NMS Stock ATSs = 6.9 hours. 794 $57 cost per NMS Stock ATS × 46 NMS Stock ATSs = $2,622.00. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 with access to EFFS for purposes of signing Form ATS–N,795 and the aggregate initial burden would be approximately $2,300.00 for all NMS Stock ATSs.796 The Commission also preliminarily estimates that NMS Stock ATSs would incur a one-time cost to make public via posting on their Web sites a direct URL hyperlink to the Commission’s Web site that contains their Form ATS–N filings.797 For the purposes of the PRA, the Commission preliminarily estimates that this initial, one-time burden would be approximately 2 hours per NMS Stock ATS at an estimated cost of $520.00,798 and the aggregate estimated burden for all NMS Stock ATSs would be approximately 92 hours 799 at an estimated cost of $23,920.00.800 2. Costs and Benefits of Public Disclosures of Proposed Form ATS–N The Commission is proposing Rule 304(b) to mandate greater public disclosure of NMS Stock ATS operations by making Form ATS–N and Form ATS–N Amendments publicly available on the Commission’s Web site, requiring each NMS Stock ATS that has a Web site to post a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in proposed Rule 304(b)(2), and providing for the posting of Commission orders related to the effectiveness of Form ATS–N on the Commission’s Web site.801 The Commission’s proposal to require such public disclosure is designed, in part, to increase the operational transparency requirements of NMS Stock ATSs in order to bring those requirements more in line with the operational transparency requirements of national securities exchanges.802 The Commission preliminarily believes the proposal should assist market participants in evaluating and choosing the NMS Stock ATSs to which they may route orders or become a subscriber due to the proposed enhanced disclosure requirements. As mentioned above, the proposed amendments to Regulation ATS would make Form ATS–N publicly available, thereby improving the information 795 $25 per digital ID × 2 individuals = $50.00 per NMS Stock ATS. 796 $50 cost per NMS Stock ATS × 46 NMS Stock ATSs = $2,300. 797 See supra Section XII.D.2.b.v. 798 Senior Systems Analyst at $260 × 2 hours = $520.00. 799 2 hours per NMS Stock ATS × 46 NMS Stock ATSs = 92 burden hours. 800 $520 per NMS Stock ATS × 46 NMS Stock ATSs = $23,920.00. 801 See supra Section IV.D. 802 See id. PO 00000 Frm 00126 Fmt 4701 Sfmt 4702 available to market participants and making that information consistent. The Commission is proposing to amend Regulation ATS to require NMS Stock ATSs to file proposed Form ATS–N in lieu of Form ATS.803 Furthermore, the Commission is proposing to require NMS Stock ATSs to disclose on Form ATS–N detailed information about the activities of the broker-dealer operator of the NMS Stock ATS and the brokerdealer operator’s affiliates, including: The operation of non-ATS trading centers and other NMS Stock ATSs; products and services offered to subscribers; arrangements with unaffiliated trading centers; trading activities on the NMS Stock ATS by the broker-dealer operator or any of its affiliates; a SOR(s) (or similar functionality) or algorithm(s) used to send or receive orders or other trading interest to or from the ATS; personnel and third parties used to operate the NMS Stock ATS; differences in the availability of services, functionalities, or procedures between the broker-dealer operator or its affiliates and subscribers to the NMS Stock ATS; and safeguards and procedures to protect subscribers’ confidential trading information. Proposed Form ATS–N would also require NMS Stock ATSs to provide detailed information about the manner of operations of the ATS, including: Subscribers; hours of operation; types of orders; connectivity, order entry, and co-location procedures; segmentation of order flow and notice about segmentation; display of order and other trading interest; trading services, including matching methodologies, order interaction rules, and order handling and execution procedures; procedures governing suspension of trading and trading during a system disruption or malfunction; opening, closing, and after-hours procedures; outbound routing services; market data; fees; trade reporting; clearance and settlement; order display and execution access (if applicable); fair access (if applicable); and market quality statistics published or provided to one or more subscribers. The Commission is proposing to make certain Form ATS–N filings available to the public on the Commission’s Web site and to require an NMS Stock ATS that has a Web site to post on the NMS Stock ATS’s Web site a direct URL hyperlink to the Commission’s Web site that contains the 803 As discussed above, to the extent an ATS trades both NMS stocks and non-NMS stocks, it would be required to file both a Form ATS and a Form ATS–N. See supra Section IV.C.2. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 documents enumerated in proposed Rule 304(b)(2). Despite NMS Stock ATSs’ increasing operational complexities and importance as a source of liquidity for NMS stocks, the Commission preliminarily believes that many market participants have limited information about NMS Stock ATSs’ order handling and execution practices. As noted above, while the current disclosures on Form ATS are ‘‘deemed confidential when filed,’’ some ATSs voluntarily disclose their Form ATS filings.804 Accordingly, there is disparate publicly available information regarding the current operations of NMS Stock ATSs. Furthermore, even if an NMS Stock ATS publicly discloses its Form ATS, some subscribers of that ATS may be privy to more detailed information about how their orders are executed, routed and/or prioritized than other subscribers. Accordingly, the Commission preliminarily believes that, often, some subscribers are able to obtain a more complete picture of the operations of an NMS Stock ATS than other subscribers, and as a result, the latter group of subscribers may not be selecting the venue that most suits their investing or trading objectives. In addition, based on Commission experience, the confidentiality of Form ATS has not always resulted in NMS Stock ATSs disclosing significant details regarding their operations, services, and functions. Therefore, the status quo, as discussed above in Section XIII.B, is characterized by variable levels of public and confidential disclosure by NMS Stock ATSs, which makes it more difficult for both market participants to evaluate NMS Stock ATSs as potential trading venues and regulators to oversee NMS Stock ATSs. a. Effects on Market Participants’ Trading Decisions The Commission preliminarily believes that the public disclosure of Form ATS–N would produce economic benefits for market participants. Specifically, the Commission preliminarily believes that requiring detailed, public disclosures about the operations of NMS Stock ATSs would, among other things, better standardize the type of information market participants receive about those operations. As a result, search costs for market participants would be lower relative to the baseline, as homogenous disclosure requirements for all NMS Stock ATSs as part of the proposed amendments to Regulation ATS should facilitate market participants’ comparison of NMS Stock ATSs when deciding which venue most suits their trading purposes. Accordingly, the Commission preliminarily believes the enhanced operational transparency resulting from the public disclosures on Form ATS–N should aid market participants when evaluating potential trading venues. The market for NMS stock execution services has also evolved such that national securities exchanges and NMS Stock ATSs have increasingly become direct competitors. However, as explained above, Form ATS filings continue to be ‘‘deemed confidential when filed,’’ while national securities exchanges must publicly file proposed rule changes and publicly disclose their entire rulebooks.805 The Commission preliminarily believes that replacing the current Form ATS with proposed Form ATS–N and making Form ATS–N public would reduce the discrepancy in information that different market participants receive about NMS Stock ATSs relative to the information they receive about national securities exchanges, which would better enable market participants to compare the stock execution services of NMS Stock ATSs against those of national securities exchanges. For instance, having information allowing a more complete comparison between the trading operations of NMS Stock ATSs and national securities exchanges could reveal to a market participant certain order handling and preferencing differences that might result in superior or inferior treatment of orders handled by an NMS Stock ATS. It could also reveal differences in fee structures among subscribers that may result in costlier or less costly execution on a particular trading platform. The Commission preliminarily believes that the proposed amendments would appropriately calibrate the level of transparency between NMS Stock ATSs and national securities exchanges, fostering even greater competition for order flow of NMS stocks between those trading platforms. As noted above, the Commission also preliminarily believes that the proposed enhanced disclosure requirements for NMS Stock ATSs would calibrate the level of transparency among different NMS Stock ATSs. Moreover, requiring Form ATS–N to be made public upon being declared effective should lead to additional scrutiny of NMS Stock ATSs by market participants. Therefore, the Commission preliminarily believes that the proposal could foster even greater 805 See 804 See supra notes 155–156. VerDate Sep<11>2014 14:26 Dec 24, 2015 supra notes 155–162 and accompanying text. Jkt 238001 PO 00000 Frm 00127 Fmt 4701 Sfmt 4702 81123 competition for order flow of NMS stocks among NMS Stock ATSs and between NMS Stock ATSs and national securities exchanges, which could lead to lower spreads and thereby foster greater capital formation and increased market liquidity relative to the baseline. This in turn could enhance execution quality and lower information opaqueness surrounding an NMS Stock ATS’s operations. The Commission also preliminarily believes that the proposed requirement for NMS Stock ATSs to disclose whether and how they segment their order flow, any criteria used to assign order flow, and their fee structures should provide market participants with a better understanding of the operating environment for NMS Stock ATSs. Search costs to identify which NMS Stock ATSs better serve a market participant’s trading interests should be reduced relative to the baseline, as market participants may be more able to predict how their orders will be executed. Broker-dealers might also make better routing decisions for their particular interests, and the interests of their customers, which might therefore lead to better execution quality. Also, the proposed enhanced disclosure requirements for NMS Stock ATSs could better enable market participants to review trading decisions made by their broker-dealers. This in turn could lower the level of uncertainty that was present in the baseline regarding how orders would be executed on NMS Stock ATSs. As such, the Commission preliminarily believes that the proposed amendments to Regulation ATS could help market participants understand how their orders will be executed on an NMS Stock ATS and evaluate any potential conflicts of interest involving the broker-dealer operator and its affiliates when handling such orders. At the same time, the proposed enhanced disclosure requirements for NMS Stock ATSs could benefit certain ATSs or national securities exchanges. For example, market participants would be aware of which NMS Stock ATSs may offer better execution services or better protection against the dissemination of their non-public trading information, and as a result, these ATSs might attract even more order flow. By attracting greater order flow, NMS Stock ATSs might, in turn, provide benefits to market participants by offering them a trading platform that is more liquid and, possibly, has lower trading costs. In the adopting release for Regulation ATS, the Commission explained that it believed that the regulatory framework established by Regulation ATS would E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81124 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules encourage innovation and encourage the growing role of technology in the securities markets.806 Since the establishment of Regulation ATS, the market for order execution services for trading NMS stocks—particularly on ATSs—has flourished. The number of ATSs that trade NMS stocks has increased substantially since the inception of Regulation ATS, and as of the end of the second quarter of 2015, trading volume of NMS stocks on ATSs accounted for 15% of total share volume.807 As it is expected to calibrate the level of transparency between NMS Stock ATSs and national securities exchanges, the proposal may foster greater competition for order flow of NMS stocks between these trading platforms. This greater competition for order flow may in turn incentivize NMS Stock ATSs to innovate—particularly in terms of their technology—so that they can attract more trading volume to their venue. The proposed requirement under Part IV, Item 16 of proposed Form ATS–N to explain and provide aggregate platformwide order flow and execution statistics regarding the NMS Stock ATS, which are not otherwise required disclosures under Exchange Act Rule 605 of Regulation NMS but still published or otherwise provided to one or more subscribers by the NMS Stock ATS, could have several potential economic effects. The economic effects would depend not only on the extent to which ATSs currently provide or publish such information and the content of the information which the Commission currently does not have (such as what order flow and execution statistics NMS Stock ATSs produce, how they are calculated and whether they are standardized across ATSs, and which subscribers currently receive these statistics),808 but also on how NMS Stock ATSs choose to comply with the proposed amendments. Some NMS Stock ATSs may not currently disclose market quality statistics not otherwise required under Exchange Act Rule 605, and these ATSs would not incur costs to comply with the proposed disclosure requirements under Part IV, Item 16 of proposed Form ATS–N; therefore, the proposed disclosure requirements would provide no benefits to market participants in such cases. Additionally, there may be some NMS Stock ATSs that currently provide these aggregate platform-wide order flow and execution statistics not just to their subscribers, 806 See Regulation ATS Adopting Release, supra note 7, at 70910. 807 See supra Section III.A. 808 See supra Section XIII.B.3. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 but also to the broader public. In such cases, the proposed disclosure requirements under Part IV, Item 16 of proposed Form ATS–N may not provide any additional benefit to market participants because the information required under Item 16 would already be publicly available. Furthermore, NMS Stock ATSs that currently provide these aggregate platform-wide order flow and execution statistics to one or more subscribers could continue to provide its subscribers with these market quality statistics, in which case, under the proposal, the NMS Stock ATS would publicly disclose these statistics and how they are calculated in proposed Form ATS–N. Another possibility is that these NMS Stock ATSs may choose to stop providing market quality statistics to subscribers so as not to have to publicly disclose information about those statistics and/or the statistics themselves in Form ATS–N. To the extent that an NMS Stock ATS continues to provide aggregate platformwide order flow and execution statistics to subscribers only, it would publicly disclose and describe how those statistics are calculated in Form ATS–N, and all market participants, not just subscribers would have access to the information, which the Commission preliminarily believes would improve the opportunity for more market participants to benefit from this information. In addition, to the extent that subscribers that receive those market quality statistics currently do not know how the NMS Stock ATS calculates the market quality statistics, the proposal would help these subscribers better understand the statistics, and such information may be useful when evaluating an NMS Stock ATS as a possible venue to which to route orders in order to accomplish their investing or trading objectives. However, NMS Stock ATSs that choose to publicly disclose aggregate platform-wide order flow and execution statistics regarding the NMS Stock ATS, which are not otherwise required disclosures under Exchange Act Rule 605 of Regulation NMS but still published or otherwise provided to one or more subscribers by the NMS Stock ATS would incur costs to do so. Therefore, some NMS Stock ATSs may choose to comply with the proposal by ceasing to disclose these market quality statistics to subscribers. As a result, the proposal could reduce transparency to the detriment of the subscribers who currently benefit from the receipt of certain market quality statistics regarding an NMS Stock ATS, which could in turn result in spill-over effects PO 00000 Frm 00128 Fmt 4701 Sfmt 4702 on the market. Furthermore, the decision of whether to continue to disclose such statistics could depend, in part, on how favorable the statistics make the ATS appear. As such, if some NMS Stock ATSs choose to stop disclosing order flow and execution statistics due to the proposed requirements of Item 16 while others decide to make those statistics public through their Form ATS–N filings, market participants may perceive the latter group of NMS Stock ATSs as having better execution quality, and these trading venues may therefore benefit by attracting even more order flow as a result of such perceptions. As most NMS Stock ATSs are operated by broker-dealers that also engage in other brokerage and dealing activities, a broker-dealer operator of an NMS Stock ATS, or its affiliates, may have business interests that compete with the ATS’s subscribers, or customers of its subscribers, which in turn may give rise to potential conflicts of interest.809 For instance, multiservice broker-dealers may execute orders in NMS stocks internally on nonATS trading centers by trading as principal against such orders, or by crossing orders as agent in a riskless principal capacity. The Commission preliminarily expects that the proposal could discourage broker-dealer operators from trading internally as principal in their NMS Stock ATS under circumstances where such might raise conflict of interest concerns because those operations would be subject to public scrutiny by market participants seeking to trade on the ATS. In addition to the possible conflicts of interest that may arise from internalization, broker-dealer operators that control and operate multiple NMS Stock ATSs may also face conflicts of interest. This is because such brokerdealers might operate competing trading venues for the execution of orders in NMS stocks without having fully separated the functions of these competing trading centers. As a result of these overlapping functionalities, broker-dealers operating multiple NMS Stock ATSs may provide subscribers of one ATS—which could include business units of the broker-dealer or its affiliates—with access to services or information about the other ATS that it does not provide to other subscribers. The Commission preliminarily believes that the proposed enhanced disclosure requirements should provide market 809 The Commission notes that, based on information provided on Form ATS, a small number of ATSs solely limit their broker-dealer business to the operation of an ATS. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 participants with information to better evaluate potential conflicts of interest when making trading decisions; any resultant change in order flow to an NMS Stock ATS with such potential conflicts might cause that ATS to alter its operations to reduce such conflicts. b. Structuring of Proposed Form ATS–N The Commission is proposing that proposed Form ATS–N be filed electronically through the EFFS system in a structured data format. The Commission is proposing to make public on the Commission’s Web site, among other things, an effective Form ATS–N, and each properly filed Form ATS–N Amendment upon filing with the Commission. The Commission would post the Form ATS–N or Form ATS–N Amendment in the same format that the Commission received the data. The Commission preliminarily believes that by having NMS Stock ATSs file the proposed Form ATS–N in a structured data format, the information’s usability for market participants would be enhanced. Once the data is structured, it is not only human-readable, but also becomes machine-readable such that market participants could download the information directly into databases and analyze it using various software. With structured data, what was static, textbased information that had to be manually and individually reviewed, can be searched and analyzed, facilitating the comparison and aggregation across NMS Stock ATSs. The Commission understands that there are varying costs associated with varying degrees of structuring. The Commission preliminarily believes that its proposed structuring of proposed Form ATS–N has minimal costs and enhanced benefits for market participants’ use of proposed Form ATS–N information. The Commission is proposing that Parts I (Name) and II (Broker-Dealer Operator Registration and Contact Information) of proposed Form ATS–N would be provided as fillable forms on the Commission’s EFFS system. The Commission is proposing that Part III (Activities of the Broker-Dealer Operator and Affiliates) of proposed Form ATS–N would be filed in a structured format whereby the filer would provide checkbox responses to certain questions and narrative responses that are block-text tagged by Item. The Commission is proposing that Part IV (The NMS Stock ATS Manner of Operations) of proposed Form ATS–N would also be filed in a structured format in that the filer would block-text tag narrative responses by Item. The VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Commission is proposing that Part V (Contact Information, Signature Block, and Consent to Service) of proposed Form ATS–N would be provided as fillable forms on the Commission’s EFFS system. The Commission also preliminarily believes that requiring NMS Stock ATSs to file proposed Form ATS–N in a structured format could allow market participants to avoid additional costs associated with third party sources who might otherwise extract and structure all the narrative disclosures, and then charge for access to that structured data. The Commission notes that the structuring of Form ATS– N can be in a variety of manners. For example, some or all of the information provided on Form ATS–N could be structured according to a particular standard that already exists, or a new taxonomy that the Commission creates, or as a single machine-readable PDF. The Commission seeks comment on the manner in which proposed Form ATS– N could be structured to enable the Commission and market participants to better collect and analyze the data. c. Effects on Entry and Exit of NMS Stock ATSs From an NMS Stock ATS’s perspective, the proposed amendments to Regulation ATS may beget uncertainty as to whether its proposed Form ATS–N will be deemed effective or ineffective. Greater uncertainty surrounding this proposed process may act as a deterrent for potential ATSs wishing to effect transactions in NMS stocks. The disclosures required by proposed Form ATS–N would be more comprehensive and require significantly more detail than those required on current Form ATS, which in turn could delay the start of operations for new NMS Stock ATSs. Therefore, the proposed amendments could raise the entry barrier for new entrants to the market for NMS stock execution services. The Commission is proposing that a legacy NMS Stock ATS would be able to continue its operations pursuant to a previously filed initial operation report on Form ATS pending the Commission’s review of its initial Form ATS–N. However, if after notice and opportunity for hearing, the Commission declares the Form ATS–N filed by a legacy NMS Stock ATS ineffective, the ATS would be required to cease operations. The NMS Stock ATS would then have the opportunity to address deficiencies in the previously filed form by filing a new Form ATS– N.810 The Commission is also proposing 810 See PO 00000 supra Section IV.C. Frm 00129 Fmt 4701 Sfmt 4702 81125 to make Form ATS–N Amendments public upon filing and also to make the public aware of which Form ATS–N Amendments filed by NMS Stock ATSs posted on the Commission’s Web site are pending Commission review and could still be declared ineffective. The Commission preliminarily believes that this process would provide immediate transparency to market participants about an NMS Stock ATS’s current operations while also notifying market participants that the disclosures in a filed Form ATS–N Amendment are still subject to Commission review. If the Commission declares a Form ATS–N Amendment ineffective, the NMS Stock ATS shall be prohibited from operating pursuant to the ineffective Form ATS– N Amendment. The NMS Stock ATS could, however, continue to operate pursuant to a Form ATS–N that was previously declared effective.811 Given the uncertainty that may surround the process to declare Form ATS–N effective or ineffective or Form ATS–N Amendments ineffective, coupled with the number and complexity of the new disclosures that would be required under proposed Form ATS–N, some broker-dealer operators of legacy NMS Stock ATSs may find that the costs of compliance with this proposal outweigh the benefits of continuing to operate their NMS Stock ATS, particularly if the operation of the ATS does not constitute a significant source of profit for a broker-dealer operator. As such, the NMS Stock ATS may exit the market. As explained above, NMS Stock ATSs would incur both implementation and ongoing costs to meet the regulatory requirements under proposed Rule 304. In particular, the proposed rules would require an NMS Stock ATS to file amendments on proposed Form ATS–N to notice a material change to its operations at least 30 days prior to implementing that material change. Under the proposal, if the Commission declares a material amendment ineffective after this advance notice period has expired, the NMS Stock ATS would be required to unwind the material change if it has already been implemented on the ATS or be precluded from proceeding to implement the change if it was not already implemented. This uncertainty regarding an NMS Stock ATS’s ability to implement material changes may also result in some NMS Stock ATSs exiting the market. 811 Nothing would preclude the NMS Stock ATS from later submitting a new or revised Form ATS– N Amendment for consideration by the Commission. E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81126 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Once an NMS Stock ATS’s initial Form ATS–N is declared effective by the Commission, the information disclosed on Form ATS–N would be made available to the broader investing public. Proposed Form ATS–N Amendments would be made public upon filing, and in the case the amendments are not declared ineffective by the Commission, the Commission would no longer indicate that the Form ATS–N Amendment is under Commission review.812 Examples of the operational information that could be disclosed to a given NMS Stock ATS’s competitors and the public on proposed Form ATS–N would include: Characteristics and use of order types (including indications of interest and conditional orders); order handling and priority distinctions among types of orders and/or subscribers; order entry and display procedures; the allocation and matching of orders, quotes, indications of interest and conditional orders; execution and trade reporting procedures, and aggregate platformwide market quality statistics regarding the NMS Stock ATS that the NMS Stock ATS currently only provides to subscribers. While the information elicited on proposed Form ATS–N would be similar to the information that national securities exchanges are required to publicly disclose, the Commission preliminarily believes that the disclosure of this previously non-public information could have some impact on the direction of order flow in the market. For instance, to the extent that an NMS Stock ATS’s competitive advantage in the market is driven by its matching methodology, other operational characteristics that are currently confidential, or the non-public disclosure of certain aggregate platformwide market quality statistics provided to subscribers, the disclosure of this information could result in other NMS Stock ATSs implementing similar methodologies, which might cause market participants to direct more order flow to those other NMS Stock ATSs. In addition, some order flow may be directed away from NMS Stock ATSs and towards national securities exchanges or broker-dealers that operate non-ATS trading centers if market participants discover that their orders could receive lower execution quality on an NMS Stock ATS relative to these other trading centers. As such, the proposal may result in lower revenues for some NMS Stock ATSs, and those ATSs may then find it unprofitable to stay in the market. The Commission preliminarily believes that fewer trading venues in the market will affect competition between existing NMS Stock ATSs and national securities exchanges as well as among existing NMS Stock ATSs, which would in turn affect market participants. Not only could an NMS Stock ATS’s competitive advantage be driven by its current matching methodology or other operational characteristics, it could also be driven by the NMS Stock ATS’s ability to improve these methodologies through technological innovation or enhancements. Under the proposal, the Commission preliminarily believes that the disclosure of an NMS Stock ATS’s innovations in proposed Form ATS–N Amendments could potentially result in certain NMS Stock ATSs losing their technological advantage. If NMS Stock ATSs cannot innovate fast enough to regain their competitive advantage in the market, orders may also flow away from those NMS Stock ATSs, and as a result, these trading venues may choose to exit the market if operating the ATS becomes unprofitable for the brokerdealer operator. Both large and small NMS Stock ATSs may be affected by the detailed disclosures required under proposed Rule 304 and Form ATS–N, though, the proposal may affect the ability of each type of ATS to stay in the market differently. As noted above, to the extent that an ATS’s dominance in the market—in terms of being able to attract substantial NMS stock trading volume— is driven by its matching methodology or other operational characteristics that are currently confidential, the public disclosure of this information may result in lower revenue for the NMS Stock ATS. If this is the case for a small NMS Stock ATS, or a large ATS without a substantial profit margin, the brokerdealer operator may no longer view the ATS as being profitable and may potentially exit the market altogether. Alternatively, if this is the case for a large NMS Stock ATS or a smaller NMS Stock ATS with large profit margins, while the NMS Stock ATS may not exit the market, such an ATS may need to engage in costly research in order to develop new matching methodologies to stay profitable in the market. Further, if revenue and earnings margins for operating an NMS Stock ATS are below the average for the entire market, the NMS Stock ATS risks being squeezed out by its competitors and would potentially exit the market.813 The result of this may be that there would be fewer trading venues in the market for NMS stock execution services. This could affect the competition between existing NMS Stock ATSs and national securities exchanges as well as among existing NMS Stock ATSs, which would in turn affect market participants. The Commission notes, however, that many smaller NMS Stock ATSs may not engage in other brokerage or dealing activities in addition to the operation of their NMS Stock ATS. Therefore, certain aspects of proposed Form ATS–N (such as several items of Part III) may not be applicable to smaller NMS Stock ATSs, which would reduce the burdens and mitigate the effects of the proposed disclosure requirements on these smaller NMS Stock ATSs. The Commission expects that the implementation and ongoing costs associated with filing proposed Form ATS–N could also affect the nature of competition. As Table 1 shows, there is a significant degree of difference in the size of NMS Stock ATSs, when measured by dollar or share volume. If the costs associated with filing proposed Form ATS–N become disproportionately greater for smaller volume NMS Stock ATSs, some of these legacy NMS Stock ATSs might cease operations, and exit the market for NMS stock execution services. As explained above, based on analysis for purposes of the PRA, the Commission has calculated preliminary estimates of the implementation and ongoing costs for the proposed amendments to Regulation ATS. The Commission preliminarily believes that the estimated implementation cost is a fixed cost that would be roughly similar across NMS Stock ATSs, regardless of their dollar volume size; this implies that implementation costs will represent a larger fraction of revenue generated on a small NMS Stock ATS relative to that percentage on a large NMS Stock ATS, which could cause some smaller NMS Stock ATSs to exit the market. However, it could be the case that if the NMS Stock ATSs that decide to exit due to this fixed implementation cost only transact small dollar (or share) volume, the Commission may not expect to see a large impact on the overall competitive structure of the NMS Stock ATSs that would remain in the market. More so, the order flow that was being traded on these small NMS Stock ATSs might in fact be absorbed and redistributed amongst these larger surviving NMS Stock ATSs. 812 See supra Section IV.D. See also proposed Rule 304(b)(2). 813 See Singhvi, Surrendra S. and Harsha B. Desai, 1971, ‘‘An Empirical Analysis of the Quality of Corporate Financial Disclosure,’’ Accounting Review 46, 129–138. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00130 Fmt 4701 Sfmt 4702 E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Another effect that the proposal could have on competition is that the greater disclosure requirements of NMS Stock ATSs, particular the disclosures related to the other business activities of the broker-dealer operator and its affiliates, may influence a broker-dealer operator’s decisions with respect to its operations of the NMS Stock ATS. Given the proposed disclosure requirements regarding the activities of broker-dealer operators and their affiliates, a multiservice broker-dealer operator of an NMS Stock ATS may cease operating its NMS Stock ATS and send its order flow, which would have gone to the brokerdealer operator’s NMS Stock ATS, to other trading centers. For example, a multi-service broker-dealer operator could internalize the order flow that it would typically send to its ATS or send that order flow to a broker-dealer that, does not operate an NMS Stock ATS, to internalize. Alternatively, the brokerdealer operator might send the order flow to a non-affiliated NMS Stock ATS that is operated by a non-multi-service broker-dealer, who would likely not encounter the same potential conflicts of interest as a multi-service brokerdealer that operates an NMS Stock ATS. Finally, the broker-dealer operator could also send its order flow to national securities exchanges for execution. Overall, the Commission preliminarily believes that the possible exit of NMS Stock ATSs from the market, or the reduced entry of new NMS Stock ATSs, due to the requirements under proposed Rule 304 and Form ATS–N might be potentially harmful to competition in the market for NMS stock execution services. The potential exit by existing NMS Stock ATSs and the reduced entry into the market by prospective NMS Stock ATSs may impact market participants by reducing the number of NMS stock trading venues and thus, reducing a market participant’s opportunities to minimize its trading costs by sending orders to different trading platforms. As such, the possible exit of NMS Stock ATSs from the market for NMS stock execution services and lower rate of entry for new NMS Stock ATSs may result in greater costs relative to the baseline cost savings that NMS Stock ATSs currently afford market participants.814 The Commission, however, is unable to predict whether legacy NMS Stock ATSs will exit the market and therefore, cannot quantify the ultimate effect that this will have on competition. 814 See supra Section XIII.B.7. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 d. Effects on Trading Costs, Price Discovery and Market Efficiency As discussed above, the proposed heightened disclosure requirements for NMS Stock ATSs might cause some NMS Stock ATSs to cease operations, which could result in reduced competition among and between NMS Stock ATSs. If it is the case that the NMS Stock ATSs that face the highest cost of disclosure are the ones that have worse execution quality, the surviving NMS Stock ATSs might enhance execution quality and may allow market participants to transact at lower prices. If order flow is directed towards these surviving NMS Stock ATSs after the trading venues that face the highest cost of disclosure cease operations, then a smaller number of surviving trading venues might mean that there would be a higher likelihood that the orders of buyers and sellers on an NMS Stock ATS would interact and execute, which could improve liquidity. Even if some of the order flow from NMS Stock ATSs that cease operations does not migrate to the surviving NMS Stock ATSs, but migrates towards national securities exchanges, greater order interaction between buyers and sellers on a national securities exchange might be fostered, thereby improving price discovery. Moreover, because some NMS Stock ATSs operate as crossing networks and derive their prices from national securities exchanges, greater price discovery on a national securities exchange could spill over to affect the execution prices on the surviving NMS Stock ATSs and thereby potentially reduce market participants’ trading costs. Additionally, given the fairly standardized set of information that would be publicly disclosed on proposed Form ATS–N and that trading in the market by NMS Stock ATSs may in fact be concentrated on fewer NMS Stock ATSs as a result of this proposal, market participants may process, and react more quickly to, information pertaining to changes in an NMS Stock ATS’s operations when evaluating potential trading venues. As such, the proposed amendments to Regulation ATS might improve market efficiency. Alternatively, heightened disclosure requirements pertaining to the public disclosure of proposed Form ATS–N could have a contrary effect, by increasing market participants’ trading costs relative to the baseline. Institutional investors may use NMS Stock ATSs in an attempt to minimize the price impact of their trades. Even though the size of the average order on NMS Stock ATSs has been shown to be roughly equivalent to that on national PO 00000 Frm 00131 Fmt 4701 Sfmt 4702 81127 securities exchanges, smaller orders on NMS Stock ATSs can be the result of shredding larger orders.815 Preventing information regarding those orders from becoming public can minimize adverse price moves that may occur when proprietary traders learn that there may be large buyers or sellers in the market. Thus, NMS Stock ATSs represent a tool for institutional investors to help control information leakage. If some NMS Stock ATSs exit the market as a result of the proposed amendments, there could be a reduction in the number of trading platforms that allow institutional investors to control their price impact costs. Institutional investors, who would have traded on these NMS Stock ATSs if they did not exit the market, may now have to trade on other trading venues, such as other NMS Stock ATSs or national securities exchanges. If institutional investors execute their orders on a national securities exchange, they may have to absorb price impact costs, because national securities exchanges may not offer a means for reducing these costs. Insofar that an NMS Stock ATS’s competitive advantage is driven by its matching methodology or other operational characteristics that are currently confidential, the Commission understands such disclosure could impact this competitive advantage. However, the Commission does not know the extent to which the proposal would affect an NMS Stock ATS’s decision to continue operations or exit the market, and, therefore, cannot estimate the number of ATSs that may exit. Furthermore, the Commission does not have information in order for it to make reasonable assumptions about the fraction of displaced volume—from NMS Stock ATSs that would cease operations—that would be directed towards national securities exchanges, NMS Stock ATSs, or non-ATS OTC trading centers. Therefore, the Commission cannot estimate the impact that the proposal would have on an NMS Stock ATS’s price impact costs. The price impact cost institutional investors face on a national securities exchange is related to the depth of the market, and the depth of the market is often related to the market capitalization of a stock and its liquidity.816 For instance, if an institutional investor were to trade a large capitalization stock on a national securities exchange as opposed to on an NMS Stock ATS, 815 See Tuttle: ATS Trading in NMS Stocks, supra note 126. 816 A deep market is one in which larger orders do not have a much greater impact on prices than smaller orders. See Foucault, Pagano and Roell, 2013, ‘‘Market Liquidity,’’ Oxford University Press. E:\FR\FM\28DEP3.SGM 28DEP3 81128 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules given that the large capitalization stock might be more liquid than a small capitalization stock, and thereby have greater market depth outside the inside quote, the institutional investor may suffer little difference in price impact costs by executing the order on a national securities exchange. On the other hand, a small capitalization, low priced stock might have much lower market depth outside the inside quote, and, therefore, the difference in price impact costs for executing orders of these stocks on an exchange might be substantial.817 Furthermore, because NMS Stock ATSs trade larger dollar volume in small capitalization, low priced stocks, the price impact costs for institutional investors that trade in such stocks may in fact be severe if many NMS Stock ATSs decided to exit the market.818 As mentioned above, while the Commission is unable to estimate the number of NMS Stock ATSs that may potentially exit the market, the Commission also does not know whether firms will send their small capitalization stock orders to other surviving NMS Stock ATSs, national securities exchanges, or non-ATS trading centers. Therefore, the Commission cannot estimate what price market participants would receive for the small capitalization stock orders and thus, the Commission cannot estimate the price impact costs associated with these small capitalization stock orders. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 3. Written Safeguards and Written Procedures To Protect Subscribers’ Confidential Trading Information, and Proposed Recordkeeping Requirements The Commission is also proposing to amend existing Rules 301(b)(10) 819 and 303(a)(1) 820 of Regulation ATS to require all ATSs to adopt and preserve written safeguards and written procedures to protect subscribers’ confidential trading information, as well as written oversight procedures to ensure those safeguards and procedures are followed. As explained above, the Commission preliminarily believes that these proposed amendments should both strengthen the effectiveness of 817 See Collver, Charles, 2014, ‘‘A Characterization of Market Quality for Small Capitalization US Equities,’’ SEC Division of Trading and Markets Working Paper, https:// www.sec.gov/marketstructure/research/small_cap_ liquidity.pdf. 818 The Commission notes that it is difficult to quantify the increase in price impact costs faced by institutional traders because it is unclear how many NMS Stock ATSs may cease operations, and more so, it is unclear whether these institutional traders who would like to execute large orders will route them to other ATSs that may continue to operate. 819 See 17 CFR 242.301(b)(10). 820 See 17 CFR 242.303(a). VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 ATS’ safeguards and procedures and improve those ATSs’ ability to implement and monitor the adequacy of, and the ATSs’ compliance with, their safeguards and procedures.821 Furthermore, the Commission preliminarily believes that requiring ATSs to adopt written safeguards and written procedures will benefit the Commission by helping it better understand, monitor, and evaluate how each ATS protects subscribers’ confidential trading information from unauthorized disclosure and access.822 The Commission also expects that this proposed requirement will help oversight by the SRO of which the NMS Stock ATS’s broker-dealer operator is a member. Under Rule 301(b)(10), all ATSs must establish adequate safeguards and procedures to protect subscribers’ confidential trading information and adequate oversight procedures to ensure that the safeguards and procedures established to protect such trading information are followed. However, neither Rule 301(b)(10) nor the recordkeeping requirements under Rule 303(a)(1) of Regulation ATS require that an ATS have and preserve those safeguards and procedures in writing. As explained above, the Commission preliminarily believes that the proposal to require written safeguards and written procedures would better enable ATSs—in particular, those ATSs that do not currently maintain written safeguards and procedures—to protect confidential subscriber trading information and implement and monitor the adequacy of, and the ATS’s compliance with, its safeguards and procedures.823 The Commission is also proposing to amend the recordkeeping rules relevant to the proposed amendments to Rule 301 and proposed Rule 304. The Commission is proposing that NMS Stock ATSs shall preserve Form ATS– N, Form ATS–N Amendments, and a Form ATS–N notice of cessation for the life of the enterprise and any successor enterprise pursuant to Rule 303(a)(2) 824 of Regulation ATS.825 The Commission is also proposing to amend Rule 303(a)(1)826 so that ATSs must preserve for a period of not less than three years, the first two in an easily accessible 821 See supra Section IX. id. 823 See id. 824 See 17 CFR 242.303(a)(2). 825 The Commission notes that an NMS Stock ATS that had previously made filings on Form ATS would be required to preserve those filings for the life of the enterprise, as well as filings made going forward on Form ATS–N. 826 See 17 CFR 242.303(a)(1). 822 See PO 00000 Frm 00132 Fmt 4701 Sfmt 4702 place, the written safeguards and procedures that would be required under the proposed amendments to Rule 301(b)(10). The Commission understands that these proposed amendments regarding recordkeeping requirements may require NMS Stock ATSs to set up systems and procedures, and these are expected to account for a portion of the implementation costs under this proposal.827 D. Alternatives 1. Require NMS Stock ATSs To Publicly Disclose Current Form ATS One alternative would be to allow NMS Stock ATSs to continue to describe their operations on current Form ATS, but either make Form ATS public by posting on the Commission’s Web site or require NMS Stock ATSs to publicly disclose their initial operation reports, amendments, and cessation of operations on Form ATS. Non-NMS Stock ATSs’ Form ATS filings would continue to remain confidential. Use of current Form ATS would lower the cost of compliance for current and future NMS Stock ATSs compared to compliance costs under the proposal. However, because the content of Form ATS would not change under this alternative, market participants would continue to receive limited information regarding how orders interact, match, and execute on NMS Stock ATSs and the activities of NMS Stock ATSs’ broker-dealer operators and their affiliates. Relative to the proposal, market participants’ search costs in identifying which NMS Stock ATS may better serve their trading interests would increase. As a result, their trading costs may increase and the execution quality related to their orders may be reduced. The Commission expects public disclosure of Form ATS could have some harmful effects on the competitive dynamics of NMS Stock ATSs and result in some exiting the market. However, such effects would likely be smaller than those expected under the proposal because, under this alternative, Form ATS would require disclosure of less information about the operations of NMS Stock ATSs than the more expansive and granular information that NMS Stock ATSs would be required to disclose in Form ATS–N. Requiring NMS Stock ATSs to publicly disclose initial operation reports, amendments, and cessation of operations on Form ATS would place NMS Stock ATSs under greater public scrutiny, which could improve the quality of the filings compared to the 827 See E:\FR\FM\28DEP3.SGM supra Section XIII.C.1. 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules current baseline. Regulators’ oversight of NMS Stock ATSs under this alternative would be similar to that under current Regulation ATS, so they would not be able to offer the same level of protection to market participants as under the proposal. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 2. Require Proposed Form ATS–N But Deem Information Confidential Another alternative would be to require NMS Stock ATSs to file proposed Form ATS–N with the Commission but not make Form ATS– N publicly available. Proposed Form ATS–N would include detailed disclosures about the NMS Stock ATS’s operations and the activities of its broker-dealer operator and its affiliates, and the Commission would declare filings on Form ATS–N either effective or ineffective. This alternative would improve the quality of NMS Stock ATSs’ disclosures to the Commission because proposed Form ATS–N would require more information about the operations of NMS Stock ATSs than is currently solicited on Form ATS. In addition, proposed Form ATS–N would require information about the activities of the broker-dealer operator and its affiliates, whereas current Form ATS does not require such information. This alternative, which would include a process for the Commission to determine whether an NMS Stock ATS qualifies for the exemption from the definition of ‘‘exchange,’’ and declare a proposed Form ATS–N effective or ineffective, would strengthen the Commission’s oversight of NMS Stock ATSs. However, this alternative would not make NMS Stock ATSs’ operations more transparent for market participants. The lack of public disclosure of the means of order interaction, display and routing practices by NMS Stock ATSs could result in market participants making less informed decisions regarding where to route their orders and therefore result in lower execution quality than they would obtain under the proposal. Additionally, this alternative would not reduce the search costs for subscribers to identify potential routing destinations for their orders. Because proposed Form ATS–N would not be publicly disclosed under this alternative, the level of competition between NMS Stock ATSs would stay the same, and the lack of transparency about an NMS Stock ATS’s operations and activities of the brokerdealer operator and its affiliates would be expected to persist. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 3. Require NMS Stock ATSs To Publicly Disclose Proposed Form ATS–N But Not Declare Proposed Form ATS–N Effective or Ineffective Under this alternative, the Commission would require NMS Stock ATSs to file proposed Form ATS–N and would make it public, but the Commission would continue to use the current notice regime instead of declaring Form ATS–N effective or ineffective. The Commission would not determine whether an NMS Stock ATS qualifies for the exemption from the definition of ‘‘exchange,’’ and would not declare proposed Form ATS–N filings effective or ineffective. Benefits of maintaining the current notice regime would include a lower demand for Commission and its staff resources to determine whether an NMS Stock ATS qualifies for the exemption from the definition of ‘‘exchange’’ and whether the Commission should declare a proposed Form ATS–N effective or ineffective, and to assess whether the Commission should suspend, limit, or revoke the effectiveness of an NMS Stock ATS’s Form ATS–N. In addition, maintaining the current notice regime as opposed to declaring the proposed Form ATS–N effective or ineffective could be cost-effective to NMS Stock ATSs and could lower the barriers to entry for new NMS Stock ATSs compared to such barriers under the proposal. Without a process to declare proposed Form ATS–N effective or ineffective, there would be less assurance that disclosures by NMS Stock ATSs would be accurate, current, and complete. Under this alternative, it would be more difficult for the Commission to exercise its oversight responsibilities with respect to the accuracy, currency, completeness and fair presentation of disclosures on proposed Form ATS–N than under the proposal, which would provide a process for the Commission to declare a proposed Form ATS–N effective or ineffective. Moreover, continued use of a notice regime could lessen the benefit of enhanced transparency relative to such benefit under the proposal and as a result, this alternative might not provide the same level of protection to market participants as the proposal. 4. Initiate Differing Levels of Public Disclosure Depending on NMS Stock ATS Characteristics Under this alternative, the Commission would require different levels of disclosure among NMS Stock ATSs based on dollar trading volume. For instance, NMS Stock ATSs with lower transaction volumes would be PO 00000 Frm 00133 Fmt 4701 Sfmt 4702 81129 subject to lower levels of disclosure on proposed Form ATS–N. As a result, their compliance costs would be lower, which could lower their entry barriers relative to such barriers under the proposal. Because these small NMS Stock ATSs would not have to disclose as much information pertaining to their operations, they could have more time to innovate without disclosing such innovation to competitors. This could allow these small NMS Stock ATSs to better compete with more established NMS Stock ATSs, national securities exchanges, and broker-dealers and put more competitive pressure on the market. Furthermore, reduced regulatory burdens for small NMS Stock ATSs may result in greater innovation relative to the proposal because these small NMS Stock ATSs would not have to be concerned about disclosing proprietary information. Greater innovation for small NMS Stock ATSs could give them a greater competitive advantage in attracting order flow relative to large NMS Stock ATSs. This competitive advantage for small NMS Stock ATSs could spill over to market participants who execute on these ATSs, by increasing the execution quality of their trades. However, under this alternative, broker-dealer operators of NMS Stock ATSs could seek to allocate order flow to multiple NMS Stock ATSs operated by either the broker-dealer or its affiliates to avoid reaching threshold volumes that would trigger additional disclosure requirements. This could create some information opaqueness in the market, which could lead to lower execution quality for market participants relative to that under the proposal. The Commission notes, however, that although Regulation ATS currently has volume thresholds for fair access and quote transparency requirements, the Commission has not observed any ATSs using such tactics to avoid crossing thresholds. 5. Require NMS Stock ATSs To Register as National Securities Exchanges and Become SROs Under this alternative, the Commission would eliminate the exemption from the definition of ‘‘exchange’’ for NMS Stock ATSs under Exchange Act Rule 3a1–1(a) so that an NMS Stock ATS would be required to register as a national securities exchange and become an SRO. This alternative would provide market participants with the same protections that accompany the regulatory regime that applies to national securities exchanges. Without the benefit of the exemption from the definition of ‘‘exchange,’’ an NMS Stock E:\FR\FM\28DEP3.SGM 28DEP3 81130 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules ATS would be required, among other things, to file proposed rule changes publicly on Form 19b–4 and make publicly available its entire rule book. Moreover, as a national securities exchange, an NMS Stock ATS would not be allowed to have conflicts of interest that it can as an NMS Stock ATS. More information about the priority, order interaction, display, and execution procedures would help market participants make better informed decisions about where to route their orders for best execution. If most NMS Stock ATSs decided to register as national securities exchanges and some NMS Stock ATSs withdrew from the market and stopped operating, competition among and between these trading venues could increase, leading to greater market liquidity and market efficiency. Further, this alternative could strengthen Commission oversight, thus benefitting market participants. While NMS Stock ATSs would no longer need to register as broker-dealers or comply with Regulation ATS, registration as national securities exchanges would create high startup costs and high ongoing operational costs compared to what they would incur under the proposal.828 Under this alternative, these new national securities exchanges, which would be SROs, would, among other things, be required to comply with Section 6 of the Exchange Act. Because national securities exchange are SROs, a new national securities exchange would bear certain regulatory costs that are higher than those associated with registering as a broker-dealer. For example, a national securities exchange would bear expenses associated with joining the national market system plans and surveilling trading activity and member conduct on the exchange.829 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 6. Discontinue Quarterly Volume Reports on Form ATS–R Another alternative would be to amend Regulation ATS so that NMS Stock ATSs would no longer be required to file quarterly volume reports on Form ATS–R because, as noted above, FINRA rules currently require ATSs that transact in NMS stocks to report aggregate weekly volume information 828 Newly registered national securities exchanges must establish appropriate surveillance and disciplinary mechanisms, and as a result incur start-up costs associated with such obligations, such as writing a rule book. See Regulation ATS Adopting Release, supra note 7, at 70897. Furthermore, the cost of acquiring the necessary assets and the operating funds to carry out the dayto-day functions of a national securities exchange are significant. See id. 829 See Regulation NMS Adopting Release, supra note 7, at 70903. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 and the number of trades to FINRA in certain equity securities, including NMS stocks.830 Instead, NMS Stock ATSs would be required to disclose, in quarterly amendments to Form ATS–N, the information that is currently captured by Form ATS–R that is not captured by FINRA reporting requirements. The Commission notes that, in addition to requiring unit volume of transactions, Form ATS–R, which is ‘‘deemed confidential when filed,’’ 831 requires ATSs to report dollar volume of transactions during the quarter, a list of all subscribers that were participants on the ATS during the quarter, a list of all securities that were traded on the ATS during the quarter, and, if the ATS is subject to fair access requirements under Rule 301(b)(5), information about all persons that were granted, denied or limited access during the quarter. The benefit of this alternative would be that NMS Stock ATSs would no longer be required to report quarterly on Form ATS–R information that is otherwise available. In addition, information that is currently deemed confidential on Form ATS–R would be made publicly available in quarterly amendments to Form ATS–N. NMS Stock ATSs would, however, be required to submit such quarterly amendments, which an NMS Stock ATS would not otherwise be required to do if the NMS Stock ATS did not have any other material changes to report during the quarter. The Commission does not believe that this alternative would create significant new costs in preparing a quarterly Form ATS–N because the costs would be comparable to the costs of preparing Form ATS–R. However, as a result of the effective merging of proposed Form ATS–N and current Form ATS–R under this alternative, some of the information that would be made public on proposed Form ATS–N, such as the ATS’s subscriber list and the list of persons granted, denied, or limited access during the reporting period (which is not being solicited under the proposed Form ATS–N) could be proprietary. Making such information public could harm the NMS Stock ATS as well as persons denied access. 7. Require NMS Stock ATSs To Operate as Limited Purpose Entities Another alternative would be to amend Regulation ATS to require an 830 See supra note 122. Each ATS is also 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. 831 See 17 CFR 242.301(b)(2)(vii). PO 00000 Frm 00134 Fmt 4701 Sfmt 4702 NMS Stock ATS to operate as a ‘‘standalone’’ entity, which would exist only to operate the ATS and have no affiliation with any broker-dealer that seeks to execute proprietary or agency orders on the NMS Stock ATS. Under this alternative, NMS Stock ATSs would be required to publicly disclose proposed Form ATS–N, proposed Form ATS–N Amendments, and notices of cessation on proposed Form ATS–N, and would be limited purpose entities that could not engage in any activities other than operation of the ATS. This alternative would prohibit the broker-dealer operator of the NMS Stock ATS from engaging in any other broker-dealer activity, and would consequently prohibit the operation of an NMS Stock ATS by a multi-service broker-dealer. The benefit of this alternative would be to eliminate potential conflicts of interest by requiring a broker-dealer that operates an NMS Stock ATS to have only a single business function, namely, operating the ATS. The broker-dealer would be required to eliminate any other functions, such as trading on a proprietary basis or routing customer orders. However, this alternative may discourage broker-dealers from creating and operating innovative NMS Stock ATS platforms, and instead drive them to execute their own proprietary trades internally on their other broker-dealer systems. In addition, if they were no longer able to trade on a proprietary basis or route customer orders to their own NMS Stock ATS, many brokerdealers may choose to file a cessation of operations report and shut down the operations of their NMS Stock ATS.832 Shutting down their NMS Stock ATS operations could result in similar (though potentially more severe) effects on the competitive dynamics of the ATS market as under the proposal. This could push more liquidity to less transparent venues (i.e., non-ATS OTC trading centers) or could result in more liquidity moving to national securities exchanges. The remaining NMS Stock ATSs, which would likely be fewer in number as some broker-dealer operators choose to cease operations of the ATSs, could become popular trading destinations because the absence of conflicts of interest could encourage market participants to route orders to those trading centers. Market 832 Alternatively, current broker-dealer operators of ATSs that trade NMS stocks may choose to spinoff or sell their ATS rather than cease operations. The expected number of broker-dealer operators selling their ATSs at once could affect the value the broker-dealer operator could receive from the sale and, as such, could factor into the decision of whether to spin-off, sell, or fold their ATS. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules participants would likely still have a need for anonymous trading, which could further contribute to liquidity still flowing to the stand-alone NMS Stock ATSs. Thus, if multi-service brokerdealers that operate their own NMS Stock ATS cease operating the ATSs, liquidity might move to other trading venues, including both transparent venues, such as national securities exchanges, and less transparent venues, such as non-ATS OTC trading centers. On the other hand, cessation of operations of NMS Stock ATSs owned by multi-service broker dealers could also result in stand-alone NMS Stock ATSs, which would not have the potential conflicts of interest discussed above, attracting more liquidity. 8. Lower the Fair Access Threshold for NMS Stock ATSs As discussed above, NMS Stock ATSs are not required to provide fair access to the services of the NMS Stock ATS unless the ATS reaches the 5% trading volume threshold in a stock under Rule 301(b)(5) of Regulation ATS.833 As an alternative to the proposed enhancements to the conditions to the exemption from the definition of ‘‘exchange’’ pursuant to Rule 3a1–1(a) for NMS Stock ATSs, which would include NMS Stock ATSs making the disclosures required by Form ATS–N so that market participants could make more informed decisions about an NMS Stock ATS as a potential trading venue,834 the Commission considered lowering the fair access threshold under Rule 301(b)(5) of Regulation ATS 835 for NMS Stock ATSs to a level sufficiently low such that most NMS Stock ATSs would be prohibited from engaging in many discriminatory practices.836 One of the principal aims of this proposed rulemaking is to provide market participants with more information about the activities of the broker-dealer operator, its affiliates, and the operations of the NMS Stock ATS, so they may better assess NMS Stock ATSs as potential trading venue for their orders. For example, as discussed above, the Commission is concerned that market participants have limited or different levels of information about mstockstill on DSK4VPTVN1PROD with PROPOSALS3 833 See supra notes 92–95 and accompanying text. discussed above in Sections VII and VIII, the information that would be disclosed on Form ATS–N would include, among other things, whether different classes of subscribers or persons have differing access to the services of the ATS. 835 17 CFR 242.301(b)(5). 836 As discussed above in Section VII.B, the requirements of Rule 301(b)(5) that prohibit or limit discriminatory practices of ATSs only apply to NMS Stock ATSs that cross the fair access threshold, and then, apply only with respect to the NMS stocks in which an ATS crosses the threshold. 834 As VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 how the NMS Stock ATSs operate, and the activities of broker-dealer operators and their affiliates.837 The Commission could propose new rules that would expressly prohibit or limit organizational structures that might raise conflicts of interest, or could expressly prohibit or limit the manner by which an ATS discriminates among or between subscribers. Lowering the threshold that triggers the fair access requirements would be one of the means of prohibiting or limiting certain discriminatory practices. The Commission preliminarily believes that lowering the fair access threshold for NMS Stock ATSs would require the Commission to consider lowering the fair access threshold to zero, or to some threshold between zero and 5%. If the fair access threshold remained at a threshold above zero, the benefit of this approach, as compared to the proposed disclosure requirements that would apply to all NMS Stock ATSs, could be further limited by the fact that the fair access requirements would apply only to the NMS stocks for which the NMS Stock ATS had crossed the fair access threshold. The Commission could address that situation by proposing further amendments to the fair access requirements that would extend an ATS’s fair access duties to all NMS stocks once the fair access threshold had been crossed by an ATS in a certain number of NMS stocks, to revise the duties incurred when the threshold is crossed, or to simply lower the threshold to zero, which would have the effect of requiring all NMS Stock ATSs to immediately comply with the fair access requirements for all NMS stocks. However, the Commission preliminarily believes that the disclosures that would be required by proposed Form ATS–N requirements would be a cost effective and simpler approach than proposing fundamental revisions to the fair access requirements that would achieve the aim of providing market participants with information to better assess NMS Stock ATSs as potential trading venues. 9. Apply Proposed Rule 304 to ATSs That Trade Fixed Income Securities and ATSs That Solely Trade Government Securities Another alternative would be to amend Regulation ATS to require ATSs that trade fixed income securities and ATSs that solely trade government securities to also report information about their operations and activities of the broker-dealer operator and affiliates on Form ATS–N. Under this alternative, NMS Stock ATSs, as well as ATSs that trade fixed income securities and ATSs that solely trade government securities, would be required to publicly disclose proposed Form ATS–N, proposed Form ATS–N Amendments, and notices of cessation on proposed Form ATS–N. The benefit of this alternative is that it may provide market participants with clearer transparency regarding the operations and activities of all types of ATSs, not just NMS stock ATSs. To the extent that there may be market participants who predominately trade orders of NMS stock, fixed income securities, and government securities on ATSs, these market participants would benefit from the added transparency regarding how these venues operate and the activities of their broker-dealer operators and affiliates. ATSs that effect trades in fixed income securities primarily compete against other trading venues with limited or no operational transparency requirements or standards. This is not the case with NMS Stock ATSs, which provide limited information to market participants about their operations and compete directly with national securities exchanges, which are required to publicly disclose information about their operations in the form of proposed rule changes and a public rule book.838 With government securities, trading occurs in bilateral transactions or on centralized electronic trading platforms that generally operate with limited transparency.839 Because the market structure for and transparency requirements related to trading each of these types of securities (NMS Stock ATSs, fixed income, government securities) differ, Form ATS–N under this alternative would need to include different or additional disclosure requirements related to the operations and activities of each of these types of ATSs, so as to capture the nuances in each particular market. As a result, Form ATS–N under this alternative would need to be much more complex than the proposed Form ATS–N, increasing the costs for investors to efficiently use Form ATS–N for a given type of security trading and for NMS Stock ATSs, reducing the benefits from Form ATS–N in NMS stocks. In addition, fixed income ATSs would incur costs to comply with the additional disclosures, which could result in an exit of existing fixed income ATSs, discourage innovation in surviving fixed income ATSs, and increase barriers to entry for new fixed income ATSs. Because the corporate 838 See 837 See PO 00000 supra Section III.C. Frm 00135 Fmt 4701 Sfmt 4702 81131 839 See E:\FR\FM\28DEP3.SGM supra Section IV.B. id. 28DEP3 81132 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 and municipal fixed income markets lack much of the automation present for venues that trade NMS stocks, such costs could be more critical in the development of the fixed income market than in the markets for NMS stocks. Furthermore, as discussed above, ATSs that solely trade government securities are exempt from compliance with Regulation ATS.840 To the extent that this exemption is removed and such ATSs were required to comply with Regulation ATS, including proposed Rule 304, these ATSs would incur costs associated with the public reporting and recordkeeping requirements of Regulation ATS. Request for Comment on the Economic Analysis The Commission is sensitive to the potential economic effects, including the costs and benefits, of the proposed amendments to Regulation ATS. The Commission has identified above certain costs and benefits associated with the proposal and requests comment on all aspects of its preliminary economic analysis. The Commission encourages commenters to identify, discuss, analyze, and supply relevant data, information, or statistics regarding any such costs or benefits. In particular, the Commission seeks comment on the following: 506. Do you believe the Commission’s analysis of the potential effects of the proposed amendments to Regulation ATS is reasonable? Why or why not? Please explain in detail. 507. Do you believe the Commission’s assessment of the baseline for the economic analysis is reasonable? Why or why not? Please explain in detail. 508. Do you believe that the proposing release provides a fair representation of current practices and how those current practices would change under the proposed amendments to Regulation ATS? Why or why not? Please explain in detail. 509. Do you believe that the Commission has reasonably described how the competitive landscape for the market for NMS stock execution services would be affected under the proposed amendments to Regulation ATS? Why or why not? Please explain in detail. Does the release discuss all relevant forms of competition and whether the proposal could alter them? If not, which additional forms of competition could the proposal impact and how? Please explain in detail. 510. Do you believe that the Commission has reasonably identified all market participants that would be 840 See supra note 64. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 affected by the proposed amendments to Regulation ATS? If so, why? If not, why not, and which market participants do you believe are not reasonably excluded or would be affected by the proposed amendments? Please explain in detail. 511. Do you believe that the Commission has reasonably described how market participants would be affected by the proposed amendments to Regulation ATS? Why or why not? Please explain in detail. 512. Do you believe that the Commission has reasonably described the information market participants currently receive? If so, why? If not, why not? Please explain in detail. 513. Do you believe that the Commission has reasonably described the benefits market participants would receive from the information that would be required to be disclosed by the proposed amendments to Regulation ATS? Why or why not? Please explain in detail. 514. Do you believe that market participants currently have all relevant information concerning the activities of the broker-dealer operator of the NMS Stock ATS and its affiliates as such activities relate to the NMS Stock ATS? Why or why not? Do you believe there is information that is not required in the proposed amendments to Regulation ATS that would be beneficial to market participants? If so, please describe that information and its benefits in detail. If not, why not? Please support your arguments. 515. Do you believe that market participants currently have all relevant information concerning the subscribers to the NMS Stock ATS where their orders are executed? Why or why not? Do you believe there is information that is not required in the proposed amendments to Regulation ATS that would be beneficial to market participants? If so, please describe that information and its benefits in detail. If not, why not? Please support your arguments. 516. Do you believe that market participants currently have all relevant information concerning the trading operations of the NMS Stock ATS where their orders are executed? Why or why not? Do you believe there is information that is not required in the proposed amendments to Regulation ATS that would be beneficial to market participants? If so, please describe that information and its benefits in detail. If not, why not? Please support your arguments. 517. Do you believe that market participants currently have all relevant information concerning the services offered by the NMS Stock ATS where PO 00000 Frm 00136 Fmt 4701 Sfmt 4702 their orders are executed and their fee structures? Why or why not? Do you believe there is information that is not required in the proposed amendments to Regulation ATS that would be beneficial to market participants? If so, please describe that information and its benefits in detail. If not, why not? Please support your arguments. 518. Do you believe that market participants currently have all relevant information concerning the safeguards and procedures that NMS Stock ATSs have instituted to protect their confidential trading information? Why or why not? Is there information that is not required in the proposed amendments to Regulation ATS that would be beneficial to market participants? If so, please describe that information and its benefits in detail. If not, why not? Please support your arguments. 519. Do you believe that the Commission has reasonably described its analysis of the costs and benefits of each proposed amendment to Regulation ATS? Why or why not? Please explain in detail. 520. Do you believe that there are additional benefits or costs that could be quantified or otherwise monetized? Why or why not? If so, please identify these categories and, if possible, provide specific estimates or data. 521. Do you believe there are there any additional benefits that may arise from the proposed amendments to Regulation ATS? If so, what are such benefits? Please explain in detail. 522. Do you believe there are benefits described above that would not likely result from the proposed amendments to Regulation ATS? If so, please explain these benefits or lack of benefits in detail. 523. Do you believe there are any additional costs that may arise from the proposed amendments to Regulation ATS? If so, do you believe there are methods by which the Commission could reduce the costs imposed by the proposed amendments to Regulation ATS while still achieving the goals? Please explain in detail. 524. Do you believe there are any potential unintended consequences of the proposed amendments to Regulation ATS? If so, what are they? If not, why not? 525. Do you believe there are costs described above that would not likely result from the proposed amendments to Regulation ATS? Why or why not? Please support your arguments. 526. Do you believe that the proposing release appropriately describes the potential effects of the proposed amendments to Regulation E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules ATS on the promotion of efficiency, competition, and capital formation? Why or why not? If possible, please provide analysis and empirical data to support your arguments on the competitive or anticompetitive effects, as well as the efficiency and capital formation effects, of the proposed amendments. 527. Do you believe that there are alternative mechanisms for achieving the Commission’s goal of improving transparency of NMS Stock ATS’s trading operations and regulatory oversight while promoting competition and capital formation? If so, what are such mechanisms? Please explain in detail. 528. Do you believe that market participants would change their behavior in response to the proposed amendments to Regulation ATS in any way? Why or why not? If so, which market participants would change their behavior and how? If not, why not? What would be the benefits and costs of these changes? How would these changes affect efficiency, competition, and capital formation? How would these changes affect market quality and market efficiency? Please support your arguments. 529. Do you believe there are benefits that may arise if the Commission were to apply proposed Rule 304, in whole or in part, to fixed income ATSs? If so, what are such benefits? Please explain in detail. 530. Do you believe there are costs that may arise if the Commission were to apply proposed Rule 304, in whole or in part, to fixed income ATSs? If so, what are such costs? Please explain in detail. 531. Do you believe that the proposed amendments could result in NMS Stock ATSs selecting to trade fixed income securities instead of NMS stocks, because, under the proposed amendments, Rule 304 would not apply to fixed income securities? Please explain in detail. 532. Do you believe that if the Commission were to apply proposed Rule 304 to fixed income ATSs, this could alter the nature of competition in the market for order execution services for fixed income securities? Why or why not? Please support your arguments. 533. Do you believe that if the Commission were to apply proposed Rule 304 to fixed income ATSs, this could promote greater efficiency, competition, and capital formation relative to the current proposal? If so, please explain in detail. 534. Do you believe there are benefits that may arise if the Commission should adopt amendments to Regulation ATS to VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 remove the exemption under Rule 301(a)(4)(ii)(A) of Regulation ATS for ATSs whose trading activity is solely in government securities? If so, what are such benefits? Please explain in detail. 535. Do you believe that there are benefits that may arise if the Commission enhances the transparency requirements applicable to ATSs that effect transactions solely in government securities? If so, what are such benefits? Please explain in detail. 536. Do you believe there are costs that may arise if the Commission adopted amendments to Regulation ATS to remove the exemption under Rule 301(a)(4)(ii)(A) of Regulation ATS for ATSs whose trading activity is solely in government securities? If so, what are such costs? Please explain in detail. 537. Do you believe that there are costs that may arise if the Commission were to apply Rule 304 to ATSs that effect transactions solely in government securities? If so, what are such costs? Please explain in detail. 538. Do you believe that the proposed amendments could result in ATSs selecting to solely trade government securities instead of NMS stocks, because, under the proposal, Rule 304 would not apply to government securities? Please explain in detail. 539. Do you believe that if the Commission were to apply Rule 304 to ATSs that solely trade government securities, this could alter the nature of competition in the market for order execution services for government securities? Why or why not? Please support your arguments. 540. Do you believe that if the Commission were to apply proposed Rule 304 to ATSs that solely trade government securities, this could promote greater efficiency, competition, and capital formation relative to the current proposal? If so, please explain in detail. 541. Do you believe that requiring NMS Stock ATSs to do something more to ensure compliance with proposed Rule 304 than the certification required under FINRA Rule 3130 would have effects on regulatory oversight and investor protection? If so, please explain in detail. 542. Do some NMS Stock ATSs currently disclose aggregate platformwide order flow and execution statistics regarding the NMS Stock ATS that are not otherwise required disclosures under Exchange Act Rule 605 of Regulation NMS to one or more subscribers by the NMS Stock ATS? If so, what order flow and execution statistics are provided? How widely disseminated is the information? To what extent do the NMS Stock ATSs PO 00000 Frm 00137 Fmt 4701 Sfmt 4702 81133 disclose how they calculate the statistics? Please explain in detail. 543. Do you believe that there are benefits to market participants from having NMS Stock ATSs publicly disclose aggregate platform-wide order flow and execution statistics regarding the NMS Stock ATS that are not otherwise required disclosures under Exchange Act Rule 605 of Regulation NMS but still published or otherwise provided to one or more subscribers by the NMS Stock ATS, and from having NMS Stock ATSs describe how those statistics are calculated? If so, please explain in detail. Do you believe that there are costs to NMS Stock ATSs from having them publicly disclose those market quality statistics and describe how those statistics are calculated? If so, please explain in detail. 544. Do you believe that there are benefits to market participants if the Commission were to require NMS Stock ATSs to provide disclosure about their governance structure, compliance programs and controls to comply with Regulation ATS? If so, please explain in detail. 545. Do you believe that there are costs to NMS Stock ATSs if the Commission were to require them to provide disclosure about their governance structure, compliance programs and controls to comply with Regulation ATS? If so, please explain in detail. 546. Should proposed Form ATS–N be submitted or made publicly available on EDGAR instead of through the EFFS system and the Commission’s Web site? What would be the advantages to the public or to NMS Stock ATSs of access through EDGAR instead of the Commission’s proposed process? 547. Should some or all of the information in proposed Form ATS–N be submitted in a particular financial reporting language such as the FIX Protocol, eXtensible Business Reporting Language (XBRL), or some other open standard that is widely available to the public and at no cost? Should the Commission create a new taxonomy for submitting the information in proposed Form ATS–N? 548. Should the Commission require that some or all of the information in proposed Form ATS–N be tagged using standard electronic definitions of a particular taxonomy, and what would be the additional compliance costs associated with tagging the information? 549. Would requiring any of the information in the narrative responses to be submitted in a tagged format enhance the public’s use of the data beyond the Commission’s proposal? If so, how? E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81134 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules 550. Could a format other than the one proposed to be accepted by the EFFS system reduce the burden on NMS Stock ATSs in filing the required disclosures with the Commission? For example, could a single machinereadable PDF reduce the filing burden on NMS Stock ATSs? If so, please identify the alternative format and the reduced filing burdens associated with it. 551. Should proposed Form ATS–N be structured in a more granular detail, and if so, how? In addition, how would the more granular detail enhance the public’s use of the data beyond the Commission’s proposal? What would be the costs of providing more granular detail? 552. Would the public’s usability of the data be enhanced if it were structured in another format? If so, please identify the other format and describe how the public’s use of the data would be enhanced by the other format. If possible, discuss factors about the other format such as how commonly available it is, whether it is viewerindependent, whether it is an open standard, how it has been adopted internationally and in other regulatory contexts, and how it supports document attachments or references as well as narrative and numeric data. 553. Do you believe that the Commission articulated all reasonable alternatives for the proposed amendments to Regulation ATS? If not, please provide additional alternatives and how their costs and benefits, as well as their potential impacts on the promotion of efficiency, competition, and capital formation, would compare to the proposed amendments. 554. Do you believe that the Commission has reasonably described the costs and benefits for the alternatives described above? If not, please provide more accurate descriptions of costs and benefits, including any data or statistics that support those costs and benefits. 555. Do you believe that the Commission has reasonably described the potential impacts on the promotion of efficiency, competition, and capital formation of the alternatives described above relative to the proposed amendments? If not, please explain in detail which impacts for which alternatives the Commission has not reasonably described, and support your arguments with any applicable data or statistics. 556. The Commission generally requests comment on the competitive or anticompetitive effects, as well as the efficiency and capital formation effects, of the proposed amendments to VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 Regulation ATS on market participants if the proposed rules are adopted as proposed. Commenters should provide analysis and empirical data to support their views on the competitive or anticompetitive effects, as well as the efficiency and capital formation effects, of the proposed amendments to Regulation ATS. 557. The Commission generally requests comment on whether the benefits of the proposed amendments to Regulation ATS justify the costs. Please be specific and provide details. Commenters should provide analysis and empirical data to support their views on the benefits and costs of the proposed amendments to Regulation ATS. 558. Do you believe that the Commission has solicited the right set of information on proposed Form ATS–N, which will be made available to the public? Is there any other information the Commission should ask NMS Stock ATSs to provide on Form ATS–N? If so, please provide details. XIV. Consideration of Impact on the Economy For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996,841 the Commission requests comment on the potential effect of the proposed amendments and Form ATS– N on the United States economy on an annual basis. The Commission also requests comment on any potential increases in costs or prices for consumers or individual industries, and any potential effect on competition, investment, or innovation. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. XV. Regulatory Flexibility Act Certification Section 3(a) of the Regulatory Flexibility Act of 1980 842 (‘‘RFA’’) requires the Commission to undertake an initial regulatory flexibility analysis of the impact of the proposed rule amendments on small entities unless the Commission certifies that the rule, if adopted, would not have a significant economic impact on a substantial number of small entities.843 For purposes of Commission rulemaking in connection with the RFA,844 a small 841 5 U.S.C. 603. U.S.C. 603(a). 843 5 U.S.C. 605(b). 844 Although Section 601(b) of the RFA defines the term ‘‘small entity,’’ the statute permits agencies to formulate their own definitions. The Commission has adopted definitions for the term ‘‘small entity’’ for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as 842 5 PO 00000 Frm 00138 Fmt 4701 Sfmt 4702 entity includes a broker or dealer that: (1) had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to Rule 17a–5(d) under the Exchange Act,845 or, if not required to file such statements, a broker-dealer with total capital (net worth plus subordinated liabilities) of less than $500,000 on the last day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization.846 With regard to national securities exchanges, a small entity is an exchange that has been exempt from the reporting requirements of Rule 601 under Regulation NMS, and is not affiliated with any person (other than a natural person) that is not a small business or small organization.847 All ATSs, including NMS Stock ATSs, would continue to have to register as broker-dealers.848 The Commission examined recent FOCUS data for the 46 broker-dealers that currently operate ATSs that trade NMS stocks and concluded that 1 of the broker-dealer operators of ATSs that currently trade NMS stock had total capital of less than $500,000 on the last day of the preceding fiscal year (or in the time that it has been in business, if shorter).849 The Commission notes that this broker-dealer operator has never relevant to this proposed rulemaking, are set forth in Rule 0–10 under the Exchange Act, 17 CFR 240.0–10. See Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS–305). 845 17 CFR 240.17a–5(d). 846 See 17 CFR 240.0–10(c). See also 17 CFR 240.0–10(i) (providing that a broker or dealer is affiliated with another person if: such broker or dealer controls, is controlled by, or is under common control with such other person; a person shall be deemed to control another person if that person has the right to vote 25 percent or more of the voting securities of such other person or is entitled to receive 25 percent or more of the net profits of such other person or is otherwise able to direct or cause the direction of the management or policies of such other person; or such broker or dealer introduces transactions in securities, other than registered investment company securities or interests or participations in insurance company separate accounts, to such other person, or introduces accounts of customers or other brokers or dealers, other than accounts that hold only registered investment company securities or interests or participations in insurance company separate accounts, to such other person that carries such accounts on a fully disclosed basis). 847 See 17 CFR 240.0–10(e). The Commission notes that while national securities exchanges can operate an ATS, subject to certain conditions, such an ATS would have to be registered as a brokerdealer. See Regulation ATS Adopting Release, supra note 7, at 70891. Currently, no national securities exchange operates an ATS that trades NMS stocks. 848 17 CFR 242.301(b)(1). E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules reported any transaction volume in any security, including NMS stock, to the Commission on Form ATS–R. Given that this particular ATS has never reported any transaction volume to the Commission over the six years since it first submitted its Form ATS to the Commission, the Commission preliminarily believes that this ATS would likely not submit a Form ATS– N if the proposed amendments to Regulation ATS are adopted. Consequently, the Commission certifies that the proposed amendments to Regulation ATS would not, if adopted, have a significant economic impact on a substantial number of small entities. The Commission encourages written comments regarding this certification. The Commission solicits comment as to whether the proposed amendments could have impacts on small entities that have not been considered. The Commission requests that commenters describe the nature of any impacts on small entities and provide empirical data to support the extent of such effect. Such comments will be placed in the same public file as comments on the proposed amendments to Regulation ATS. Persons wishing to submit written comments should refer to the instructions for submitting comments in the front of this release. XVI. Statutory Authority Pursuant to Exchange Act, 15 U.S.C. 78a et seq., and particularly Sections [3(b), 5, 6, 11A, 15, 17(a), 17(b), 19, 23(a), and 36 thereof (15 U.S.C. 78c, 78k–1, 78o, 78q(a), 78q(b), 78w(a), and 78mm)], the Commission proposes to adopt Form ATS–N under the Exchange Act, to amend Rule 3a1–1 and Regulation ATS under the Exchange Act, and to amend 17 CFR 200.30–33. List of Subjects in 17 CFR Parts 240, 242 and 249 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Brokers, Confidential business information, Fraud, Reporting and recordkeeping requirements, Securities. For the reasons stated in the preamble, title 17, chapter II of the Code of Federal Regulations is proposed to be amended as follows: PART 240—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1934 1. The authority citation for part 240 continues to read as follows: ■ Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 3, 80b–4, 80b–11, 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and Pub. L. 111–203, 939A, 124 Stat. 1376 (2010), unless otherwise noted. * * * * * 2. Amend § 240.3a1–1 by removing ‘‘242.303’’ from paragraphs (a)(2) and (3) wherever it occurs and adding in its place ‘‘242.304’’. ■ PART 242—REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES 3. The authority citation for part 242 continues to read as follows: ■ Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a– 23, 80a–29, and 80a–37. 4. Amend § 242.300 by: a. In paragraph (f) adding the phrase ‘‘the broker-dealer of’’ before the phrase ‘‘an alternative trading system’’ wherever it occurs; and ■ b. Adding paragraph (k) to read as follows: ■ ■ § 242.300 Definitions. * * * * * (k) NMS Stock ATS means an alternative trading system, as defined in § 242.300(a), that facilitates transactions in NMS stocks, as defined in § 242.300(g). ■ 5. Amend § 242.301 by: ■ a. In paragraph (b)(2)(i), removing the phrase ‘‘, or if the alternative trading system is operating as of April 21, 1999, no later than May 11, 1999’’; ■ b. In paragraph (b)(2)(vii), removing the phrase ‘‘Market Regulation, Stop 10– 2’’ and in its place adding ‘‘Trading and Markets’’ after the words ‘‘Division of’’; ■ c. Adding paragraph (b)(2)(viii); ■ d. In paragraph (b)(9)(i), adding the word ‘‘Separately’’ before the word ‘‘File’’ and changing the first letter of the word ‘‘File’’ to lower case and adding the phrase ‘‘for transactions in NMS stocks, as defined in § 242.300(g), and transactions in securities other than NMS stocks’’ after the phrase ‘‘(§ 249.638 of this chapter)’’; ■ e. In paragraph (b)(9)(ii), adding the word ‘‘Separately’’ before the word ‘‘File’’ and changing the first letter of the word ‘‘File’’ to lower case and adding the phrase ‘‘for transactions in NMS stocks and transactions in securities other than NMS stocks’’ after the phrase ‘‘required by Form ATS–R’’; ■ f. In paragraph (b)(10), adding the word ‘‘Written’’ before the phrase ‘‘Procedures to ensure the confidential treatment of trading information’’ and PO 00000 Frm 00139 Fmt 4701 Sfmt 4702 81135 changing the first letter of the word ‘‘Procedures’’ to lower case; ■ g. In paragraph (b)(10)(i), adding the word ‘‘written’’ before the word ‘‘safeguards’’ in both instances and adding the word ‘‘written’’ before the word ‘‘procedures’’ in both instances; and ■ h. In paragraph (b)(10)(ii), adding the word ‘‘written’’ before the word ‘‘oversight’’ and adding the word ‘‘written’’ before the word ‘‘safeguards’’. The addition reads as follows: § 242.301 Requirements for alternative trading systems. * * * * * (b) * * * (2) * * * (viii) An alternative trading system that is an NMS Stock ATS shall file the reports and amendments required by § 242.304, and shall not be subject to the requirements of paragraph (b)(2) of this section. An alternative trading system that effects transactions in both NMS stocks and non-NMS stocks shall be subject to the requirements of § 242.304 of this chapter with respect to NMS stocks and paragraph (b)(2) of this section with respect to non-NMS stocks. * * * * * ■ 6. Amend § 242.303 by: ■ a. In paragraph (a) introductory text, removing ‘‘(b)(9)’’ and add in its place ‘‘(b)(8)’’; ■ b. Adding paragraph (a)(1)(v); and ■ c. In paragraph (a)(2)(ii), adding the phrase ‘‘or § 242.304’’ after the phrase ‘‘paragraph (b)(2) of § 242.301’’. The addition reads as follows: § 242.303 Record preservation requirements for alternative trading systems. * * * * * (a) * * * (1) * * * (v) At least one copy of the written safeguards and written procedures to protect subscribers’ confidential trading information and the written oversight procedures created in the course of complying with paragraph (b)(10) of § 242.301. ■ 7. Add § 242.304 to the undesignated center heading Regulation ATS— Alternative Trading Systems to read as follows: § 242.304 NMS Stock ATSs. (a) Conditions to the exemption. Unless 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)) to be exempt from the definition of an exchange pursuant to § 240.3a1–1(a)(2). E:\FR\FM\28DEP3.SGM 28DEP3 mstockstill on DSK4VPTVN1PROD with PROPOSALS3 81136 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules (1) Form ATS–N—(i) Filing. No exemption from the definition of ‘‘exchange’’ is available to an NMS Stock ATS pursuant to § 240.3a1–1(a)(2) unless the NMS Stock ATS files with the Commission a Form ATS–N, in accordance with the instructions therein, and the Commission declares the Form ATS–N effective. If the NMS Stock ATS is operating pursuant to a previously filed initial operation report on Form ATS as of [effective date of the final rule], such NMS Stock ATS shall file with the Commission a Form ATS– N, in accordance with the instructions therein, no later than 120 calendar days after [effective date of the final rule]. An NMS Stock ATS operating as of [effective date of the final rule] may continue to operate pursuant to a previously filed initial operation report on Form ATS pending the Commission’s review of the filed Form ATS–N. (ii) Review period and extension of the 120-day review period. (A) The Commission will declare a Form ATS– N filed by an NMS Stock ATS operating as of [effective date of the final rule] effective or ineffective no later than 120 calendar days from filing with the Commission. The Commission may extend the Form ATS–N review period for an NMS Stock ATS operating as of [effective date of the final rule] for: (1) An additional 120 calendar days if the Form ATS–N is unusually lengthy or raises novel or complex issues that require additional time for review, in which case the Commission will notify the NMS Stock ATS in writing within the initial 120-day review period and will briefly describe the reason for the determination for which additional time for review is required; or (2) Any extended review period to which a duly-authorized representative of the NMS Stock ATS agrees in writing. (B) The Commission will declare a Form ATS–N filed by an NMS Stock ATS that was not operating as of [effective date of the final rule] effective or ineffective no later than 120 calendar days from filing with the Commission. The Commission may extend the Form ATS–N review period for: (1) An additional 90 days, if the Form ATS–N is unusually lengthy or raises novel or complex issues that require additional time for review, in which case the Commission will notify the NMS Stock ATS in writing within the initial 120-day review period and will briefly describe the reason for the determination for which additional time for review is required; or (2) Any extended review period to which a duly-authorized representative of the NMS Stock ATS agrees in writing. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 (iii) Effectiveness. The Commission will declare effective a Form ATS–N if the NMS Stock ATS qualifies for the Rule 3a1–1(a)(2) exemption. The Commission will declare ineffective a Form ATS–N if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors. (iv) Order regarding effectiveness. The Commission will issue an order to declare a Form ATS–N effective or ineffective. Upon the effectiveness of the Form ATS–N, the NMS Stock ATS may operate pursuant to the conditions of this section. If the Commission declares a Form ATS–N ineffective, the NMS Stock ATS shall be prohibited from operating as an NMS Stock ATS. A Form ATS–N declared ineffective would not prevent the NMS Stock ATS from subsequently filing a new Form ATS–N. (2) Form ATS–N amendment—(i) Form ATS–N amendment filing requirements. An NMS Stock ATS shall amend an effective Form ATS–N, in accordance with the instructions therein: (A) At least 30 calendar days prior to the date of implementation of a material change to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that are subject to disclosure on Form ATS–N; (B) Within 30 calendar days after the end of each calendar quarter to correct any other information that has become inaccurate for any reason and has not been previously reported to the Commission as a Form ATS–N Amendment; or (C) Promptly, to correct information in any previous disclosure on Form ATS–N, after discovery that any information filed under paragraphs (a)(1)(i) or (a)(2)(i)(A) or (B) of this section was inaccurate or incomplete when filed. (ii) Commission review. The Commission will, by order, if it finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors, declare ineffective any Form ATS–N Amendment filed pursuant to paragraphs (a)(2)(i)(A) through (C) of this section no later than 30 calendar days from filing with the Commission. If the Commission declares a Form ATS–N Amendment ineffective, the NMS Stock ATS shall be prohibited from operating pursuant to the ineffective Form ATS–N Amendment. A Form ATS–N Amendment declared ineffective would not prevent the NMS PO 00000 Frm 00140 Fmt 4701 Sfmt 4702 Stock ATS from subsequently filing a new Form ATS–N Amendment. (3) Notice of cessation. An NMS Stock ATS shall notice its cessation of operations on Form ATS–N at least 10 business days before the date the NMS Stock ATS ceases to operate as an NMS Stock ATS. The notice of cessation shall cause the Form ATS–N to become ineffective on the date designated by the NMS Stock ATS. (4) Suspension, limitation, and revocation of the exemption from the definition of exchange. (i) The Commission will, by order, if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors, suspend for a period not exceeding twelve months, limit, or revoke an NMS Stock ATS’s exemption from the definition of ‘‘exchange’’ pursuant to § 240.3a1–1(a)(2) of this chapter. (ii) If an NMS Stock ATS’s exemption is suspended or revoked pursuant to paragraph (a)(4)(i) of this section, the NMS Stock ATS shall be prohibited from operating pursuant to the exemption from the definition an ‘‘exchange’’ pursuant to § 240.3a1– 1(a)(2) of this chapter. If an NMS Stock ATS’s exemption is limited pursuant to paragraph (a)(4)(i) of this section, the NMS Stock ATS shall be prohibited from operating in a manner otherwise inconsistent with the terms and conditions of the Commission order. (b) Public disclosures. (1) Every Form ATS–N filed pursuant to this section shall constitute a ‘‘report’’ within the meaning of sections 11A, 17(a), 18(a), and 32(a) (15 U.S.C. 78k–1, 78q(a), 78r(a), and 78ff(a)), and any other applicable provisions of the Act. (2) The Commission would make public via posting on the Commission’s Web site, each: (i) Order of effectiveness of a Form ATS–N; (ii) Order of ineffectiveness of a Form ATS–N; (iii) Effective Form ATS–N; (iv) Filed Form ATS–N Amendment; (v) Order of ineffectiveness of a Form ATS–N Amendment; (vi) Notice of cessation; and (vii) Order suspending, limiting, or revoking the exemption from the definition of an ‘‘exchange’’ pursuant to § 240.3a1–1(a)(2) of this chapter. (3) Each NMS Stock ATS shall make public via posting on its Web site a direct URL hyperlink to the Commission’s Web site that contains the documents enumerated in paragraph (b)(2) of this section. E:\FR\FM\28DEP3.SGM 28DEP3 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 (c) Form ATS–N filing requirements. (1) A filed Form ATS–N must respond to each item, as applicable, in detail and disclose information that is accurate, current, and complete. (2) Any report required to be filed with the Commission under this section shall be filed electronically on Form ATS–N, and include all information as prescribed in Form ATS–N and the instructions thereto and contain an electronic signature. The signatory to an electronically filed Form ATS–N shall manually sign a signature page or document, in the manner prescribed by Form ATS–N, authenticating, VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 acknowledging, or otherwise adopting his or her signature that appears in typed form within the electronic filing. Such document shall be executed before or at the time Form ATS–N is electronically filed and shall be retained by the NMS Stock ATS in accordance with § 242.303. PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 8. The general authority citation for part 249 continues to read in part as follows: ■ Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; PO 00000 Frm 00141 Fmt 4701 Sfmt 4702 81137 Sec. 953(b), Pub. L. 111–203, 124 Stat. 1904; and Sec. 102(a)(3), Pub. L. 112–106, 126 Stat. 309, unless otherwise noted. * * * * * 9. Add § 249.640 to subpart G to read as follows: ■ § 249.640 Form ATS–N, information required of NMS Stock ATSs pursuant to § 242.304(a) of this chapter. This form shall be used by every NMS Stock ATS to file required reports under § 242.304(a) of this chapter. Note: The text of Form ATS–N will not appear in the Code of Federal Regulations. BILLING CODE 8011–01–P E:\FR\FM\28DEP3.SGM 28DEP3 81138 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules United States Securities and Exchange Commission Washington, DC 20510 FORMATS-N INTENTIONAL MISSTATEMENTS OR OMMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL VIOLATIONS. See 18 U.S.C.1001 and 15 U.S.C. 78ff(a) Page 1 of _ _ File No: ATSN-[acronym]-YYYY-#### (Entity name) is making this filing pursuant to the Rule 304 under the Securities Exchange Act of 1934 D Initial Form Filing D Withdrawal of Initial Form Filing Submission Type (select one) D D D D D Rule 304(a)(l)(i) Form ATS-N Rule 304(a)(2)(i)(A) Material Amendment to Form ATS-N Rule 304(a)(2)(i)(B) Periodic Amendment to Form ATS-N Rule 304(a)(2)(i)(C) Correcting Amendment to Form ATS-N Rule 304(a)(3) Notice of Cessation Date NMS Stock ATS will cease to operate: mm/dd/yyyy Provide a brief narrative description ofthe Amendment: Part 1: Name 1. Full Name of Registered Broker-Dealer of the NMS Stock ATS ("broker-dealer operator") as stated on Form BD: - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2. Full Name ofNMS Stock ATS under which business is conducted, if any: _______________________________________________ 3. Market Participant Identifier (MPID) of the NMS Stock ATS: VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00142 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.002</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 4. Is the NMS Stock ATS currently operating pursuant to a previously filed initial operation report on FormATS? YesD NoD Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules 81139 Part II- Broker Dealer Operator Registration and Contact Information 1. Effective date of broker-dealer registration with the Commission: mm/dd/yyyy 2. SEC File No.: 8-- - - 3. CRDNo.: 4. Full Name of the national securities association and the effective date ofbroker-dealer membership with the national securities association: Name - - - - - - - - - - mm/dd/yyyy 5. Legal Status (select one) D D D D D Sole Proprietorship Corporation Partnership Limited Liability Company Other (Specify): _ _ _ _ _ __ If other than a sole proprietor, please provide the following: a) Date ofFormation: mm/dd/yyyy b) State/Country of Formation: {pick list} 6. Physical Street Address of the NMS Stock ATS matching system: Street: - - - - - - - - - - - - - - - - - - - - - - - - - City___________ State __ Zip Code______ If the broker-dealer operator is a sole proprietor and the physical street address is a private residence, check this box: D A private residential address of a sole proprietor will not be included in publicly available versions of this form. 7. Mailing Address: D Same as physical address Street: - - - - - - - - - - - - - - - - - - - - - - - - - City___________ State __ Zip Code______ If the broker-dealer operator is a sole proprietor and the mailing address is a private residence, check this box: D A private residential address of a sole proprietor will not be included in publicly available versions of this form. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00143 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.003</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 8. Website URL of the NMS Stock ATS- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 81140 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Exhibit 1 Provide a copy of any materials currently provided to subscribers or other persons related to the operations of the NMS Stock ATS or the disclosures on Form ATS-N (~,FIX protocol procedures, rules of engagement/manuals, frequently asked questions, marketing materials). Exhibit 2A Provide a copy of the most recently filed or amended Schedule A of the broker-dealer operator's Form BD disclosing information related to direct owners and executive officers. D In lieu of filing {entity} certifies that the information requested under this exhibit is available at the Internet website below and is accurate as of the date of this filing. URL: Exhibit 2B Provide a copy of the most recently filed or amended Schedule B of the broker-dealer operator's Form BD disclosing information related to indirect owners. D In lieu of filing {entity} certifies that the information requested under this exhibit is available at the Internet website below and is accurate as of the date of this filing. URL: Part III. Activities of the Broker-Dealer Operator and Affiliates For Items requesting the identity of affiliates and business units of the broker-dealer operator, provide the name under which each affiliate or business unit conducts business (~, the formal name under which a proprietary trading desk of the broker-dealer operator conducts business) and the applicable CRD number and MPID(s) under which the affiliate or business unit conducts business. • For filings made pursuant to Rule 304(a)(2)(i) (i.e., Form ATS-N Amendments), also attach as Exhibit 3A a redline document to indicate additions to or deletions from any amended Item. Items in which there is no change do not need to be included within the Exhibit 3A. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00144 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.004</GPH> Respond to each question below. Attach responses to each Item of Part III as Exhibit 3 with the information required for each "yes" response. Label each Item appropriately and organize responses according to Item number. For any Item or subpart of an Item that is inapplicable, state as such. • mstockstill on DSK4VPTVN1PROD with PROPOSALS3 • Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Item 1: Non-ATS Trading Centers Does the broker-dealer operator, or any of its affiliates, operate or control any non-ATS trading center(s) that is an OTC market maker or executes orders in NMS stocks internally by trading as principal or crossing orders as agent ("non-ATS trading centers")? 81141 YesD NoD IfYes: a) Identify the non-ATS trading center(s); and b) Describe any interaction or coordination between the non-ATS trading center(s) identified in Item l(a) and the NMS Stock ATS, including: l. Circumstances under which subscriber orders or other trading interest (such as quotes, indications of interest ("101"), conditional orders or messages (hereinafter collectively referred to as "trading interest")) sent to the NMS Stock ATS are displayed or otherwise made known to the non-ATS trading center(s) identified in Item l(a) before entering the NMS StockATS; 11. Circumstances under which subscriber orders or other trading interest received by the brokerdealer operator or its affiliates may execute, in whole or in part, in the non-ATS trading center(s) identified in Item l(a) before entering the NMS StockATS; and ... 111. Item 2: Multiple NMS StockATS Operations Circumstances under which subscriber orders or other trading interest are removed from the NMS Stock ATS and sent to the non-ATS trading center(s) identified in Item l(a). Does the broker-dealer operator, or any of its affiliates, operate one or more NMS Stock ATSs other than the NMS Stock ATS named on this Form ATS-N? YesD NoD IfYes: a) Identify the NMS StockATS(s) and provide the MPID(s); and b) Describe any interaction or coordination between each NMS Stock ATS(s) identified in Item 2(a) and the NMS StockATS named on this FormATS-N including: VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 The circumstances under which subscriber orders or other trading interest received by the brokerdealer operator or its affiliates to be sent to the NMS StockATS named on this FormATS-N may be sent to an NMS Stock ATS identified in Item 2(a); Frm 00145 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.005</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 l. 81142 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules 11. The circumstances under which subscriber orders or other trading interest to be sent to the NMS StockATS named on this FormATS-N are displayed or otherwise made known in an NMS Stock ATS identified in Item 2(a); and iii. The circumstances under which subscriber orders or other trading interest received by the NMS StockATS named on this FormATS-N may be removed and sent to the NMS Stock ATS(s) identified in Item 2(a). Item 3: Products or Services Offered to Subscribers Does the broker-dealer operator, or any of its affiliates, offer subscribers any products or services used in connection with trading on the NMS Stock ATS (~, algorithmic trading products, market data feeds)? YesDNoD IfYes: a) Describe the products or services, and identify the types of subscribers (~, retail, institutional, professional) to which such services or products are offered; and b) If the terms and conditions of the services or products are not the same for all subscribers, describe any differences. Item 4: Arrangements with Unaffiliated Trading Centers Does the broker-dealer operator, or any of its affiliates, have any formal or informal arrangement with an unaffiliated person(s), or affiliate(s) of such person(s), that operates a trading center regarding access to the NMS Stock ATS, including preferential routing arrangements? YesD NoD IfYes: a) Identify the person(s) and the trading center(s); and VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00146 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.006</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 b) Describe the terms of the arrangement(s). Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Item 5: Trading Activities on the NMS Stock ATS Does the broker-dealer operator, or any of its affiliates, enter orders or other trading interest on the NMS Stock ATS? 81143 YesD NoD IfYes: a) Identify each affiliate and business unit of the brokerdealer operator that may enter orders or other trading interest on the NMS Stock ATS; b) Describe the circumstances and capacity (~, proprietary or agency) in which each affiliate and business unit identified in Item s(a) enters orders or other trading interest on the NMS Stock ATS; c) Describe the manner in which by which each affiliate or business unit identified in Item s(a) enters orders or other trading interest on the NMS Stock ATS (~, directly through a Financial Information Exchange ("FIX") connection to the NMS Stock ATS, or indirectly, by way of the broker-dealer operator's SOR (or similar functionality), algorithm, intermediate application, or sales desk); and d) Describe any means by which a subscriber can be excluded from interacting or trading with orders or other trading interest of the broker-dealer operator or its affiliates on the NMS Stock ATS. Item 6: Smart Order Router ("SOR") (or Similar Functionality) or Algorithms Does the broker-dealer operator, or any of its affiliates, use a SOR(s) (or similar functionality), an algorithm(s), or both to send or receive subscriber orders or other trading interest to or from the NMS Stock ATS? YesD NoD IfYes: a) Identify the SOR(s) (or similar functionality) or algorithm(s) and identify the person(s) that operates the SOR(s) (or similar functionality) and algorithm(s), if other than the broker-dealer operator; VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00147 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.007</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 b) Describe the interaction or coordination between the SOR(s) (or similar functionality) or algorithm(s) identified in Item 6(a) and the NMS Stock ATS, including any information or messages about orders or other trading interest(~, lOis) that the SOR(s) (or similar functionality) or algorithm(s) send or receive to or from the NMS StockATS and the circumstances under which such information may be shared with any person. 81144 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Item 7: Shared Employees of the NMS Stock ATS Does any employee of the broker-dealer operator that services the operations of the NMS Stock ATS also service any other business unit(s) or any affiliate(s) of the broker-dealer operator ("shared employee")? YesD NoD IfYes: a) Identify the business unit(s) and/ or the affiliate(s) of the broker-dealer operator to which the shared employee(s) provides services and identify the position(s) or title(s) that the shared employee(s) holds in the business unit(s) and/or affiliate(s) of the broker-dealer operator; and b) Describe the roles and responsibilities of the shared employee(s) at the NMS Stock ATS and the business unit(s) and/or affiliate(s) of the broker-dealer operator. Item 8: Service Providers to the NMS Stock ATS Is any operation, service, or function of the NMS Stock ATS performed by any person(s) other than the broker-dealer operator of the NMS Stock ATS? YesD NoD IfYes: a) Identify the person(s) (in the case of a natural person, identify only the person's position or title) performing the operation, service, or function and note whether this service provider(s) is an affiliate of the broker-dealer, if applicable; b) Describe the operation, service, or function that the person(s) identified in Item 8(a) provides and describe the role and responsibilities of that person(s); and VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00148 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.008</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 c) State whether or not the person(s) identified in Item 8(a), or any of its affiliates, may enter orders or other trading interest on the NMS Stock ATS, and, if so, describe the circumstances and means by which such orders or other trading interest are entered on the NMS StockATS. Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Item 9: Is there any service, functionality, or procedure of the NMS Stock ATS that is available or applies to the broker-dealer operator or its affiliates, that is not available or does not apply to a subscriber(s) to the NMS StockATS? 81145 YesD NoD Differences in Availability of Services, Functionalities If Yes: or Procedures a) Identify the service, functionality, or procedure; and b) Describe the service, functionality, or procedure that is available to the broker-dealer operator or its affiliates but is not available or does not apply to a subscriber(s) to the NMS Stock ATS. Item 10: Confidential Treatment of Trading Information Describe the written safeguards and written procedures to protect the confidential trading information of subscribers to the NMS Stock ATS. Including: a) Describe the means by which a subscriber can consent or withdraw consent to the disclosure of confidential trading information to any persons (including the broker-dealer operator and any of its affiliates); b) Identify the positions or titles of any persons that have access to confidential trading information; describe the confidential trading information to which the persons have access; and describe the circumstances under which the persons can access confidential trading information; c) Describe the written standards controlling employees of the NMS Stock ATS that trade for employees' accounts; and VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00149 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.009</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 d) Describe the written oversight procedures to ensure that the safeguards and procedures described above are implemented and followed. 81146 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Part IV. The NMS Stock A TS Manner of Operations • Respond to the questions below. Attach responses to each Item to Part IV as Exhibit 4 with the information required for each disclosure. Label each Item appropriately and organize responses according to Item number. For any Item or subpart of an Item that is inapplicable, state as such. • For filings made pursuant to Rule 304(a)(2)(i) (i.e., Form ATS-N Amendments), also attach as Exhibit 4A a redline document to indicate additions to or deletions from any Item which is being amended. Items in which there is no change do not need to be included within the Exhibit 4A Item 1: Subscribers a) Eligibility: Describe any eligibility requirements to gain access to the services of the NMS Stock ATS. If the eligibility requirements are not the same for all subscribers and persons, describe any differences. b) Terms and Conditions of Use: Describe the terms and conditions of any contractual agreements for granting access to the NMS Stock ATS for the purpose of effecting transactions in securities or for submitting, disseminating, or displaying orders on the NMS Stock ATS. State whether these contractual agreements are written. If the terms or conditions of any contractual agreements are not the same for all subscribers and persons, describe any differences. c) Types of Subscribers: Describe the types of subscribers and other persons that use the services of the NMS Stock ATS (~, institutional investors, retail investors, broker-dealers, proprietary trading firms). State whether the NMS StockATS accepts nonbroker-dealers as subscribers to the ATS. Describe any criteria for distinguishing among types of subscribers, classes of subscribers, or other persons. d) Liquidity Providers: Describe any formal or informal arrangement the NMS Stock ATS has with a subscriber(s) or person(s) to provide liquidity to the NMS Stock ATS (~, undertaking to buy or sell continuously, or to meet specified thresholds of trading or quoting activity). Describe the terms and conditions of each arrangement and identify any liquidity providers that are affiliates of the brokerdealer operator. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00150 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.010</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 e) Limitation and Denial of Services: Describe the circumstances by which access to the NMS Stock ATS for a subscriber or other person may be limited or denied, and describe any procedures or standards that are used to determine such action. If the circumstances, procedures, or standards are not applicable to all subscribers and persons, describe any differences. Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Item 2: Hours of Operations 81147 a) Hours: Provide the days and hours of operation of the NMS Stock ATS, including the times when orders or other trading interest are entered on the NMS Stock ATS and the time when pre-opening or after-hours trading occur. b) Application: If the times when orders or other trading interest are entered on the NMS Stock ATS are not the same for all subscribers and persons, describe any differences. Item 3: Types of Orders a) Order Types and Modifiers: Describe any types of orders that are entered on the NMS Stock ATS, their characteristics, operations, and how they are handled on the NMS Stock ATS, including: priority for each order type, including the order type's priority upon order entry and any subsequent change to priority (if applicable); whether the order type can receive a new time stamp; the order type's priority vis-a-vis other orders on the book due to changes in the NBBO or other reference price; and any instance in which the order type could lose execution priority to a later arriving order at the same price; ii. conditions for each order type, including any price conditions, including how the order type is ranked and how price conditions affect the rank and price at which it can be executed; conditions on the display or non-display of an order; or conditions on executability and routability; iii. order types designed not to remove liquidity (~ post -only orders), including what occurs when such order is marketable against trading interest on the NMS StockATS when received; iv. order types that adjust their price as changes to the order book occur(~ price sliding orders or pegged orders) or have a discretionary range, including an order's rank and price upon order entry and whether such prices or rank may change based on the NBBO or other market conditions when using such order type; when the order type is executable and at what price the execution would occur; whether the price at which the order type can be executed ever changes; and if the order type can operate in different ways, the default operation of the order type; v. the time-in-force instructions that can be used or not used with each order type; vi. the availability of order types across all forms of connectivity to the NMS Stock ATS and differences, if any, between the availability of an order type across those forms of connectivity; vii. whether an order type is eligible for routing to other trading centers, including, if the order type is routable, whether it can be used with any routing services offered; and viii. the circumstances under which order types may be combined with a time-in-force or another order type, modified, replaced, canceled, rejected, or removed from the NMS Stock ATS. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00151 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.011</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 l. 81148 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules b) Application: If the availability of order types and their terms and conditions are not the same for all subscribers and persons, describe any differences. c) Order Size Requirements and Odd-Lot Orders: Describe any requirements and handling procedures for minimum order sizes, odd-lot orders, or mixed-lot orders. If the requirements and handling procedures for minimum order sizes or, odd lot orders, or mixed lot orders are not the same for all subscribers and persons, describe any differences. d) Indications of Interest ("IOJ'') and Conditional Orders: Describe any messages sent to or received by the NMS Stock ATS indicating trading interest(~, lOis, actionable lOis, or conditional orders), including the information contained in the message, the means under which messages are transmitted, the circumstances in which messages are transmitted (e.g., automatically by the NMS Stock ATS, or upon the subscriber's request), and the circumstances in which they may result in an execution on the NMS Stock ATS. If the terms and conditions regarding these messages, indications of interests, and conditional orders are not the same for all subscribers and persons, describe any differences. Item 4: Connectivity, Order Entry, and Colocation a) Connectivity and Order Entry: Describe the means by which subscribers or other persons connect to the NMS Stock ATS and enter orders or other trading interest on the NMS Stock ATS (~, directly, through a Financial Information eXchange ("FIX") connection to the ATS, or indirectly, through the broker-dealer operator's SOR, or any intermediate functionality, algorithm, or sales desk). If the terms and conditions for connecting and entering orders or other trading interest on the NMS Stock ATS are not the same for all subscribers and persons, describe any differences. b) Co-Location: Describe any co-location services or any other means by which any subscriber or other persons may enhance the speed by which to send or receive orders, trading interest, or messages to or from the NMS Stock ATS. Describe the terms and conditions of colocation services. If the terms and conditions of the co-location services are not the same for all subscribers and persons, describe any differences. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Segmentation of Order Flow and Notice About Segmentation VerDate Sep<11>2014 14:26 Dec 24, 2015 a) Categories: Describe any segmentation of orders or other trading interest on the NMS Stock ATS (~, classification by type of participant, source, nature of trading activity) and describe the segmentation categories, the criteria used to segment these categories, and procedures for determining, evaluating, and changing segmented categories. If the segmented categories, the criteria used to segment these categories, and any procedures for determining, evaluating or changing segmented categories are not the same for all subscribers and persons, describe any differences. Jkt 238001 PO 00000 Frm 00152 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.012</GPH> Item 5: Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules 81149 b) Notice about Segmentation: State whether the NMS Stock ATS notifies subscribers or persons about the segmentation category that a subscriber or a person is assigned. Describe any notice provided to subscribers or persons about the segmentation category that they are assigned and the segmentation identified in s(a), including the content of any notice and the means by which any notice is communicated. If the notice is not the same for all subscribers and persons, describe any differences. c) Order Preferencing: Describe any means and the circumstances by which a subscriber, the broker-dealer operator, or any of its affiliates may designate an order or trading interest submitted to the NMS Stock ATS to interact or not to interact with specific orders, trading interest, or persons on the NMS Stock ATS (~, designating an order or trading interest to be executed against a specific subscriber) and how such designations affect order priority and interaction. Item 6: Display of Order and Trading Interest a) Display: Describe any means and circumstances by which orders or other trading interest on the NMS Stock ATS are displayed or made known outside the NMS Stock ATS and the information about the orders and trading interest that are displayed. If the display of orders or other trading interest is not the same for all subscribers and persons, describe any differences. b) Recipients: Identify the subscriber(s) or person(s) (in the case of a natural person, identify only the person's position or title) to whom the orders and trading interest are displayed or otherwise made known. Item 7: Trading Services a) Matching Methodology: Describe the means or facilities used by the NMS Stock ATS to bring together the orders of multiple buyers and sellers, including the structure of the market (~crossing system, auction market, limit order matching book). If the use of these means or facilities are not the same for all subscribers and persons, describe any differences. c) Other Trading Procedures: Describe any trading procedures related to price protection mechanisms, short sales, locked-crossed markets, the handling of execution errors, time-stamping of orders and executions, or price improvement functionality. If the trading procedures are not the same for all subscribers and persons, describe any differences. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00153 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.013</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 b) Order Interaction Rules: Describe the established, nondiscretionary methods that dictate the terms of trading among multiple buyers and sellers on the facilities of the NMS Stock ATS, including rules and procedures governing the priority, pricing methodologies, allocation, matching, and execution of orders and other trading interest. If the rules and procedures are not the same for all subscribers and persons, describe any differences. 81150 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules Item 8: Suspension of Trading, System Disruption or Malfunction Item 9: Opening, Reopening, and Closing Processes, and After Hours Procedures a) Suspension of Trading, System Disruption or Malfunction: Describe any procedures governing trading in the event the NMS Stock ATS suspends trading or experiences a system disruption or system malfunction. If the procedures governing trading during a suspension or system disruption or malfunction are not the same for all subscribers and persons, describe any differences. a) Opening and Reopening Processes: Describe any opening and reopening processes, including how orders or other trading interest are matched and executed prior to the start of regular trading hours or following a stoppage of trading in a security during regular trading hours and how unexecuted orders or other trading interest are handled at the time the NMS Stock ATS begins regular trading at the start of regular trading hours or following a stoppage of trading in a security during regular trading hours. Describe any differences between pre-opening executions, executions following a stoppage of trading in a security during regular trading hours, and executions during regular trading hours. b) Closing Process: Describe any closing process, including how unexecuted orders or other trading interest are handled at the close of regular trading. Describe any differences between the closing executions and executions during regular trading hours. c) After-Hours Trading: Describe any after-hours trading procedures, including how orders and trading interest are matched and executed during after-hours trading. Describe any differences between the after-hours executions and executions during regular trading hours. Item 10: Outbound Routing a) Routing: Describe the circumstances under which orders or other trading interest are routed from the NMS Stock ATS to another trading center, including whether outbound routing occurs at the affirmative instruction of the subscriber or at the discretion of the broker-dealer operator, and the means by which routing is performed (~, a third party or order management system or a SOR (or similar functionality) or algorithm of the broker-dealer operator or any of its affiliates). b) Application: If the means by which orders or other trading interest are routed from the NMS Stock ATS are not the same for all subscribers and persons, describe any differences. mstockstill on DSK4VPTVN1PROD with PROPOSALS3 Market Data VerDate Sep<11>2014 14:26 Dec 24, 2015 a) Market Data: Describe the market data used by the NMS Stock ATS and the source of that market data (~, market data feeds disseminated by the consolidated data processor ("SIP") and market data feeds disseminated directly by an exchange or other trading center or third-party vendor of market data). Jkt 238001 PO 00000 Frm 00154 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.014</GPH> Item 11: Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules 81151 b) Usage: Describe the specific purpose for which market data is used by the NMS Stock ATS, including how market data is used to determine the NBBO, protected quotes, pricing of orders and executions, and routing destinations. Item 12: Fees a) Fees: Describe any fees, rebates, or other charges of the NMS Stock ATS (~, connectivity fees, subscription fees, execution fees, volume discounts) and provide the range(~, high and low) of such fees, rebates, or other charges. b) Application: If the fees, rebates, or other charges of the NMS Stock ATS are not the same for all subscribers and persons, describe any differences. Item 13: Trade Reporting, Clearance and Settlement Item 14: Order Display and Execution Access a) Trade Reporting: Describe any arrangements or procedures for reporting transactions on the NMS Stock ATS. If the trade reporting procedures are not the same for all subscribers and persons, describe any differences. b) Clearance and Settlement: Describe any arrangements or procedures undertaken by the NMS Stock ATS to facilitate the clearance and settlement of transactions on the NMS Stock ATS (~, whether the NMS Stock ATS becomes a counterparty, whether it submits trades to a registered clearing agency, or whether it requires subscribers to have arrangements with a clearing firm). If the clearance and settlement procedures are not the same for all subscribers and persons, describe any differences. If the NMS Stock ATS displays orders in an NMS stock to any person other than employees of the NMS Stock ATS and executed 5% or more of the average daily trading volume in that NMS stock as reported by an effective transaction reporting plan for four of the preceding six calendar months: a) Provide the ticker symbol for each NMS stock displayed for each of the last 6 calendar months; b) Describe the manner in which the NMS Stock ATS displays such orders on a national securities exchange or through a national securities association; and c) Describe how the NMS Stock ATS provides access to such orders displayed in the national market system equivalent to the access to other orders displayed on that exchange or association. Item 15: Fair Access If the NMS Stock ATS executed 5% or more of the average daily trading volume in an NMS stock as reported by an effective transaction reporting plan for four of the preceding six calendar months: b) Describe the written standards for granting access to trading on the NMS StockATS. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00155 Fmt 4701 Sfmt 4725 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.015</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 a) Provide the ticker symbol for each NMS stock for each of the last 6 calendar months; and 81152 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules If the NMS Stock ATS publishes or otherwise provides to one or more subscribers aggregate platform-wide order flow and execution statistics of the NMS Stock ATS that are not otherwise required disclosures under 17 CFR § 242.605: Item 16: Market Quality Statistics Published or Provided to Subscribers a) List and describe the categories or metrics of aggregate platformwide order flow and execution statistics published or provided; b) Describe any criteria or methodology used to calculate aggregate platform-wide order flow and execution statistics; and c) Attach as Exhibit 5 the most recent disclosure of aggregate platformwide order flow and execution statistics published or provided to one or more subscribers for each category or metric as of the end of the calendar quarter. Part V: Contact Information, Signature Block, and Consent to Service Provide the following information of the person at {the name of the NMS Stock ATS} prepared to respond to questions for this submission: First Name: Last Name: Title: E-Mail: Telephone: The {name of the NMS Stock ATS} consents that service of any civil action brought by, or notice of any proceeding before, the SEC or a self-regulatory organizations in connection with the alternative trading system's activities may be given by registered or certified mail or email to the contact employee at the primary street address or email address, or mailing address if different, given in Part I above. The undersigned, being first duly sworn, deposes and says that he/she has executed this form on behalf of, and with the authority of, said alternative trading system. The undersigned and {name ofNMS Stock ATS} represents that the information and statements contained herein, including exhibits, schedules, or other documents attached hereto, and other information filed herewith, all of which are made a part hereof, are current, true, and complete. {Name ofNMS Stock ATS} Date {auto fill} By: ____________________ Title- - - - - - - - - - - - - - - - - - - - - - - - - - BILLING CODE 8011–01–C VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 PO 00000 Frm 00156 Fmt 4701 Sfmt 4702 E:\FR\FM\28DEP3.SGM 28DEP3 EP28DE15.016</GPH> mstockstill on DSK4VPTVN1PROD with PROPOSALS3 (Digital sign) Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules FORM ATS–N INSTRUCTIONS mstockstill on DSK4VPTVN1PROD with PROPOSALS3 A. GENERAL INSTRUCTIONS: • Form ATS–N is a public reporting form that is designed to provide the public and the Commission with information about the operations of the NMS Stock ATS and the activities of its broker-dealer operator and its affiliates. Form ATS–N is to be used by an NMS Stock ATS to qualify for the exemption from the definition of an ‘‘exchange’’ pursuant to Exchange Act Rule 3a1– 1(a)(2), for which no other form is authorized or prescribed. • An NMS Stock ATS must respond to each item, as applicable, in detail and disclose information that is accurate, current, and complete. An NMS Stock ATS must provide all the information required by the form, including the exhibits, and must present the information in a clear and comprehensible manner. A filing that is incomplete or similarly deficient may be returned to the NMS Stock ATS. Any filing so returned shall for all purposes be deemed not to have been filed with the Commission. See also Rule 0–3 under the Exchange Act (17 CFR 240.0– 3). • A separate Form ATS–N is required for each NMS Stock ATS operated by the same broker-dealer operator. B. WHEN TO FILE FORM ATS–N • Form ATS–N: Prior to commencing operations, an NMS Stock ATS shall file a Form ATS–N and the Form ATS–N must be declared effective by the Commission. If the NMS Stock ATS is operating pursuant to a previously filed initial operation report on Form ATS as of the effective date of proposed Rule 304, such NMS Stock ATS shall file with the Commission a Form ATS–N no later than 120 calendar days after such effective date. • Form ATS–N Amendment: An NMS Stock ATS shall amend an effective Form ATS–N: (1) at least 30 calendar days prior to the date of implementation of a material change to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that are subject to disclosure on Form ATS–N; (2) within 30 calendar days after the end of each calendar quarter to correct any other information that has become inaccurate for any reason and has not been previously reported to the Commission as a Form ATS–N Amendment; or (3) promptly, to correct information in any previous disclosure on Form ATS–N, after discovery that any information filed under paragraphs (a)(1)(i) or (a)(2)(i)(A) or (B) of proposed Rule 304 was inaccurate or incomplete when filed. VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 • Notice of Cessation: An NMS Stock ATS shall notice its cessation of operations on Form ATS–N at least 10 business days before the date the NMS Stock ATS will cease to operate as an NMS Stock ATS. • Withdrawal: If an NMS Stock ATS determines to withdraw a Form ATS–N, it must select the appropriate check box and provide the correct file number to withdraw the submission. C. HOW TO FILE A FORM ATS–N • Any report required to be submitted pursuant to Rule 304 of Regulation ATS shall be filed in an electronic format through the electronic form filing system (‘‘EFFS’’), a secure Web site operated by the Securities and Exchange Commission (‘‘Commission’’). Documents filed through the EFFS system must be in a text-searchable format without the use of optical character recognition. • A duly authorized individual of the NMS Stock ATS shall electronically sign the completed Form ATS–N. In addition, a duly authorized individual of the NMS Stock ATS shall manually sign one copy of the completed Form ATS–N, and the manually signed signature page shall be preserved pursuant to the requirements of proposed Rule 303 of Regulation ATS. D. CONTACT INFORMATION • The individual listed on the NMS Stock ATS’s response to Part V of Form ATS–N as the contact representative must be authorized to receive all incoming communications and be responsible for disseminating that information, as necessary, within the NMS Stock ATS. E. RECORDKEEPING • A copy of this Form ATS–N must be retained by the NMS Stock ATS and made available for inspection upon request of the SEC. F. PAPERWORK REDUCTION ACT DISCLOSURE • Form ATS–N requires an NMS Stock ATS to provide the Commission with certain information regarding: (1) the operation of the NMS Stock ATS and the activities of the broker-dealer operator and its affiliates; (2) material and other changes to the operation of the NMS Stock ATS; and (3) notice upon ceasing operation of the alternative trading system. Form ATS–N is intended to provide the public with information about the operations of the NMS Stock ATS and the activities of the broker-dealer operator and its affiliates so that they may make an informed decision as to whether to participate on PO 00000 Frm 00157 Fmt 4701 Sfmt 4702 81153 the NMS Stock ATS. In addition, the Form ATS–N is intended to provide the Commission with information to permit it to carry out its market oversight and investor protection functions. • The information provided on Form ATS–N will help enable the Commission to determine whether an NMS Stock ATS is in compliance with the federal securities laws and the rules or regulations thereunder, including Regulation ATS. An NMS Stock ATS must: (1) file Form ATS–N prior to commencing operations; (2) file a Form ATS–N Amendment at least 30 calendar days prior to the date of implementation of a material change to the operations of the NMS Stock ATS or to the activities of the broker-dealer operator or its affiliates that are subject to disclosure on Form ATS–N; (3) file a Form ATS– N Amendment within 30 calendar days after the end of each calendar quarter to correct any other information that has become inaccurate for any reason and has not been previously reported to the Commission on Form ATS–N; (4) file a Form ATS–N Amendment promptly to correct information in any previous disclosure on a Form ATS–N or a Form ATS–N Amendment after discovery that any information filed was inaccurate or incomplete when filed; and (5) notice its cessation of operations at least 10 business days before the date the NMS Stock ATS ceases to operate as an NMS Stock ATS. • This collection of information will be reviewed by the Office of Management and Budget in accordance with the clearance requirements of 44 U.S.C. 3507. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The Commission estimates that that an NMS Stock ATS will spend approximately 141.3 hours completing the Form ATS– N, approximately 9.5 hours preparing each amendment to Form ATS–N, and approximately 2 hours preparing a notice of cessation on Form ATS–N. Any member of the public may direct to the Commission any comments concerning the accuracy of this burden estimate and any suggestions for reducing this burden. G. EXPLANATION OF TERMS The following terms are defined for purposes of Form ATS–N. • AFFILIATE: Shall mean, with respect to a specified person, any person that, directly or indirectly, controls, is under common control with, or is controlled by, the specified person. • ALTERNATIVE TRADING SYSTEM: Shall mean any organization, E:\FR\FM\28DEP3.SGM 28DEP3 81154 Federal Register / Vol. 80, No. 248 / Monday, December 28, 2015 / Proposed Rules mstockstill on DSK4VPTVN1PROD with PROPOSALS3 association, person, group of persons, or system: (1) that 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 under the Exchange Act; and (2) that does not (i) set 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) discipline subscribers other than by exclusion from trading. 17 CFR 242.300(a). • BROKER–DEALER OPERATOR: Shall mean the registered broker-dealer of the NMS Stock ATS pursuant to 17 CFR 242.301(b)(1). • CONTROL: Shall mean the power, directly or indirectly, to direct the management or policies of the brokerdealer of an alternative trading system, whether through ownership of securities, by contract, or otherwise. A person is presumed to control the broker-dealer of an alternative trading system if that person: (1) is a director, general partner, or officer exercising executive responsibility (or having VerDate Sep<11>2014 14:26 Dec 24, 2015 Jkt 238001 similar status or performing similar functions); (2) directly or indirectly has the right to vote 25 percent or more of a class of voting securities or has the power to sell or direct the sale of 25 percent or more of a class of voting securities of the broker-dealer of the alternative trading system; or (3) in the case of a partnership, has contributed, or has the right to receive upon dissolution, 25 percent or more of the capital of the broker-dealer of the alternative trading system. • NMS SECURITY: Shall mean any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options. 17 CFR 242.600(b)(46). • NMS STOCK: Shall mean any NMS security other than an option. 17 CFR 242.600(b)(47). • NMS STOCK ATS: Shall mean an alternative trading system, as defined in Rule 300(a) under the Exchange Act, that facilitates transactions in NMS stocks, as defined in Rule 300(g) under the Exchange Act. [Proposed] 17 CFR 242.300(k). PO 00000 Frm 00158 Fmt 4701 Sfmt 9990 • ORDER: Shall mean any firm indication of a willingness to buy or sell a security as either principal or agent, including any bid or offer quotation, market order, limit order or other priced order. 17 CFR 242.300(e). • PERSON: Shall mean a natural person or a company. 15 U.S.C. 80a– 2(a)(28). • SUBSCRIBER: Shall mean any person that has entered into a contractual agreement with an alternative trading system to access an alternative trading system for the purpose of effecting transactions in securities, or for submitting, disseminating or displaying orders on such alternative trading system, including a customer, member, user, or participant in an alternative trading system. A subscriber, however, shall not include a national securities exchange or association. 17 CFR 242.300(b). By the Commission. Dated: November 18, 2015. Brent J. Fields, Secretary. [FR Doc. 2015–29890 Filed 12–24–15; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\28DEP3.SGM 28DEP3

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 248 (Monday, December 28, 2015)]
[Proposed Rules]
[Pages 80997-81154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29890]

[[Page 80997]]

Vol. 80

Monday,

No. 248

December 28, 2015

Part III

Securities and Exchange Commission

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17 CFR Parts 240, 242, 249

Regulation of NMS Stock Alternative Trading Systems; Proposed Rule

Federal Register / Vol. 80 , No. 248 / Monday, December 28, 2015 /
Proposed Rules

[[Page 80998]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, 249

[Release No. 34-76474; File No. S7-23-15]
RIN 3235-AL66

Regulation of NMS Stock Alternative Trading Systems

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing to amend
the regulatory requirements in Regulation ATS under the Securities
Exchange Act of 1934 (``Exchange Act'') applicable to alternative
trading systems (``ATSs'') that transact in National Market System
(``NMS'') stocks (hereinafter referred to as (``NMS Stock ATSs''),
including so called ``dark pools.'' First, the Commission is proposing
to amend Regulation ATS to adopt Form ATS-N to provide information
about the broker-dealer that operates the NMS Stock ATS (``broker-
dealer operator'') and the activities of the broker-dealer operator and
its affiliates in connection with the NMS Stock ATS, and to provide
detailed information about the manner of operations of the ATS. Second,
the Commission is proposing to make filings on Form ATS-N public by
posting certain Form ATS-N filings on the Commission's internet Web
site and requiring each NMS Stock ATS that has a Web site to post on
the NMS Stock ATS's Web site a direct URL hyperlink to the Commission's
Web site that contains the required documents. Third, the Commission is
proposing to amend Regulation ATS to provide a process for the
Commission to determine whether an entity qualifies for the exemption
from the definition of ``exchange'' under Exchange Act Rule 3a1-1(a)(2)
with regard to NMS stocks and declare an NMS Stock ATS's Form ATS-N
either effective or, after notice and opportunity for hearing,
ineffective. Fourth, under the proposal, the Commission could suspend,
limit, or revoke the exemption from the definition of ``exchange''
after providing notice and opportunity for hearing. Fifth, the
Commission is proposing to require that an ATS's safeguards and
procedures to protect subscribers' confidential trading information be
written. The Commission is also proposing to make conforming changes to
Regulation ATS and Exchange Act Rule 3a1-1(a). Additionally, the
Commission is requesting comment about, among other things, changing
the requirements of the exemption from the definition of ``exchange''
pursuant to Exchange Act Rule 3a1-1(a) for ATSs that facilitate
transactions in securities other than NMS stocks. Lastly, the
Commission is also requesting comment regarding its consideration to
amend Exchange Act Rules 600 and 606 to improve transparency around the
handling and routing of institutional customer orders by broker-
dealers.

DATES: Comments should be received on or before February 26, 2016.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/proposed); or
Send an email to rule-comments@sec.gov. Please include
File Number S7-23-15 on the subject line; or
Use the Federal eRulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-1090.

All submissions should refer to File Number S7-23-15. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (https://www.sec.gov/rules/proposed.shtml). Comments will also be available for Web site viewing
and printing in the Commission's Public Reference Room, 100 F Street
NE., Washington, DC 20549, on official business days between the hours
of 10:00 a.m. and 3:00 p.m. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's Web site. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

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 Derek James, Special Counsel, at (202) 551-5792;
Office of Market Supervision, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street NE., Washington, DC
20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing: (1) New Form
ATS-N under the Exchange Act provided by Rule 3a1-1(a) of the Exchange
Act [17 CFR 240.3a1-1(a)], which NMS Stock ATSs would rely on to
qualify for the exemption from the definition of ``exchange''; (2) to
amend Regulation ATS under the Exchange Act [17 CFR 242.300 through
242.303] to add new Rule 304 to provide new conditions for NMS Stock
ATSs seeking to rely on the exemption from the definition of
``exchange''; and (3) related amendments to Rule 300, 301, and 303 of
Regulation ATS and Rule 3a1-1(a) under the Exchange Act [17 CFR
242.300; 17 CFR 242.301, 17 CFR 242.303; and 17 CFR 240.3a1-1]. The
Commission is also proposing amendments to Rules 301(b)(10) and 303 of
Regulation ATS under the Exchange Act [17 CFR 242.301(b)(10) and 17 CFR
242.303] to require all ATSs to make and keep written safeguards and
written procedures to protect subscribers' confidential trading
information.

Table of Contents

I. Introduction
II. Current ATS Regulatory Framework
A. Exemption From National Securities Exchange Registration
B. Conditions to the ATS Exemption; Confidential Notice Regime
III. Role of ATSs in the Current Equity Market Structure
A. Significant Source of Liquidity for NMS Stocks
B. Heightened Operational Complexity and Sophistication of NMS
Stock ATSs
C. Lack of Operational Transparency for NMS Stock ATSs
D. Prior Comments on Operational Transparency and Regulatory
Framework for NMS Stock ATSs
IV. Proposed Amendments to Regulation ATS and Rule 3a1-1 To Heighten
Regulatory Requirements for ATSs That Transact in NMS Stocks
A. Proposed Definition of NMS Stock ATS
B. Rule 3a1-1(a)(2): Proposed Amendments to the Exemption From
the Definition of ``Exchange'' for NMS Stock ATSs
C. Proposed Rule 304: Enhanced Filing Requirements for NMS Stock
ATSs
1. Application of Existing Requirements to NMS Stock ATSs

[[Page 80999]]

2. Rule 301(b)(2) and Form ATS; ATSs That Trade in Non-NMS
Stocks
3. Proposed Rule 304(a)(1)(i) and (ii): Filing and Review of
Form ATS-N
4. Proposed Rule 304(a)(1)(iii): Declarations of Effectiveness
or Ineffectiveness of Form ATS-N
5. Proposed Rule 304(a)(1)(iv): Orders Regarding Form ATS-N
Effectiveness
6. Proposed Rule 304(a)(2): Form ATS-N Amendments
7. Proposed Rule 304(a)(3): Notice of Cessation
8. Proposed Rule 304(a)(4): Suspension, Limitation, or
Revocation of the Exemption From the Definition of Exchange
D. Rule 304(b): Public Disclosure of Form ATS-N and Related
Commission Orders
E. Rule 304(c)(1) and (2): Proposed Form ATS-N Requirements
V. Proposed Form ATS-N: Submission Type and Part I of Form ATS-N
VI. Part II of Proposed Form ATS-N: Broker-Dealer Operator
Registration Information
VII. Part III of Proposed Form ATS-N: Activities of the Broker-
Dealer Operator and Its Affiliates
A. The Relationship Between the Broker-Dealer Operator's
Operation of the NMS Stock ATS and Its Other Operations
1. Background
2. Potential Conflicts of Interest for the Broker-Dealer
Operator or Its Affiliates
B. Disclosures Required Under Part III of Proposed Form ATS-N
1. Proposed Definitions of ``Affiliate'' and ``Control''
2. Non-ATS Trading Centers of the Broker-Dealer Operator
3. Multiple NMS Stock ATS Operations of the Broker-Dealer
Operator
4. Products or Services Offered to Subscribers by the Broker-
Dealer Operator
5. Broker-Dealer Operator Arrangements With Unaffiliated Trading
Centers
6. Trading on the NMS Stock ATS by the Broker-Dealer Operator
and Its Affiliates
7. Broker-Dealer Operator Smart Order Routers (or Similar
Functionalities) and Algorithms
8. Shared Employees of NMS Stock ATS
9. Service Providers to the NMS Stock ATS
10. Differences in Availability of Services, Functionality, or
Procedures
11. Confidential Treatment of Trading Information
VIII. Part IV of Proposed Form ATS-N: The Manner of Operations of
the NMS Stock ATS
A. Subscribers
B. Hours of Operations
C. Types of Orders
D. Connectivity, Order Entry, and Co-Location
E. Segmentation of Order Flow and Notice About Segmentation
F. Display of Order and Trading Interest
G. Trading Services
H. Suspension of Trading, System Disruption or Malfunction
I. Opening, Reopening, and Closing Processes, and After Hours
Procedures
J. Outbound Routing
K. Market Data
L. Fees
M. Trade Reporting, Clearance and Settlement
N. Order Display and Execution Access
O. Fair Access
P. Market Quality Statistics Published or Provided by the NMS
Stock ATS to Subscribers
IX. Proposed Amendment to Rule 301(b)(10): Written Safeguards and
Written Procedures To Protect Confidential Trading Information
X. Recordkeeping Requirements
XI. General Request for Comment
XII. Paperwork Reduction Act
A. Summary of Collection of Information
1. Requirements Relating to Rule 301(b)(10) of Regulation ATS
2. Requirements Relating to Proposed Rules 301(b)(2)(viii) and
304 of Regulation ATS, Including Proposed Form ATS-N
B. Proposed Use of Information
1. Proposed Amendments to Rules 301(b)(10) of Regulation ATS
2. Proposed Rules 301(b)(2)(viii), 304 of Regulation ATS,
Including Proposed Form ATS-N, and 301(b)(9)
C. Respondents
D. Total Initial and Annual Reporting and Recordkeeping Burdens
1. Proposed Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS
2. Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS,
Including Proposed Form ATS-N
E. Collection of Information Is Mandatory
F. Confidentiality of Responses to Collection of Information
G. Retention Period for Recordkeeping Requirements
H. Request for Comments
XIII. Economic Analysis
A. Background
B. Baseline
1. Current NMS Stock ATSs
2. Current Reporting Requirements for NMS Stock ATSs
3. Lack of Public Disclosure of NMS Stock ATS Operations and the
Activities of the Broker-Dealer Operator and the Broker-Dealer
Operator's Affiliates
4. NMS Stock ATS Treatment of Subscriber Confidential Trading
Information
5. Current State of Competition Between NMS Stock ATSs and
Registered National Securities Exchanges
6. Competition Among NMS Stock ATSs
7. Competition Between Broker-Dealers That Operate NMS Stock
ATSs and Broker-Dealers That Do Not Operate NMS Stock ATSs
8. Effect of NMS Stock ATSs on the Current Market for NMS Stock
Execution Services
C. Economic Effects and Effects on Efficiency, Competition, and
Capital Formation
1. Costs and Benefits of Proposed Enhanced Filing Requirements
2. Costs and Benefits of Public Disclosures of Proposed Form
ATS-N
3. Written Safeguards and Written Procedures To Protect
Subscribers' Confidential Trading Information, and Proposed
Recordkeeping Requirements
D. Alternatives
1. Require NMS Stock ATSs To Publicly Disclose Current Form ATS
2. Require Proposed Form ATS-N But Deem Information Confidential
3. Require NMS Stock ATSs To Publicly Disclose Proposed Form
ATS-N But Not Declare Proposed Form ATS-N Effective or 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. Lower the Fair Access Threshold for NMS Stock ATSs
9. Apply Proposed Rule 304 to ATSs That Trade Fixed Income
Securities and ATSs that Solely Trade Government Securities
XIV. Consideration of Impact on the Economy
XV. Regulatory Flexibility Act Certification
XVI. Statutory Authority and Text of Proposed Amendments

I. Introduction

Section 11A(a)(2) of the Exchange Act,\1\ enacted as part of the
Securities Acts Amendments of 1975 (``1975 Amendments''),\2\ 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.\3\ Among the findings and objectives in
Section 11A(a)(1) are that ``[n]ew data processing and communications
techniques create the opportunity for more efficient and effective
market operations'' \4\ and ``[i]t is in the public interest and
appropriate for the protection of investors and the maintenance of fair
and orderly markets to assure . . . the economically efficient
execution of securities transactions'' \5\ and the ``practicability of
brokers executing investors' orders in the best markets.'' \6\ Congress
also found, as noted by the Commission when it adopted Regulation ATS,
that it was in the public interest to assure ``fair

[[Page 81000]]

competition . . . between exchange markets and markets other than
exchange markets.'' \7\ Congress recognized that the securities markets
dynamically change and, accordingly, granted the Commission broad
authority to oversee the implementation, operation, and regulation of
the national market system in accordance with Congressional goals and
objectives.\8\
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\1\ 15 U.S.C. 78k-1(a)(2).
\2\ Public Law 94-29, 89 Stat. 97 (1975).
\3\ 15 U.S.C. 78k-1(a)(1).
\4\ Section 11A(a)(1)(B) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(B).
\5\ Section 11A(a)(1)(C)(i) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(C)(i).
\6\ Section 11A(a)(1)(C)(iv) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(C)(iv).
\7\ See Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844 (December 22, 1998) (Regulation of Exchanges and
Alternative Trading Systems, hereinafter ``Regulation ATS Adopting
Release'') at 70858 n.113 and accompanying text (citing Section
11A(a)(1)(C)(ii) of the Exchange Act, 15 U.S.C. 78k-1(a)(1)(C)(ii)).
The Commission also noted that a fundamental goal of a national
market system was to ``achieve a market characterized by
economically efficient executions, fair competition, [and the] broad
dissemination of basic market information.'' See id. at 70858 n.113
(quoting S. Rep. No. 75, 94th Cong., 1st Sess. 8 (1975) at 101).
\8\ See id. at 70858 n.110 and accompanying text (citing S. Rep.
No. 75, 94th Cong., 1st Sess. 8 (1975) at 8-9). The Commission also
noted that Congress explicitly rejected mandating specific
components of a national market system because of uncertainty as to
how technological and economic changes would affect the securities
market. See id. at 70858 n.109 and accompanying text (citing S. Rep.
No. 75, 94th Cong., 1st Sess. 8 (1975) at 8-9.
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In December 1998, the Commission adopted Regulation ATS to advance
the goals of the national market system and establish a regulatory
framework for ATSs.\9\ At that time, there had been a surge in a
variety of alternative trading systems that traded NMS stocks and
furnished services traditionally provided by national securities
exchanges,\10\ such as matching counterparties' orders, executing
trades, operating limit order books, and facilitating active price
discovery.\11\ The Commission observed at the time that, among other
things, activity on ATSs was not fully disclosed, or accessible, to
investors, and that these systems had no obligation to provide
investors a fair opportunity to participate on the systems or to treat
their participants fairly.\12\ The Commission noted in the Regulation
ATS Adopting Release that while ATSs at that time operated in a manner
similar to registered national securities exchanges, each type of
trading center was subject to different regulatory regimes, and that
these differences created disparities that affected investor protection
and the operation of the markets as a whole, calling into question the
fairness of the then-current regulatory requirements.\13\
---------------------------------------------------------------------------

\9\ See generally Regulation ATS Adopting Release, supra note 7.
\10\ See id. at 70845.
\11\ See id. at 70848.
\12\ See id. at 70845.
\13\ See id. at 70845-46 (noting that alternative trading
systems prior to the adoption of Regulation ATS were private
markets, which were open to only chosen subscribers, and were
regulated as broker-dealers and not like registered national
securities exchanges).
---------------------------------------------------------------------------

In response to the substantial changes in the way securities were
traded at the time, and the regulatory disparity between registered
national securities exchanges and non-exchange markets, the Commission
adopted a new regulatory framework that the Commission believed would
encourage market innovation, while ensuring basic investor
protections,\14\ by giving securities markets a choice to register as
national securities exchanges, or to register as broker-dealers and
comply with Regulation ATS. Regulation ATS was designed to permit
market centers meeting the Commission's updated interpretation of the
definition of ``exchange,'' as set forth in Exchange Act Rule 3b-
16,\15\ to select the regulatory framework more applicable to their
business models. Among other things, Regulation ATS was intended to
better integrate ATSs into the national market system, and ensure that
market participants have fair access to ATSs with significant
volume.\16\
---------------------------------------------------------------------------

\14\ See id. at 70847.
\15\ 17 CFR 240.3b-16.
\16\ See Regulation ATS Adopting Release, supra note 7, at
70846, 70874. The Commission also notes that when it adopted
Regulation ATS, it stated its belief that the Commission's
regulation of markets should both accommodate traditional market
structures and provide sufficient flexibility to ensure that new
markets promote fairness, efficiency, and transparency. See
Regulation ATS Adopting Release, supra note 7, at 70846.
---------------------------------------------------------------------------

In the seventeen years since the Commission adopted Regulation ATS,
the equity markets have evolved significantly, resulting in an
increased number of trading centers and a reduced concentration of
trading activity in NMS stocks.\17\ The growth in trading centers and
trading activity has been fueled primarily by advances in technology
for generating, routing, and executing orders. These technologies have
markedly improved the speed, capacity, and sophistication of the
trading mechanisms and processes that are available to market
participants. Today, ATSs that trade NMS stocks have become an integral
part of the national market system, as the number of these ATSs, and
the volume of NMS stocks transacted on them, has increased
significantly since the adoption of Regulation ATS.\18\ Despite the
emergence of ATSs as a significant source of liquidity in NMS stocks
among today's markets, and the fact that ATSs compete with, and operate
with almost the same complexity and sophistication as, registered
national securities exchanges, the regulatory requirements applicable
to ATSs have remained, for the most part, the same since Regulation ATS
was adopted.\19\
---------------------------------------------------------------------------

\17\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72251 (December 5, 2014), 72262 (adopting final rules
for systems compliance and integrity) (``SCI Adopting Release'') at
72262 n.105 and n.106 and accompanying text (discussing the
increased significance of NMS Stock ATSs).
\18\ See infra notes 116-122 and accompanying text.
\19\ The Commission notes that when the Commission adopted
Regulation NMS, it also amended Regulation ATS to lower the
threshold that triggers the Regulation ATS fair access requirements
from 20% of the average daily volume in a security to 5%. See
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR
37496, 37550 (June 29, 2005) (``Regulation NMS Adopting Release'').
See also infra notes 92-95 and accompanying text (discussing the
fair access requirements of Regulation ATS).
When adopting Regulation ATS, the Commission noted that the 20%
volume threshold was based on current market conditions, and that if
such conditions changed, or if the Commission believed that
alternative trading systems with less than 20% of the trading volume
were engaging in inappropriate exclusionary practices or in
anticompetitive conduct, the Commission could revisit the fair
access thresholds. See Regulation ATS Adopting Release, supra note
7, at 70873 n.245. The Commission also stated its intent to monitor
the impact and effect of the fair access rules, as well as the
practices of ATSs, and consider changing the rules if necessary to
prevent anticompetitive behavior and ensure that qualified investors
have access to significant sources of liquidity in the securities
markets. See id.
See also infra note 107 and accompanying text (discussing
amendments to Regulation ATS in connection with the adoption of
Regulation SCI).
---------------------------------------------------------------------------

Although ATSs and registered national securities exchanges
generally operate in a similar manner and compete as trading centers
for order flow in NMS stocks, each of these types of trading centers is
subject to a separate regulatory regime with a different mix of
benefits and obligations, including with respect to their obligations
to disclose information about their trading operations. Unlike ATSs,
national securities exchanges must register with the Commission
pursuant to Section 6 of the Exchange Act,\20\ and undertake self-
regulatory \21\ obligations over their members. 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

[[Page 81001]]

securities laws and the rules of the exchange.\22\ 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.\23\ 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 trading services and fees. As an SRO, a national
securities exchange enjoys certain unique benefits, such as limited
immunity from private liability with respect to its regulatory
functions and the ability to receive market data revenue, among others.
---------------------------------------------------------------------------

\20\ 15 U.S.C. 78f.
\21\ Section 3(a)(26) of the Exchange Act defines a self-
regulatory organization (``SRO'') 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).
\22\ 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).
\23\ See generally Section 19(b) of the Exchange Act, 15 U.S.C.
78s(b).
---------------------------------------------------------------------------

Although falling within the statutory definition of ``exchange,''
an ATS is exempt from that definition if it complies with Regulation
ATS. Regulation ATS includes the requirement that, as an alternative to
registering as a national securities exchange, an ATS must register as
a broker-dealer with the Commission, which entails becoming a member of
an SRO, such as the Financial Industry Regulatory Authority
(``FINRA'').\24\ Unlike national securities exchanges, ATSs are not
approved by the Commission, but are instead required only to provide
notice of their operations by filing a Form ATS with the Commission 20
days before commencing operations as an ATS.\25\ Form ATS is ``deemed
confidential when filed,'' \26\ and it only requires an ATS to disclose
limited aspects of the ATS's operations. ATSs are neither required to
file proposed rule changes with the Commission nor otherwise publicly
disclose their trading services, operations, or fees.
---------------------------------------------------------------------------

\24\ Section 15(b)(8) of the Exchange Act requires a broker or
dealer to become a member of a registered national securities
association, unless it effects transactions in securities solely on
an exchange of which it is a member. 15 U.S.C. 78o(b)(8).
\25\ See Regulation ATS Adopting Release, supra note 7, at 70863
and infra Section II.B (discussing the current requirements of
Regulation ATS applicable to all ATSs).
\26\ See 17 CFR 242.301(b)(2)(vii).
---------------------------------------------------------------------------

The Commission is concerned that the current regulatory
requirements relating to operational transparency for ATSs,
particularly those that execute trades in NMS stocks, may no longer
fully meet the goals of furthering the public interest and protecting
investors. Today, ATSs account for approximately 15.4% of the total
dollar volume in NMS stocks \27\ and as noted, compete with, and
operate with respect to trading in a manner similar to, registered
national securities exchanges. Unlike registered national securities
exchanges, however, there is limited public information available to
market participants about the operations of ATSs, including how orders
and other trading interest may interact, match, and execute on ATSs.
The Commission is concerned that the differences between ATSs that
trade NMS stocks and registered national securities exchanges with
regard to operational transparency may be creating a competitive
imbalance between two functionally similar trading centers that may
trade the same security but are subject to different regulatory
requirements. The Commission is also concerned that this difference in
operational transparency disadvantages market participants by limiting
their ability to adequately assess the relative merits of many trading
centers.\28\ Specifically, the Commission is concerned that the lack of
operational transparency around ATSs limits market participants'
ability to adequately discern how their orders interact, match, and
execute on ATSs and to find the optimal market or markets for their
orders.
---------------------------------------------------------------------------

\27\ See infra Table 1 ``NMS Stock ATSs Ranked by Dollar Trading
Volume--March 30, 2015 to June 26, 2015.'' Total dollar trading
volume on all exchanges and off-exchange trading in the second
quarter of 2015 was approximately $16.3 trillion and approximately
397 billion shares. See id.
\28\ Market participants may include many different types of
persons seeking to transact in NMS stocks, including broker-dealers
and institutional or retail investors.
---------------------------------------------------------------------------

The Commission is also concerned about the current lack of
transparency around potential conflicts of interest that arise from the
activities of the broker-dealer operator of the NMS Stock ATS and its
affiliates \29\ in connection with the ATS. As discussed herein, an ATS
must register as a broker-dealer pursuant to Rule 301(b)(1) of
Regulation ATS. This broker-dealer operator, its affiliates, or both,
however, may also conduct brokerage or dealing activities in NMS stocks
in addition to operating the ATS.\30\ Broker-dealer operators may also
have affiliates that support the operations of the ATS or trade on it.
The Commission notes that these multi-service broker-dealers that
engage in brokerage and dealing activities, in addition to the
operation of their ATSs, have become more prevalent since the adoption
of Regulation ATS and the other services multi-service broker-dealers
provide have become increasingly intertwined with the operation of
their ATSs. Given the unique position that the broker-dealer operator
and its affiliates occupy with regard to the operation of an ATS,
potential conflicts of interest arise when the various business
interests of the broker-dealer operator or its affiliates compete with
the interests of market participants that access and trade on the
ATS.\31\ Some of the recent settled actions against ATSs highlight this
potential.\32\ As discussed further below, although the operations of
most ATSs and their broker-dealer operators have become more closely
connected, market participants receive limited information about the
activities of the broker-dealer operator and its affiliates and the
potential conflicts of interest that arise from these activities.
---------------------------------------------------------------------------

\29\ The Commission is proposing to define ``affiliate'' for
purposes of proposed Form ATS-N as described and discussed further
below. See infra note 378 and accompanying text. See also
Instruction G to proposed Form ATS-N.
\30\ Throughout this release, broker-dealer operators of NMS
Stock ATSs that also provide brokerage or dealing services in
addition to operating an NMS Stock ATS are referred to as ``multi-
service broker-dealers''.
\31\ See infra Section VII.A (discussing the relationship
between NMS Stock ATSs and the other business functions of their
broker-dealer operators). The Commission notes that, although it was
concerned at the time of adoption of Regulation ATS about conflicts
of interest that may be present when the broker-dealer operator of
an ATS also performs other trading functions (see infra notes 530-
532 and accompanying text discussing the Commission's concerns
regarding the potential for misuse of confidential trading
information that led to the adoption of Rule 301(b)(10)), the
business structure of broker-dealers that operate NMS Stock ATSs has
changed since 1998.
\32\ See infra note 375 and accompanying text.
---------------------------------------------------------------------------

Transparency is a hallmark of the U.S. securities markets and a
primary tool by which investors protect their own interests, and the
Commission is concerned that the current lack of transparency around
potential conflicts of interest of the broker-dealer operator may
impede market participants from adequately protecting their interests
when doing business on the NMS Stock ATS. The Commission preliminarily
believes that if market participants have more information about the
operations of NMS Stock ATSs and the activities of the broker-dealer
operators and the broker-dealer operators' affiliates, they could
better evaluate whether to do business with an ATS and make more
informed decisions about where to route their orders.\33\
---------------------------------------------------------------------------

\33\ See, e.g., infra notes 187 and 189 and accompanying text
(discussing a comment by the Consumer Federation of America about
how more detailed information about ATS operations would allow
participants to assess whether it makes sense to trade on that
venue, and a comment by Bloomberg Tradebook LLC that because buy-
side representatives might not be customers of all ATSs, they could
not assess order interaction that occurs across the market
structure); and infra note 374 (citing recent enforcement actions
settled by the Commission, many of which, such as the Liquidnet
Settlement, the Pipeline Settlement, the UBS Settlement, and the ITG
Settlement, included allegations that subscribers were fraudulently
misled about the operations of certain ATSs).

---------------------------------------------------------------------------

[[Page 81002]]

The Commission has long recognized that effective competition
requires transparency and access across the national market system.\34\
The Commission preliminarily believes that the proposals discussed
below could promote more efficient and effective market operations by
providing more transparency to market participants about the operations
of ATSs and the potential conflicts of interest of the controlling
broker-dealer operator and its affiliates.\35\ The Commission
preliminarily believes that the operational transparency rules being
proposed today could increase competition among trading centers in
regard to order routing and execution quality. For example, the
proposed rules could reveal order interaction procedures that may
result in the differential treatment of some order types handled by an
NMS Stock ATS. This improved visibility, in turn, could cause market
participants to shift order flow to NMS Stock ATSs that provide better
opportunities for executions. The Commission preliminarily believes
that the proposal could facilitate comparisons among trading centers in
NMS stocks and increase competition by informing market participants
about the operations of NMS Stock ATSs.
---------------------------------------------------------------------------

\34\ See generally Regulation ATS Adopting Release, supra note
7.
\35\ See infra Sections XIII.B and C (analyzing the possible
impact from the current lack of public disclosure of NMS Stock ATSs'
operations, as well as disparate levels of information available to
market participants about NMS Stock ATS operations and the
activities of their broker-dealer operators and their affiliates;
the competitive environment between national securities exchanges
and NMS Stock ATSs, between NMS Stock ATSs, and between broker-
dealers that operate NMS Stock ATSs and broker-dealers that do not
operate NMS Stock ATSs; and the anticipated costs and benefits of
improving transparency).
---------------------------------------------------------------------------

The Commission preliminarily believes that a wide range of market
participants would benefit from the operational transparency that would
result from the proposal. For example, many brokers subscribe to NMS
Stock ATSs and route their orders, and those of their customers, to NMS
Stock ATSs for execution. The Commission preliminarily believes that
improved transparency about the operations of NMS Stock ATSs could aid
brokers with meeting their best execution obligations to their
customers, as they can better assess the trading venues to which they
route orders.\36\ The duty of best execution requires broker-dealers to
execute customers' trades at the most favorable terms reasonably
available under the circumstances (i.e., at the best reasonably
available price).\37\ The Commission has not viewed the duty of best
execution as inconsistent with the automated routing of orders or
requiring automated routing on an order-by-order basis to the market
with the best quoted price at the time.\38\ Rather, the duty of best
execution requires broker-dealers to periodically assess the quality of
competing markets to assure that order flow is directed to the markets
providing the most beneficial terms for their customer orders.\39\
---------------------------------------------------------------------------

\36\ See, e.g., infra note 187 and accompanying text (noting
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'').
\37\ A broker-dealer's duty of best execution derives from
common law agency principles and fiduciary obligations, and is
incorporated in SRO rules and, through judicial and Commission
decisions, in the antifraud provisions of the federal securities
laws. See Order Execution Obligations, Securities Exchange Act
Release No. 37619A (Sept. 6, 1996), 61 FR 48290, 48322 (Sept. 12,
1996). See also Newton v. Merrill, Lynch, Pierce, Fenner & Smith,
Inc., 135 F.3d 266, 270, 273 (3d Cir. 1998) (en banc), cert. denied,
525 U.S. 811 (1998) (finding that failure to satisfy the duty of
best execution can constitute fraud because a broker-dealer, in
agreeing to execute a customer's order, makes an implied
representation that it will execute it in a manner that maximizes
the customer's economic gain in the transaction, and stating
that``[T]he basis for the duty of best execution is the mutual
understanding that the client is engaging in the trade--and
retaining the services of the broker as his agent--solely for the
purpose of maximizing his own economic benefit, and that the broker
receives her compensation because she assists the client in reaching
that goal.''); Matter of Marc N. Geman, Securities Exchange Act
Release No. 43963 (Feb. 14, 2001), aff'd, Geman v. SEC, 334 F.3d
1183 (10th Cir. 2003) (citing Newton, but deciding against finding a
violation of the duty of best execution based on the record). See
also Payment for Order Flow, Securities Exchange Act Release No.
34902 (Oct. 27, 1994), 59 FR 55006, 55009 (Nov. 2, 1994). If the
broker-dealer intends not to act in a manner that maximizes the
customer's economic gain when he accepts the order and does not
disclose this to the customer, a trier of fact could find that the
broker-dealer's implied representation was false. See Newton, 135
F.3d at 273-274.
\38\ See Regulation NMS Adopting Release, supra note 19, at
37538.
\39\ Id.
---------------------------------------------------------------------------

In addition, the Commission preliminarily believes that the
proposal could also help customers of broker-dealers, whose orders are
routed to an NMS Stock ATS for possible execution in the ATS, evaluate
whether their broker-dealer fulfilled its duty of best-execution. The
Commission preliminarily believes that institutional investors, who may
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 the ATS may match and execute
customer orders.\40\ The Commission preliminarily believes that
additional information about how NMS Stock ATSs operate could aid these
investors in evaluating the routing decisions of their brokers and
understanding whether their broker routed their orders to a trading
venue that best fits their needs. To illustrate this point,
institutional investors would likely find it useful to know whether an
NMS Stock ATS provides execution priority to customer order flow, uses
strict price-time priority rules to rank and execute orders, or applies
certain execution allocation methodologies for institutional orders.
Such information could permit an institutional investor to compare NMS
Stock ATSs against each other, as well as against national securities
exchanges, to determine which trading centers would best fit its needs.
Additionally, there may be market participants, who may not currently
subscribe to an NMS Stock ATS, that may wish to obtain information
about how a particular NMS Stock ATS operates before sending orders to
that trading venue.
---------------------------------------------------------------------------

\40\ See, e.g., Consumer Federation of America letter, infra
note 175, at 22, 37-38 (expressing support for requiring all ATSs to
publicly disclose Form ATS ``so that the public can see how these
venues operate,'' and opining that the Commission should ``undertake
an exhaustive investigation of the current order types, requiring
exchanges and all ATSs . . . to disclose in easily understandable
terms what their purpose is, how they are used in practice, who is
using them, and why they are not discriminatory or resulting in
undue benefit or harm to any traders''); Citadel letter, infra note
214, at 4 (expressing the view that ``dark pools should be subject
to increased transparency,'' and that ``ATS operational information
and filings should be publicly available''); KOR Group letter, infra
note 175, at 12 (opining that the fact that ``ATS filings are hidden
from the public while the burden is on SROs to file publicly . . .
does not serve the public interest in any way'' and that there
``should not be any reasoned argument against'' making Form ATS
publicly available); Liquidnet letter #1, infra note 166, at D-5-6,
-11 (stating that the Commission should require institutional
brokers, including institutional ATSs, to disclose to their
customers specific order handling practices, including
identification of external venues to which the broker routes orders,
the process for crossing orders with other orders, execution of
orders as agent and principal, a detailed description of the
operation and function of each ATS or trading desk operated by the
broker, and a clear and detailed description of each algorithm and
order type offered by the broker and expressing the view that Form
ATS should be made publicly available).
---------------------------------------------------------------------------

This proposal is primarily designed to provide market participants
with greater transparency around the operations of

[[Page 81003]]

NMS Stock ATSs and potential conflicts of interest that may arise
involving the broker-dealer operator and its affiliates. The proposed
rules would require public, detailed information to be disclosed about
the activities of the broker-dealer operator and its affiliates in
connection with the NMS Stock ATS, including: Their operation of non-
ATS trading centers and other NMS Stock ATSs; the products and services
offered to subscribers; any arrangements with unaffiliated trading
centers; trading activities on the NMS Stock ATS of the broker-dealer
operator or its affiliates; the use of smart order routers (``SORs'')
(or similar functionality) and algorithms used to send or receive
orders or other trading interest to or from the NMS Stock ATS; shared
employees of the NMS Stock ATS and third parties used to operate the
NMS Stock ATS; any differences in the availability of services,
functionalities, or procedures to subscribers and the availability of
those services, functionalities, or procedures to the broker-dealer
operator or its affiliates; and the NMS Stock ATS's safeguards and
procedures to protect subscribers' confidential trading information.
Form ATS-N would also require detailed information about the operations
of the NMS Stock ATS, including: Any eligibility requirements and any
terms and conditions imposed for subscribers; the NMS Stock ATS's hours
of operation; the types of orders or other trading interest that can be
entered on the NMS Stock ATS; any connectivity, order entry, and co-
location procedures or services; the segmentation of order flow (and
notice given about segmentation); the display of order and other
trading interest; trading services, including matching methodologies,
order interaction rules, and order handling and execution procedures;
procedures governing the suspension of trading and trading during a
system disruption or malfunction; opening, re-opening, closing, and
after hours processes or trading procedures; any outbound routing
services; the NMS Stock ATS's use of market data; fees, rebates, or
other charges of the NMS Stock ATS; any trade reporting, clearance or
settlement arrangements or procedures; order display and execution
access and fair access information (if applicable); and market quality
statistics published or provided to one or more subscribers. The
Commission preliminarily believes that greater transparency in this
regard would provide important information to market participants so
they can evaluate whether submitting order flow to a particular NMS
Stock ATS aligns with their trading or investment objectives. Among
other things, these enhanced, public disclosures also are designed to
limit the potential that a broker-dealer operator of an NMS Stock ATS
could provide certain subscribers with greater disclosure about the
operations and system functionalities of the ATS than it provides to
other market participants.
The Commission also preliminarily believes that proposing a process
for the Commission to determine whether an NMS Stock ATS qualifies for
the exemption from the Exchange Act definition of ``exchange'' would
facilitate better Commission oversight of NMS Stock ATSs and thus,
better protection of investors.\41\ The proposed process would provide
the Commission with an opportunity to review disclosures on Form ATS-N
for compliance with the Form ATS-N requirements, Regulation ATS, and
other applicable requirements of the federal securities laws and
regulations. To qualify for the exemption from the Exchange Act
definition of ``exchange,'' an NMS Stock ATS would be required to file
with the Commission a Form ATS-N, in accordance with the instructions
therein, and the Form ATS-N would need to be declared effective by the
Commission. The Commission would declare ineffective a Form ATS-N if it
finds, after notice and opportunity for hearing, that such action is
necessary or appropriate in the public interest and is consistent with
the protection of investors.\42\ If the Commission declares a Form ATS-
N ineffective, the NMS Stock ATS would be prohibited from operating as
an NMS Stock ATS,\43\ but would not be prohibited from subsequently
filing a new Form ATS-N. The Commission also preliminarily believes
that proposing a process for the Commission to review and declare
ineffective Form ATS-N Amendments, if it finds that such action is
necessary or appropriate in the public interest and is consistent with
the protection of investors, would aid the Commission's ongoing
oversight of NMS Stock ATSs.\44\
---------------------------------------------------------------------------

\41\ See proposed Rule 304(a)(1)(i). See also infra Section IV.C
(discussing the proposed process for Commission review of Form ATS-N
and circumstances under which an NMS Stock ATS may not qualify for
the exemption, as well as the benefits that the process should
provide to market participants).
\42\ See proposed Rule 304(a)(1)(iii).
\43\ See proposed Rule 304(a)(1)(iv).
\44\ See infra Section IV.C (discussing the proposed process for
Commission review of amendments). See also proposed Rule
304(a)(2)(ii).
---------------------------------------------------------------------------

In this light, the Commission is proposing to amend Regulation ATS,
including as follows: (1) Define in proposed Rule 300(k) of Regulation
ATS the term NMS Stock ATS, amend the definition of ``control'' under
current Rule 300(f) of Regulation ATS to specify that control means to
direct the management or policies of the broker-dealer of an ATS, and
amend the exemption from the definition of ``exchange'' in Rule 3a1-
1(a) to require NMS Stock ATSs to comply with proposed Rule 304 (in
addition to the other requirements of Regulation ATS) as a condition of
the exemption; (2) amend Rule 301(b)(2) to require NMS Stock ATSs to
file the reports and amendments mandated by proposed Rule 304, which
would include filing proposed Form ATS-N, in lieu of current Form ATS,
to provide detailed disclosures about an NMS Stock ATS's operations and
the activities of its broker-dealer operator and its affiliates and
amend Rule 301(b)(2) to require an ATS that effects transactions in
both NMS stocks and non-NMS stocks to file the reports and amendments
mandated by proposed Rule 304 for its NMS stock trading activity and
the reports and amendments required under current Rule 301(b)(2) of
Regulation ATS for its non-NMS stock trading activity; (3) amend Rule
301(b)(9) to require an ATS that trades both NMS stocks and non-NMS
stocks to separately report its transactions in NMS stocks on one Form
ATS-R, and its transactions in securities other than NMS stocks on
another Form ATS-R; (4) provide a process for the Commission, pursuant
to proposed Rule 304(a)(1), to declare a Form ATS-N effective or, after
notice and opportunity for hearing, ineffective; (5) establish the
requirements for amending Form ATS-N pursuant to proposed Rule
304(a)(2); (6) provide, pursuant to proposed Rule 304(a)(3), that a
notice of cessation shall cause the Form ATS-N to be ineffective on the
date designated by the NMS Stock ATS; (7) provide a process for the
Commission, pursuant to proposed Rule 304(a)(4), to suspend, limit, or
revoke the exemption of an NMS Stock ATS's Form ATS-N upon notice and
after opportunity for hearing; (8) provide that the Commission,
pursuant to proposed Rule 304(b), will publicly post on its Web site:
each effective Form ATS-N, each properly filed Form ATS-N Amendment,
and each properly filed Form ATS-N notice of cessation, as well as each
order of effectiveness or ineffectiveness of a Form ATS-N, order of
ineffectiveness of a Form ATS-N Amendment, and order suspending,
limiting, or revoking an NMS Stock ATS's exemption, issued by the
Commission; and also require each NMS Stock ATS that has a Web site to
post on the NMS Stock ATS's Web site a

[[Page 81004]]

direct URL hyperlink to the Commission's Web site that contains the
documents enumerated in proposed Rule 304(b)(2); (9) amend existing
Rule 301(b)(10) of Regulation ATS to require all ATSs to adopt written
safeguards and written procedures to protect subscribers' confidential
trading information, as well as written oversight procedures to ensure
those safeguards and procedures are followed; and (10) amend Rule
303(a) to require that the written safeguards and written procedures
required by proposed Rule 301(b)(10) and reports pursuant to proposed
Rule 304 be preserved.

II. Current ATS Regulatory Framework

A. Exemption From National Securities Exchange Registration

A fundamental component of the current ATS regulatory framework
adopted by the Commission in 1998 is Exchange Act Rule 3b-16.\45\ Rule
3b-16 was designed to address the blurring of traditional
classifications between exchanges and broker-dealers as a result of
advances in technology by providing a more comprehensive and meaningful
interpretation of what constitutes an exchange under Section 3(a) of
the Exchange Act.\46\ Rule 3b-16(a) provides a functional test to
assess whether a trading platform meets the definition of exchange
under Section 3(a)(1) of the Exchange Act, and thus is required to
register as a national securities exchange pursuant to Sections 5 and 6
of the Exchange Act.\47\ Under Rule 3b-16, 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.\48\
---------------------------------------------------------------------------

\45\ See 17 CFR 240.3b-16.
\46\ See Regulation ATS Adopting Release, supra note 7, at
70847. 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 . .
.&ensp.” 15 U.S.C. 78c(a)(1).
\47\ See 15 U.S.C. 78e and 78f. A ``national securities
exchange'' is an exchange registered as such under Section 6 of the
Exchange Act.
\48\ See 17 CFR 240.3b-16(a).
---------------------------------------------------------------------------

The Commission adopted Exchange Act Rule 3b-16(b) to explicitly
exclude certain systems that the Commission believed did not meet the
exchange definition.\49\ Specifically, Rule 3b-16(b) excludes 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.\50\ 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 \51\ the system from the definition.
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\49\ See Regulation ATS Adopting Release, supra note 7, at
70852.
\50\ See 17 CFR 240.3b-16(b). Rule 3b-16(b)(2) excludes systems
that allow persons to enter orders for execution against the bids
and offers of a single dealer if, as an incidental part of such
activities, the system matches orders that are not displayed to any
person other than the dealer and its employees; or in the course of
acting as a registered market maker with an SRO, the system displays
the limit orders of the market maker's, or other broker-dealer's,
customers, and in addition, matches customer orders with those
displayed limit orders and, as an incidental part of its market
making activities, the system crosses or matches orders that are not
displayed to any person other than the market maker and its
employees. See 17 CFR 240.3b-16(b)(2). The purpose of the exclusions
in 17 CFR 240.3b-16(b)(2) was to encompass systems operated by third
market makers, as well as those systems operated by dealers,
primarily in debt securities, who display their own quotations to
customers and other broker-dealers on a proprietary basis. Rule 3b-
16(b)(2)(ii) was adopted to exclude registered market makers that
display their own quotes and, in order to comply with a Commission
or SRO rule, customer limit orders, and allow their customers and
other broker-dealers to enter orders of execution against the
displayed orders. Additionally, it was designed to allow registered
market makers, as an incidental activity resulting from their market
maker status, to match or cross orders for securities in which they
make a market, even if those orders are not displayed. See
Regulation ATS Adopting Release, supra note 7, at 70854.
\51\ See 17 CFR 240.3b-16(e).
---------------------------------------------------------------------------

For those systems that meet the criteria of Rule 3b-16(a) and are
not excluded under Rule 3b-16(b) of the Exchange Act,\52\ Rule 3a1-
1(a)(2) \53\ provides an exemption from the definition of ``exchange.''
Specifically, Exchange Act Rule 3a1-1(a)(2) exempts from the Exchange
Act Section 3(a)(1) definition of ``exchange'' an organization,
association, or group of persons that complies with Regulation ATS,\54\
which includes, among other things, the requirement to register as a
broker-dealer.\55\ Therefore, an organization, association, or group of
persons that complies with Regulation ATS is not subject to Section 5
of the Exchange Act,\56\ which requires that an ``exchange'' register
with the Commission as a national securities exchange pursuant to
Section 6 of the Exchange Act \57\ or otherwise be exempt.
Additionally, an ATS that is not required to register as a national
securities exchange pursuant to Section 5 is not an SRO \58\ and is not
required to comply with applicable requirements.\59\
---------------------------------------------------------------------------

\52\ See 17 CFR 240.3b-16(b).
\53\ See 17 CFR 240.3a1-1(a)(2).
\54\ See 17 CFR 240.3a1-1(a)(2). 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).
\55\ See 17 CFR 242.301(b)(1).
\56\ 15 U.S.C. 78e.
\57\ 15 U.S.C. 78f.
\58\ See supra note 21 (setting forth the statutory definition
of SRO).
\59\ See, e.g., Section 19 of the Exchange Act, 15 U.S.C. 78s.
---------------------------------------------------------------------------

To satisfy the requirements of the Rule 3a1-1(a)(2) exemption, a
system that otherwise meets the definition of an ``exchange'' must
comply with Regulation ATS. An ATS that fails to comply with the
requirements of Regulation ATS would no longer qualify for the
exemption from the definition of an ``exchange'' provided under
Exchange Act Rule 3a1-1(a)(2), and thus, risks operating as an
unregistered exchange in violation of Section 5 of the Exchange
Act.\60\
---------------------------------------------------------------------------

\60\ See 15 U.S.C. 78e.
---------------------------------------------------------------------------

B. 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

[[Page 81005]]

from trading.'' \61\ Governing the conduct of or disciplining
subscribers are functions performed by an SRO that the Commission
believes should be regulated as such.\62\ 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).\63\
---------------------------------------------------------------------------

\61\ See 17 CFR 242.300(a).
\62\ See Regulation ATS Adopting Release, supra note 7, at
70859. As the Commission noted when it adopted Regulation ATS, the
Commission believes that any system that uses its market power to
regulate its participants should be regulated as an SRO. The
Commission noted 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, the Commission
stated its 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
alternative trading system from imposing credit conditions on
subscribers or requiring subscribers to submit financial information
to the alternative trading system. See id.
\63\ 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,\64\
be registered as a broker-dealer under Section 15 of the Exchange
Act,\65\ and thus become a member of an SRO, such as FINRA.\66\ In the
Regulation ATS Adopting Release, the Commission stated that an ATS that
registers as a broker-dealer must, in addition to complying with
Regulation ATS, comply with the filing and conduct obligations
associated with being a registered broker-dealer, including membership
in an SRO and compliance with SRO rules.\67\
---------------------------------------------------------------------------

\64\ 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 an
exchange under Section 6 of the Exchange Act; exempt from 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 is
a bank, that limits its activities to certain instruments; or
exempted, conditionally or unconditionally, by Commission order,
after application by such alternative trading system. See 17 CFR
242.301(a). For example, an ATS that is registered as a broker-
dealer, or is a bank, and limits its securities activities solely to
government securities is not required to comply with Regulation ATS.
See 17 CFR 242.301(a)(4).
\65\ See 17 CFR 242.301(b)(1).
\66\ See Section 15(b)(8) of the Exchange Act; 15 U.S.C.
78o(b)(8). See also supra 24 note and infra note 295 and
accompanying text (setting forth the requirements of Section
15(b)(8) of the Exchange Act).
\67\ See Regulation ATS Adopting Release, supra note 7, at
70903.
---------------------------------------------------------------------------

In addition, Rule 301(b)(2) of Regulation ATS requires an ATS to
file an initial operation report with the Commission on Form ATS \68\
at least 20 days before commencing operations.\69\ 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.\70\ 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 its operations prior to commencing operations.\71\
---------------------------------------------------------------------------

\68\ Form ATS and the Form ATS Instructions are available at
https://www.sec.gov/about/forms/formats.pdf.
\69\ See 17 CFR 242.301(b)(2)(i).
\70\ See Regulation ATS Adopting Release, supra note 7, at
70864.
\71\ See id. As discussed more fully below, the current notice
process applicable to ATSs is very different than the process by
which exchanges register with the Commission and how amendments to
exchange rules are regulated. See infra notes 158-162 and
accompanying text.
---------------------------------------------------------------------------

Form ATS requires, among other things, 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 execution; and trade reporting, clearance and
settlement of trades on the ATS. Regulation ATS states that information
filed by an ATS on Form ATS is ``deemed confidential when filed.'' \72\
Thus, under the current regulatory requirements, market participants
generally do not have information about, for example, how orders are
entered, prioritized, handled, and executed on an NMS Stock ATS, ATSs
are not otherwise required to publicly disclose such information.\73\
---------------------------------------------------------------------------

\72\ See 17 CFR 242.301(b)(2)(vii).
\73\ The Commission does note, however, that some ATSs may
currently make voluntary public disclosures. See, e.g., infra note
156.
---------------------------------------------------------------------------

In addition to providing notice of its initial operation, an ATS
must notify the Commission of any changes in its operations by filing
an amendment to its initial operation report. There are three types of
amendments to an initial operation report.\74\ 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.\75\
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.\76\ 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.\77\ Also,
upon ceasing to operate as an ATS, an ATS is required to promptly file
a cessation of operations report on Form ATS.\78\ 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,\79\ and Rule 301(b)(2)(vii) and the instructions
to the form state that Form ATS is ``deemed confidential.'' \80\
---------------------------------------------------------------------------

\74\ 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.
\75\ 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 7, at 70864. See also supra Section IV.C.6 (discussing
the proposed materiality standard that would apply to the filing of
amendments on Form ATS-N).
\76\ See 17 CFR 242.301(b)(2)(iii).
\77\ See 17 CFR 242.301(b)(2)(iv).
\78\ See 17 CFR 242.301(b)(2)(v).
\79\ See Regulation ATS Adopting Release, supra note 7, at
70864.
\80\ See 17 CFR 242.301(b)(2)(vii); Form ATS at 3, General
Instructions A.7.
---------------------------------------------------------------------------

Rule 301(b)(9) of Regulation ATS also requires ATSs 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.\81\ 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

[[Page 81006]]

during the quarter.\82\ Form ATS-R also requires an ATS that is subject
to the fair access obligations under Rule 301(b)(5) of Regulation ATS
to: (1) Provide a list of all persons granted, denied, or limited
access to the ATS during the period covered by the ATS-R and (2)
designate for each person: (a) Whether they were 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.\83\ 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.\84\ Like Form
ATS, Rule 301(b)(2)(vii) and the instructions to Form ATS-R state that
Form ATS-R is ``deemed confidential.'' \85\
---------------------------------------------------------------------------

\81\ 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.
\82\ See Form ATS-R at 4, Items 1 and 2 (describing the
requirements for Exhibit A and Exhibit B of Form ATS-R). 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.
\83\ See Form ATS-R at 6, Item 7 (explaining requirements for
Exhibit C).
\84\ See Regulation ATS Adopting Release, supra note 7, at
70878.
\85\ See 17 CFR 242.301(b)(2)(vii); Form ATS-R at 2, General
Instruction A.7.
---------------------------------------------------------------------------

In addition to the reporting requirements under Rules 301(b)(2) and
301(b)(9) of Regulation ATS, an ATS's exemption from national
securities exchange registration is conditioned on the ATS complying
with the other requirements under Regulation ATS. 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: \86\
---------------------------------------------------------------------------

\86\ See 17 CFR 242.301(b)(3)(i).
---------------------------------------------------------------------------

Pursuant to Rule 301(b)(3)(ii),\87\ provide to a national
securities exchange or national securities association the prices and
sizes of the orders at the highest buy price and the lowest sell price
for such NMS stock, displayed to more than one person in the ATS, for
inclusion in the quotation data made available by the national
securities exchange or national securities association pursuant to Rule
602 under Regulation NMS; \88\ and
---------------------------------------------------------------------------

\87\ See 17 CFR 242.301(b)(3)(ii).
\88\ See 17 CFR 242.602.
---------------------------------------------------------------------------

pursuant to Rule 301(b)(3)(iii),\89\ with respect to any
such order displayed pursuant to Rule 301(b)(3)(ii), provide to any
broker-dealer that has access to the national securities exchange or
national securities association to which the ATS provides the prices
and sizes of displayed orders pursuant to Rule 301(b)(3)(ii), the
ability to effect a transaction with such orders that is:
---------------------------------------------------------------------------

\89\ See 17 CFR 242.301(b)(3)(iii).
---------------------------------------------------------------------------

[cir] equivalent to the ability of such broker-dealer to effect a
transaction with other orders displayed on the exchange or by the
association; and
[cir] at the price of the highest priced buy order or lowest priced
sell order displayed for the lesser of the cumulative size of such
priced orders entered therein at such price, or the size of the
execution sought by such broker-dealer.

These order display and execution access obligations were adopted by
the Commission with the expectation they would promote additional
market integration and further discourage two-tier markets when trading
in an NMS stock on an ATS reaches a certain level.\90\
---------------------------------------------------------------------------

\90\ See Regulation ATS Adopting Release, supra note 7, at
70867.
---------------------------------------------------------------------------

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).\91\
---------------------------------------------------------------------------

\91\ 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: \92\
---------------------------------------------------------------------------

\92\ 17 CFR 242.301(b)(5)(i).
---------------------------------------------------------------------------

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:
[cir] all grants of access including, for all subscribers, the
reasons for granting such access; and
[cir] 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.\93\
---------------------------------------------------------------------------

\93\ See 17 CFR 242.301(b)(5)(ii). Regulation ATS does not
mandate compliance with these requirements when an ATS reaches the
5% trading threshold in an NMS stock if the following conditions are
met: The ATS matches customer orders for a security with other
customer orders; such customers' orders are not displayed to any
person, other than employees of the ATS; and such orders are
executed at a price for such security disseminated by an effective
transaction reporting plan, or derived from such prices. See 17 CFR
242.301(b)(5)(iii).

The above requirements of Rule 301(b)(5) are referred to as the ``fair
access'' requirements and apply on a security-by-security basis.\94\ A
denial of access to a market participant after an ATS reaches the above
5% fair access threshold in an NMS stock would be reasonable if it is
based on objective standards.\95\
---------------------------------------------------------------------------

\94\ 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).
\95\ See Regulation ATS Adopting Release, supra note 7, at
70874.
---------------------------------------------------------------------------

Additionally, under Rule 301(b)(6), an ATS that trades only
municipal securities or corporate fixed income debt with 20% or more of
the average daily volume traded in the U.S. during at least four of the
preceding six calendar months, must do the following with respect to
those systems that support order entry, order routing, order execution,
transaction reporting, and trade comparison: \96\
---------------------------------------------------------------------------

\96\ See 17 CFR 242.301(b)(6)(i).
---------------------------------------------------------------------------

Establish reasonable current and future capacity
estimates;
conduct periodic capacity stress tests of critical systems
to determine such system's ability to process transactions in an
accurate, timely, and efficient manner;
develop and implement reasonable procedures to review and
keep current its system development and testing methodology;
review the vulnerability of its systems and data center
computer operations to internal and external threats, physical hazards,
and natural disasters;
establish adequate contingency and disaster recovery
plans;
on an annual basis, perform an independent review, in
accordance with

[[Page 81007]]

established audit procedures and standards, of the ATS's controls for
ensuring that the above requirements are met, and conduct a review by
senior management of a report containing the recommendations and
conclusions of the independent review; and
promptly notify the Commission and its staff of material
systems outages and significant systems changes.\97\
---------------------------------------------------------------------------

\97\ See 17 CFR 242.301(b)(6)(ii). Also, as with the fair access
requirements pursuant to Rule 301(b)(5), Regulation ATS does not
mandate compliance with the requirements under Rule 301(b)(6) when
an ATS reaches a 20% trading threshold 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)(6)(iii).

Prior to the Commission's adoption of Regulation SCI,\98\ the
requirements of Rule 301(b)(6) also applied to ATSs with regard to
their trading in NMS stocks and non-NMS equity securities.\99\
Regulation SCI superseded and replaced Rule 301(b)(6)'s requirements
with regard to ATSs that trade NMS stocks and non-NMS stocks.\100\ In
general, Regulation SCI requires SCI entities,\101\ including NMS Stock
ATSs that meet the definition of an ``SCI ATS,'' \102\ 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.\103\
In addition, Regulation SCI requires SCI entities, including NMS Stock
ATSs that are SCI entities, to take corrective action with respect to
SCI events (defined to include systems disruptions, systems compliance
issues, and systems intrusions), and notify the Commission of such
events.\104\ Regulation SCI further requires SCI entities, including
NMS Stock ATSs that are SCI entities, to disseminate information about
certain SCI events to affected members or participants and, for certain
major SCI events, to all members or participants of the SCI entity. In
addition, Regulation SCI requires SCI entities, including NMS Stock
ATSs that are SCI entities, to conduct a review of their systems by
objective, qualified personnel at least annually, submit quarterly
reports regarding completed, ongoing, and planned material changes to
their SCI systems to the Commission, and maintain certain books and
records.\105\ It also requires SCI entities, including NMS Stock ATSs
that are SCI entities, to mandate participation by designated members
or participants in scheduled testing of the operation of their business
continuity and disaster recovery plans, including backup systems, and
to coordinate such testing on an industry- or sector-wide basis with
other SCI entities.\106\ Regulation SCI, as compared to the former Rule
301(b)(6), also modified the volume thresholds applicable to SCI
ATSs.\107\
---------------------------------------------------------------------------

\98\ See SCI Adopting Release, supra note 17.
\99\ See Regulation ATS Adopting Release, supra note 7, at
70875-76.
\100\ Regulation SCI does not apply to ATSs that trade only
municipal securities or corporate debt securities. See SCI Adopting
Release, supra note 17, at 72262. Prior to the adoption of
Regulation SCI, Rule 301(b)(6) of Regulation ATS imposed by rule
certain aspects of Commission policy statements with respect to
technology systems of significant-volume ATSs.
Specifically, Regulation SCI, with regard to SCI entities (as
defined in Regulation SCI; see infra note 101), superseded and
replaced the Commission's prior Automation Review Policy (``ARP''),
established by the Commission's two policy statements, each titled
``Automated Systems of Self-Regulatory Organizations,'' issued in
1989 and 1991, see Securities Exchange Act Release Nos. 27445
(November 16, 1989), 54 FR 48703 (November 24, 1989), and 29185 (May
9, 1991), 56 FR 22490 (May 15, 1991), including the aspects of those
policy statements previously codified in Rule 301(b)(6) of
Regulation ATS applicable to significant-volume ATSs that trade NMS
stocks and non-NMS stocks. See SCI Adopting Release, supra note 17,
at 72252.
\101\ 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.
\102\ 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.
\103\ See SCI Adopting Release, supra note 17, at 72252.
\104\ See id.
\105\ See id.
\106\ See id.
\107\ See supra note 102. Prior to the adoption of Regulation
SCI, the requirements of Rule 301(b)(6) also applied to ATSs that,
during at least 4 of the preceding 6 calendar months, had with
respect to any NMS stock, 20% or more of the average daily volume
reported by an effective transaction reporting plan.
---------------------------------------------------------------------------

Rule 301(b)(7) \108\ 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) \109\ requires all ATSs to
make and keep current the records specified in Rule 302 of Regulation
ATS \110\ and preserve the records specified in Rule 303 of Regulation
ATS.\111\
---------------------------------------------------------------------------

\108\ See 17 CFR 242.301(b)(7).
\109\ See 17 CFR 242.301(b)(8).
\110\ See 17 CFR 242.302.
\111\ 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 7, at 70877-78.
---------------------------------------------------------------------------

Under Rule 301(b)(10), all ATSs must establish adequate safeguards
and procedures to protect subscribers' confidential trading
information, which must include the following:
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 these or any other applicable
rules; and
implementing standards controlling employees of the ATS
trading for their own accounts.\112\
---------------------------------------------------------------------------

\112\ See 17 CFR 242.301(b)(10)(i).
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Furthermore, all ATSs must adopt and implement adequate oversight
procedures to ensure that the above safeguards and procedures are
followed.\113\
---------------------------------------------------------------------------

\113\ See 17 CFR 242.301(b)(10)(ii).
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Finally, Rule 301(b)(11) \114\ expressly prohibits any ATS from
using the word ``exchange'' or derivations of the word ``exchange,''
such as the term ``stock market,'' in its name.\115\
---------------------------------------------------------------------------

\114\ See 17 CFR 240.301(b)(11).
\115\ When the Commission proposed Regulation ATS, it said that
``it is important that the investing public not be confused about
the market role [ATSs] have chosen to assume.'' See Securities
Exchange Act Release No. 39884 (April 21, 1998), 63 FR 23504, 23523
(April 29, 1998) (``Regulation ATS Proposing Release''). The
Commission 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.
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III. Role of ATSs in the Current Equity Market Structure

A. Significant Source of Liquidity for NMS Stocks

The equity market structure in 1998 was starkly different than it
is today. At the time Regulation ATS was proposed, there were only 8
registered national

[[Page 81008]]

securities exchanges,\116\ and the Commission estimated that there were
approximately 43 systems that would be eligible to operate as
ATSs.\117\ Currently, there are 18 registered national securities
exchanges, of which there are 11 national securities exchanges that
trade NMS stocks,\118\ and 84 ATSs with a Form ATS on file with the
Commission. Currently, there are 46 ATSs that have noticed on their
Form ATS that they expect to trade NMS stocks.\119\ As the Commission
noted in the SCI Adopting Release, even smaller trading centers, such
as certain high-volume ATSs, now collectively represent a significant
source of liquidity for NMS stocks, and some ATSs have similar and, in
some cases, greater trading volume than some national securities
exchanges.\120\ In 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), and 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.\121\ During this period, no individual ATS
executed more than approximately 13% of the total share volume on NMS
Stock ATSs and no more than approximately 2% of total NMS stock share
volume.\122\ Given this dispersal of trading volume in NMS stocks among
an increasing number of trading centers, NMS Stock ATSs, with their
approximately 15% market share, represent a significant source of
liquidity in NMS stocks.
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\116\ See Regulation ATS Proposing Release, supra note 115, at
23543 n.341.
\117\ See id. at 23540 n.313 and accompanying text.
\118\ The Commission notes that National Stock Exchange, Inc.
ceased trading on its system as of the close of business on May 30,
2014. See Securities Exchange Act Release No. 72107 (May 6, 2014),
79 FR 27017 (May 12, 2014) (SR-NSX-2014-14).
\119\ Data compiled from Forms ATS submitted to the Commission
as of November 1, 2015.
\120\ See SCI Adopting Release, supra note 17, at 72262.
\121\ See infra Table 1--``NMS Stock ATSs Ranked by Dollar
Trading Volume--March 30, 2015 to June 26, 2015.'' Total dollar
trading volume on all exchanges and off-exchange trading in the
second quarter of 2015 was approximately $16.3 trillion and
approximately 397 billion shares. See Market Volume Summary, https://www.batstrading.com/market_summary/. See also infra Section
XIII.B.1.
Competitors for listed-equity (NMS) trading services also
include several hundred OTC market makers and broker-dealers.
\122\ The NMS Stock ATS with the greatest volume executed
approximately 12.7% of NMS Stock ATS share volume and 1.9% of the
total consolidated NMS stock share trading volume.
The market share percentages were calculated by Commission staff
using market volume statistics reported by BATS and FINRA ATS data
collected from ATSs pursuant to FINRA Rule 4552. See infra Table 1--
``NMS Stock ATSs Ranked by Dollar Trading Volume--March 30, 2015 to
June 26, 2015.''
FINRA recently adopted a rule that requires NMS Stock ATSs to
report aggregate weekly volume information and number of trades to
FINRA in certain equity securities, including NMS stocks, some of
which FINRA makes publicly available. Reporting is on a security-by-
security basis for transactions occurring within the ATS. Each ATS
is also 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 4552, 6160, 6170, 6480 and 6720. See
also Securities Exchange Act Release No. 71341 (January 17, 2014),
79 FR 4213 (January 24, 2014) (SR-FINRA-2013-042) (order granting
approval of a proposed rule change to require alternative trading
systems to report volume information to FINRA and use a unique
market participant identifier) (``FINRA ATS Reporting Approval'').
FINRA publishes on its Web site the trading information (volume
and number of trades) reported for each equity security, with
appropriate disclosures that the information is based on ATS-
submitted reports and not on reports produced or validated by FINRA.
See id. at 4214. See also Alternative Trading System (ATS)
Transparency on FINRA's Web site, https://www.finra.org/Industry/Compliance/MarketTransparency/ATS/.
---------------------------------------------------------------------------

Another significant aspect of the increased role of NMS Stock ATSs
in equity market structure is the proliferation of ATSs that trade NMS
stocks but do not publicly display quotations in the consolidated
quotation data, commonly referred to as ``dark pools.'' \123\ Dark
pools originally were designed to offer certain market participants,
particularly institutional investors, the ability to minimize
transaction costs when executing trades in large size by completing
their trades without prematurely revealing the full extent of their
trading interest to the broader market. The disclosure of large size
trades could have an impact on the market, and reduce the likelihood of
the orders being filled.\124\ As the Commission has previously noted,
some dark pools, such as block crossing networks, offer specialized
size discovery mechanisms that attempt to bring large buyers and
sellers in the same stock together anonymously and to facilitate a
trade between them.\125\ The traditional definition of block orders are
orders for more than 10,000 shares,\126\ however average trade sizes
can far exceed this and be as high as 500,000 shares per trade.\127\
---------------------------------------------------------------------------

\123\ 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 Regulation of
Non-Public Trading Interest, Securities Exchange Act Release No.
60997 (November 13, 2009), 74 FR 61208, 61209 (November 23, 2009)
(``Regulation of Non-Public Trading Interest'') (proposing rules and
amendment to joint-industry plans describing the term dark pool).
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 release, these trading centers
are not defined as dark pools because they are not ATSs. These
trading centers may, however, offer electronic dark liquidity
services that are analogous to those offered by dark pools. See id.
at 61209 n.8.
\124\ See, e.g., Securities Exchange Act Release No. 61358
(January 14, 2010), 75 FR 3594, 3599 n.28 (January 21, 2010) (``2010
Equity Market Structure Release'').
\125\ See id. at 3599.
\126\ See Rule 600(b)(9) of Regulation NMS (defining block size
with respect to an order), 17 CFR 242.600(b)(9). See also Laura
Tuttle, Alternative Trading Systems: Description of ATS Trading in
National Market System Stocks, at 9-10 (October 2013), https://www.sec.gov/marketstructure/research/alternative-trading-systems-march-2014.pdf (``Tuttle: ATS Trading in NMS Stocks'').
\127\ See infra, Table 2--``NMS Stock ATSs Ranked by Average
Trade Size--March 30, 2015 to June 26, 2015.''
---------------------------------------------------------------------------

Most dark pools today, however, primarily execute trades with small
sizes that are more comparable to the average size of trades on
registered national securities exchanges, which is 181 shares.\128\
These dark pools that primarily match smaller orders (though the
matched orders may be ``child'' orders of much larger ``parent''
orders) execute more than 90% of dark pool volume.\129\ The majority of
this volume is executed by dark pools that are operated by multi-
service broker-dealers.\130\ These broker-dealers typically also offer
order routing services, trade as principal in the ATS that they are
operating, or both.\131\
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\128\ See infra note 725 and accompanying text.
\129\ See 2010 Equity Market Structure Release, supra note 124,
75 FR at 3599; see also infra, Table 2--``NMS Stock ATSs Ranked by
Average Trade Size--March 30, 2015 to June 26, 2015.''
\130\ See infra note 364 and accompanying text and Table 1--
``NMS Stock ATSs Ranked by Dollar Trading Volume--March 30, 2015 to
June 26, 2015.''
\131\ See 2010 Equity Market Structure Release, supra note 124,
at 3599.
---------------------------------------------------------------------------

In recent years, as the number of NMS Stock ATSs has increased, so
has the number of dark pools. The number of active dark pools trading
NMS stocks has increased from approximately 10 in 2002,\132\ to 32 in
2009,\133\ to over 40 today.\134\ Furthermore, in 2009, dark pools
accounted for 7.9% of NMS share volume.\135\ It is now estimated that
of the approximately 397 billion shares traded in NMS stocks ($16.3
trillion), 14.9% of total NMS stock share volume is attributable to
dark pools, with no

[[Page 81009]]

single individual dark pool executing more than 1.9% of total NMS stock
share volume.\136\ The Commission also notes that some NMS Stock ATSs,
which do not provide their best priced-orders for inclusion in the
consolidated quotation data, make available to subscribers real-time
information about quotes, orders, or other trading interest on the NMS
Stock ATS.
---------------------------------------------------------------------------

\132\ See Regulation of Non-Public Trading Interest, supra note
123, at 61209 n.9 and accompanying text.
\133\ See 2010 Equity Market Structure Release, supra note 124,
at 3598 n.22 and accompanying text.
\134\ Data compiled from Forms ATS and Forms ATS-R filed to the
Commission as of the end of, and for the third quarter of, 2015.
\135\ See 2010 Equity Market Structure Release, supra note 124,
at 3598.
\136\ See infra Section XIII.B.1.
---------------------------------------------------------------------------

In contrast to dark pools, an ATS could be an Electronic
Communication Network (``ECN''). ECNs 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.\137\ In
general, ECNs offer trading services (such as displayed or non-
displayed order types, maker-taker pricing, and data feeds) that are
analogous to registered national securities exchanges.\138\
---------------------------------------------------------------------------

\137\ 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 124, at 3599.
\138\ See 2010 Equity Market Structure Release, supra note 124,
at 3599. See infra note 494 (describing the maker-taker pricing
model).
---------------------------------------------------------------------------

B. Heightened Operational Complexity and Sophistication of NMS Stock
ATSs

Since Regulation ATS was adopted, ATSs have gained market share in
NMS stocks and have also evolved to become more complex and
sophisticated trading centers. In addition, ATSs that transact in NMS
stocks increasingly are operated by multi-service broker-dealers that
engage in significant brokerage and dealing activities in addition to
their operation of their ATSs, and the operations of NMS Stock ATSs
have become increasingly intertwined with operations of their broker-
dealer operator, adding to the complexity of the manner in which those
ATSs operate.\139\ The Commission is concerned that market participants
have limited information about the complex operations of NMS Stock ATSs
and the unique relationship between an NMS Stock ATS and its broker-
dealer operator and the affiliates of the broker-dealer operator, who
often provide a significant source of liquidity on the NMS Stock ATS.
The Commission preliminarily believes that improving transparency of
information available to market participants would enable them to
better assess NMS Stock ATSs as potential trading venues.\140\
---------------------------------------------------------------------------

\139\ As exemplified by some commenters' responses and as
discussed further below, market participants are interested in
information about, among other things, ATS affiliations, sharing of
order information, operation of smart order routers and to whom they
give preference, priority rules, order types, calculation of
reference prices, and segmentation. See, e.g., infra notes 186 and
190 and accompanying text (describing comments received from
Blackrock, Inc. and Bloomberg Tradebook LLC).
\140\ See, e.g., infra note 187 and accompanying text
(describing a comment received from the Consumer Federation of
America).
---------------------------------------------------------------------------

Since Regulation ATS was adopted, ATSs that effect transactions in
NMS stocks have grown increasingly complex in terms of the services and
functionalities that they offer subscribers. Over the past 16 years,
these ATSs, like registered national securities exchanges, have used
advances in technology to improve the speed, capacity, and efficiency
of their trading functionalities to bring together the orders in NMS
stocks of multiple buyers and sellers using established, non-
discretionary methods under which such orders interact and trade.
Before Regulation ATS was adopted, ATSs primarily operated as ECNs, as
dark pools were not prevalent during that period. Today, the vast
majority of NMS Stock ATSs operate as dark pools. Furthermore, based on
Commission experience, ATSs that traded NMS stocks prior to the
adoption of Regulation ATS did not offer the same services and
functionalities as they do today. Today, most NMS Stock ATSs, like most
registered national securities exchanges, are fully-electronic,
automated systems that provide a myriad of trading services to
facilitate order interaction among various types of users on the NMS
Stock ATS. For example, NMS Stock ATSs offer a wide range of order
types, which are a primary means by which subscribers communicate their
instructions for the handling of their orders on the ATS. Based on
Commission experience, some NMS Stock ATSs allow subscribers to submit
indications of interests, conditional orders, and various types of
pegged orders, often with time-in-force, or other specifications, which
are similar to those offered by exchanges, such as all or none, minimum
execution quantity, immediate or cancel, good till cancelled, and day.
Unlike registered national securities exchanges, however, most NMS
Stock ATSs have adopted a dark trading model, and do not display any
quotations in the consolidated quotation data.
Additionally, at the time Regulation ATS was adopted, SORs were not
a primary point of access to ATSs that trade NMS stocks. Today,
however, brokers compete to offer sophisticated technology tools to
monitor liquidity at many different venues and to implement order
routing strategies.\141\ Using that knowledge of available liquidity,
many brokers offer smart order routing technology to route orders to
various trading centers to access such liquidity.\142\ Based on
Commission experience, broker-dealer operators frequently use SORs (or
similar functionality) to route orders to their NMS Stock ATSs in
today's marketplace. Furthermore, for some NMS Stock ATSs, most orders
must pass through the broker-dealer operator's SOR (or similar
functionality) to enter the ATS.\143\
---------------------------------------------------------------------------

\141\ See 2010 Equity Market Structure Release, supra note 124,
75 FR at 3602.
\142\ See id.
\143\ For a further discussion about the increased use of SORs
(or similar functionalities) by broker-dealer operators of NMS Stock
ATSs, see infra Section VII.B.7.
---------------------------------------------------------------------------

In today's highly automated trading environment, NMS Stock ATSs
offer various matching systems to bring together orders and
counterparties in NMS stocks. These automated matching systems,
including limit order books, crossing systems, and various types of
auctions, are generally pre-programmed to execute orders pursuant to
established non-discretionary methods. These established non-
discretionary methods dictate the terms of trading among multiple
buyers and sellers entering orders into the NMS Stock ATS and generally
include priority and allocation procedures. Based on Commission
experience, some NMS Stock ATSs offer price-time priority, while others
offer midpoint only matching with time priority, or time priority at
other prices derived from the NBBO. Some NMS Stock ATSs may also offer
priority mechanisms with additional overlays. For example, amongst
orders at a given price, priority may be given to a certain type of
order (e.g., agency orders), before then applying time priority.
Additionally, some NMS Stock ATSs offer order routing services similar
to those offered by national securities exchanges.\144\
---------------------------------------------------------------------------

\144\ For example, based on Commission experience, some NMS
Stock ATSs, like national securities exchanges, will route a
subscriber's order to another trading center when the NMS Stock ATS
cannot execute the order without trading through the NBBO, or if
otherwise directed by the subscriber.
---------------------------------------------------------------------------

Some NMS Stock ATSs also offer subscribers the ability to further
customize trading parameters, or the broker-dealer operator may set
parameters around the interaction of various order flow. Based on
Commission experience with information disclosed on Form ATS, some NMS
Stock ATSs may enable subscribers to select the types of, or

[[Page 81010]]

even specific, subscriber or order flow with which the subscriber
wishes to interact. For example, some NMS Stock ATSs may enable
subscribers to prevent their orders from interacting with principal
order flow of the ATS's broker-dealer operator, or may enable
subscribers to prohibit execution of their order flow against that of
subscribers with certain execution characteristics (e.g., so called
high-frequency traders or ``HFTs''). Subscribers may also have the
option to prevent self-matching with other order flow originating from
the same firm. Some NMS Stock ATSs may also segment order flow into
various classifications of subscribers based upon parameters set by the
broker-dealer operator, such as historical execution characteristics,
or may limit access to certain crossing mechanisms based on a
subscriber's profile (e.g., the system may be programmed such that
institutional order flow only executes against other institutional
order flow).\145\ Subscribers may or may not be aware that they have
been classified as a particular type of participant on the NMS Stock
ATS, which may limit their ability to interact with order flow of
certain other subscribers to that NMS Stock ATS.
---------------------------------------------------------------------------

\145\ A purported reason for such segmentation may be to help
reduce information leakage or the possibility of trading with
undesirable counterparties.
---------------------------------------------------------------------------

The Commission also preliminarily believes that, since Regulation
ATS was adopted, the operations of NMS Stock ATSs have become
increasingly intertwined with operations of the broker-dealer operator,
providing additional complexity to the manner in which NMS Stock ATSs
operate. Given this close relationship, the Commission preliminarily
believes that conflicts of interest can arise between the broker-dealer
operator's interest in its NMS Stock ATS and its interest in its other
non-ATS businesses. As discussed further below, at the time Regulation
ATS was adopted, the Commission recognized that broker-dealer operators
may perform additional functions other than the operation of their ATS,
such as other trading services, and adopted Rule 301(b)(10), which
requires that ATSs have safeguards and procedures to protect
confidential subscriber trading information.\146\ The Commission is
concerned that today, the potential for conflicts of interest as a
result of a broker-dealer operator's other business interests,
including those of its affiliates, may be greater than it was at that
time, particularly due to trading centers that multi-service broker-
dealer operators own and operate.\147\ Additionally, the broker-dealer
operator of an NMS Stock ATS controls all aspects of the operation of
the ATS, including, among other things: Means of access; who may trade;
how orders interact, match, and execute; market data used for
prioritizing or executing orders; display of orders and trading
interest, and determining the availability of ATS services among
subscribers.\148\ The non-ATS operations of a broker-dealer operator
and its NMS Stock ATS typically are connected in many ways. For
example, in some cases, the broker-dealer operator, or its affiliates,
owns, and controls access to, the technology and systems that support
the trading facilities of the NMS Stock ATS, and provides and directs
personnel to service the trading facilities of the ATS. As discussed in
more detail below,\149\ the Commission is aware that most NMS Stock
ATSs are operated by broker-dealers that also engage in brokerage and
dealing activities, and offer their customers a variety of brokerage
services, including algorithmic trading software, agency sales desk
support, and automated smart order routing services, often with, or
through, their affiliates. In addition, multi-service broker-dealers
and their affiliates may operate, among other things, an OTC market
making desk or proprietary trading desk in addition to operating an
ATS, 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.
Furthermore, the broker-dealer operator of an NMS Stock ATS may have
arrangements with third-parties to perform certain aspects of its ATS's
operations, and affiliates of those third parties may subscribe to the
NMS Stock ATS, which the Commission is concerned give rise to the
potential for information leakage or conflicts of interest, of which
market participants may be unaware.\150\
---------------------------------------------------------------------------

\146\ See infra Section IX.
\147\ See infra Section VII.A (discussing the activities of
broker-dealer operators of NMS Stock ATSs and the possible conflicts
of interest that may result, and the Commission's preliminary belief
that providing market participants with information about such
activities will enable market participants to assess whether
potential conflicts of interest exist so that they may make more
informed decisions about whether to send their order flow to a
particular NMS Stock ATS).
\148\ See infra Section VII.A.1.
\149\ See id.
\150\ See infra Sections VII.B.6 and 9 (discussing trading on
the ATS by the broker-dealer operator and its affiliates, and the
relationship between an NMS Stock ATS and its service providers, and
proposing to require related disclosure).
---------------------------------------------------------------------------

As discussed further below, the Commission preliminarily believes
that details about the operations and trading services of ATSs, such as
those described above, are useful to market participants' understanding
of the terms and conditions under which their orders will be handled
and executed on a given ATS.\151\ The Commission also preliminarily
believes that market participants should have access to information
about the relationship between a broker-dealer, its affiliates, and the
NMS Stock ATS that it operates, to adequately understand the operations
of the ATS and potential conflicts of interest that may arise.
---------------------------------------------------------------------------

\151\ See generally infra Sections VII and VIII.
---------------------------------------------------------------------------

C. Lack of Operational Transparency for NMS Stock ATSs

The Commission believes that one of the most important functions it
can perform for investors is to ensure that they have access to the
information they need to protect and further their own interests.\152\
As noted above, although 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, market participants have limited
knowledge of the operations of ATSs and how orders interact, match, and
execute on ATSs.\153\ The Commission is concerned that market
participants have limited information about the non-ATS activities of
the broker-dealer operators of NMS Stock ATSs and potential conflicts
of interest that might arise from those activities.\154\ The Commission
is also concerned that different classes of subscribers may have
different levels of information about the operations of NMS Stock ATSs
and how their orders or other trading interests may interact on the NMS
Stock ATS. To address these concerns, the Commission's proposal is
designed to provide better access to information about the operations
of NMS Stock ATSs to all market participants, including subscribers and
potential subscribers.
---------------------------------------------------------------------------

\152\ See, e.g., Securities Exchange Act Release No. 42208, 64
FR 70613, 70614 (December 17, 1999) (concept release reviewing
regulation of market information fees and revenues).
\153\ See supra notes 40 and 139 (citing prior comment letters
expressing the view that Form ATS should be made publicly available
and expressing support for making publicly available ATS filings
with the Commission, and exemplifying the kinds of information about
NMS Stock ATS operations that market participants, including broker-
dealers and intuitional investors, seek, but to which they may not
currently have access).
\154\ See infra Section VII.A.
---------------------------------------------------------------------------

Under current rules, a Form ATS is ``deemed confidential when
filed.'' \155\ As a result, market participants

[[Page 81011]]

typically have, at best, limited access to Form ATS filings and the
information contained therein. Additionally, Form ATS discloses only
limited aspects of an ATS's operations, and the Commission
preliminarily believes that even where an ATS has voluntarily made
public its Form ATS,\156\ market participants currently might not be
able to obtain a complete understanding of how ATSs operate. In
addition, Form ATS does not solicit information about possible
circumstances that give rise to potential conflicts of interest
resulting from the activities of the broker-dealer operator and its
affiliates. Despite the confidentiality afforded Form ATS, based on
Commission experience, including the Commission's experience reviewing
disclosures made by ATSs on Form ATS over the past 16 years, ATSs have
often provided minimal, summary disclosures about their operations on
Form ATS. Furthermore, the Commission preliminarily believes that the
complexity of the operations of NMS Stock ATSs has increased
substantially and in a manner that causes the current disclosure
requirements of Form ATS to result in a potentially insufficient, and
inconsistent, level of detail about the operations of NMS Stock ATSs.
---------------------------------------------------------------------------

\155\ See 17 CR 242.301(b)(2)(vii). The information on Form ATS
is available for examination by staff, state securities authorities,
and SROs. See Form ATS at 3, Instruction A.7.
\156\ The Commission notes that some ATSs have chosen to make
Form ATS filings publicly available. See, e.g., IEX ATS Form ATS
Amendment, dated July 29, 2015, https://www.iextrading.com/policy/ats/; PDQ ATS Inc's Form ATS Amendment, dated January 30, 2015,
https://www.pdqats.com/wp-content/uploads/2013/10/PDQ-FORM-ATS-FILING_01_30_15-Website.pdf; Liquidnet H20 ATS Form ATS Amendment,
dated February 4, 2015, https://www.liquidnet.com/uploads/ATS_(H2O)_Form-Exhibits_CLEAN_4feb2015.pdf; SIGMA X Form ATS
Amendment, dated May 21, 2014, https://www.goldmansachs.com/media-relations/in-the-news/current/pdf-media/gs-form-ats-amendment.pdf;
POSIT Form ATS Amendment, dated January 26, 2015, https://www.itg.com/marketing/ITG_Form_ATS_for_POSIT_02112015.pdf.
---------------------------------------------------------------------------

By comparison, national securities exchanges, with which NMS Stock
ATSs directly compete, are subject to comprehensive registration and
rule filing requirements under Section 19(b) of the Exchange Act.\157\
Under these requirements, national securities exchanges must make
public their trading rules and detail their trading operations. As
discussed above, national securities exchanges register with the
Commission on Form 1, and thereafter file proposed rule changes on Form
19b-4, which are not confidential, are approved by the Commission or
become effective by operation of law, and are made public.\158\ These
mandatory filings publicly disclose, among other things, details about
the exchange's trading services, operations, order types, order
interaction protocols, priority procedures, and fees.\159\ A national
securities exchange must file such a proposed rule change any time it
seeks to change its rules,\160\ and even non-controversial rule changes
cannot be implemented until the exchange files a Form 19b-4 with the
Commission.\161\ In contrast, an ATS can change its operations in
certain cases before notifying the Commission, and in all cases,
without obtaining Commission approval or notifying ATS subscribers or
the public about the change.\162\
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\157\ 15 U.S.C. 78s(b).
\158\ See generally 15 U.S.C. 78s(a) and (b); and 17 CFR
240.19b-4. See also supra notes 20-23 and accompanying text; https://www.sec.gov/rules/sro.shtml.
\159\ Among other things, Form 1 requires an exchange applying
for registration as a national securities exchange to disclose its
procedures governing entry and display of quotations and orders in
its system, procedures governing the execution, reporting, clearance
and settlement of transactions in connection with the system, and
fees. See Form 1, Exhibits E.2-E.4. The disclosures required in Form
1 must include sufficient detail for the Commission to determine the
exchange's rules are consistent with the Act. See generally 15
U.S.C. 78f(b)(1). Once registered, a national securities exchange
must file any proposed rule or any proposed change in, addition to,
or deletion from its rules. See 15 U.S.C. 78s(b)(2).
\160\ See 15 U.S.C. 78s(b)(1).
\161\ See 17 CFR 240.19b-4(f).
\162\ See supra notes 20-25 and accompanying text and infra
notes 342-343 and accompanying text (discussing, in more detail, the
differences in the regulatory regimes for registered national
securities exchanges and ATSs, including with respect to
requirements related to transparency of operations). See also 17 CFR
242.301(b)(2) (requiring ATSs to file amendments on Form ATS at
least 20 days prior to implementing a material change to the
operation of the ATS, and within 30 calendar days after the end of
each calendar quarter to update any other information that has
become inaccurate and not previously reported).
---------------------------------------------------------------------------

The Commission preliminarily believes that the increased complexity
of NMS Stock ATS operations and the business structures of their
broker-dealer operators, combined with a lack of transparency around
the operation of NMS Stock ATSs and the activities of their broker-
dealer operators, could inhibit a market participant's ability to
assess an NMS Stock ATS as a potential trading venue. Further, the
Commission recognizes that Form ATS was designed before NMS Stock ATSs
operated at the level of complexity that they do today, and the equity
market structure has substantially changed since Regulation ATS was
adopted.\163\ As such, the Commission preliminarily believes that
transparency of NMS Stock ATSs' operations will promote competition and
benefit investors by informing market participants about differences
between trading venues that could impact the quality of the execution
of their orders.\164\ The Commission preliminarily believes that
requiring ATSs to respond to proposed Form ATS-N, which would require
more detailed information about the ATSs' operations and be made
available to the public on the Commission's Web site, would facilitate
the public's understanding of NMS Stock ATSs by improving the
information available to market participants, enabling them to make
better decisions about where to route their orders to achieve their
investing or trading objectives.
---------------------------------------------------------------------------

\163\ The Commission preliminarily believes that information
solicited on Form ATS-N would be similar to portions of what
registered national securities exchange are required to publicly
disclose, and thus, that disclosure of the information would not
place NMS Stock ATSs at a competitive disadvantage with respect to
competing trading venues. See infra Section IV.D. The Commission
notes that, while some of the questions on Form ATS-N are designed
to provide information about potential conflicts of interest arising
from the activities of the broker-dealer operator or its affiliates
and are dissimilar to information required to be disclosed by a
national securities exchange, national securities exchanges must
have rules that are consistent with the Exchange Act, and in
particular Section 6. To date, national securities exchanges have
implemented rules to address the potential for conflicts of interest
when the national securities exchange is affiliated with a broker-
dealer that is a member of the national securities exchange. See,
infra, notes 369-373 and accompanying text (discussing the
Commission's concerns regarding conflicts of interest in the context
of national securities exchanges).
\164\ See infra Section XIII.C (discussing the Commission's
preliminary belief that the proposal would help market participants
make better decisions about where to route their orders, improve the
efficiency of capital allocation, and execution quality, and also
addressing the effect of the disclosure of proprietary information
on competition).
---------------------------------------------------------------------------

D. Prior Comments on Operational Transparency and Regulatory Framework
for NMS Stock ATSs

The Commission is proposing to amend Regulation ATS to adopt Form
ATS-N, which would require an NMS Stock ATS to publicly disclose
detailed information about its operations and the activities of the
broker-dealer operator and its affiliates. The Commission is also
proposing to modify the regulatory requirements that apply to NMS Stock
ATSs and qualify NMS Stock ATSs for the exemption from the definition
of ``exchange'' under Exchange Act Rule 3a1-1(a)(2) by declaring the
Form ATS-N effective or ineffective.
In 2009, the Commission proposed to amend the regulatory
requirements of the Exchange Act that apply to non-public trading
interest in NMS stocks, including dark pools.\165\ Among other

[[Page 81012]]

things, the Commission proposed to substantially lower the trading
volume threshold in Regulation ATS that triggers public display
obligations for ATSs and to amend joint-industry plans for publicly
disseminating consolidated trade data to require real-time disclosure
of the identity of an ATS in the consolidated last-sale report. The
Commission received four comments on its Regulation of Non-Public
Interest proposal that directly relate to the amendments to Regulation
ATS that the Commission is proposing today.\166\
---------------------------------------------------------------------------

\165\ See Regulation of Non-Public Trading Interest, supra note
123, at 62108 (proposing rules and amendment to joint-industry
plans).
\166\ See letter to Mary L. Schapiro, Chairman, Commission, from
Sen. Edward E. Kaufman, United States Senate, dated August 5, 2010
(``Kaufman letter''); letters to Elizabeth M. Murphy, Secretary,
Commission, from Janet M. Kissane, Senior Vice President, Legal &
Corporate Secretary Office of the General Counsel, NYSE Euronext,
dated February 22, 2010 (``NYSE Euronext letter #1''); from Jeffrey
D. Morgan, CAE, President and CEO, National Investor Relations
Institute, dated February 16, 2010 (``National Investor Relations
Institute letter''); letter to the Commission, from Seth Merrin,
Chief Executive Officer; Anthony Barchetto, Head of Trading
Strategy; Jay Biancamo, Global Head of Marketplace; Vlad Khandros,
Market Structure Analyst; Howard Meyerson, General Counsel,
Liquidnet, Inc., dated December 21, 2009 (``Liquidnet letter #1'').
---------------------------------------------------------------------------

Three commenters expressed the view that the Commission should
address the regulatory disparity between national securities exchanges
and ATSs. Senator Edward E. Kaufman expressed the view that ``as
trading continues to become faster and more dispersed, it is that much
more difficult for regulators to perform their vital oversight and
surveillance functions,'' and that ``the Commission should consider
strengthening the regulatory requirements for becoming an Alternative
Trading System or starting a new trading platform for existing market
centers.'' \167\ Senator Kaufman further urged the Commission to
``harmonize rules across all market centers to ensure exchanges and
ATSs are competing on a level playing field that serves the interests
of all investors.'' NYSE Euronext stated that because ``ATSs now
represent a significant share of trading volume in NMS stocks . . . the
time is ripe to move to a framework that has consistent regulatory
requirements when the trading activity at issue is essentially the
same.'' \168\ The National Investor Relations Institute opined that
``the same regulatory oversight, market surveillance, reporting, and
other investor safeguards that exist for exchanges should be in place
for all trading venues to ensure maximum investor protection.''\169\
---------------------------------------------------------------------------

\167\ Kaufman letter, supra note 166, attachment at 4-5.
\168\ NYSE Euronext letter #1, supra note 166, at 3.
\169\ National Investor Relations Institute letter, supra note
166, at 2.
---------------------------------------------------------------------------

Liquidnet expressed the view that the Commission should require
institutional brokers, including institutional ATSs, to disclose to
their customers specific order handling practices and that Regulation
ATS should be amended to enhance the review process of new ATSs and
material changes to ATSs' business operations.\170\ Liquidnet stated
that disclosures by institutional brokers, including institutional
ATSs, to their customers should include, among other things,
identification of external venues to which the broker routes orders,
the process for crossing orders with other orders received by the
broker, execution of orders as agent and principal, a detailed
description of the operation and function of each ATS or trading desk
operated by the broker, a clear and detailed description of each
algorithm and order type offered by the broker, categories of
participant and admission criteria for each ATS or trading desk with
which the customer's order can interact, and internal processes and
policies to control dissemination of the institution's order and trade
information and other confidential information.\171\ Liquidnet also
suggested that the Commission amend ``Regulation ATS to permit the
Commission to delay the effective date of a new ATS commencing
operation or of an existing ATS implementing a material business change
if the Commission believes that information in the ATS filing is
unclear or incomplete or raises an issue of potential non-compliance
with applicable law or regulation,'' and expressed support for making
publicly available ATS filings with the Commission.\172\
---------------------------------------------------------------------------

\170\ See Liquidnet letter #1, supra note 166, at D-5-6, 11.
\171\ See Liquidnet letter #1, supra note 166, at D-5-6.
\172\ Id. at D-11.
---------------------------------------------------------------------------

In 2010, the Commission issued a Concept Release that, among other
things, solicited comment on whether trading centers offering
undisplayed liquidity are subject to appropriate regulatory
requirements for the type of business they conduct.\173\ Specifically,
the Commission asked, among other things, for comment on the following:
\174\
---------------------------------------------------------------------------

\173\ See 2010 Equity Market Structure Release, supra note 124,
at 3614.
\174\ See id.
---------------------------------------------------------------------------

Do investors have sufficient information about dark pools
to make informed decisions about whether in fact they should seek
access to dark pools? Should dark pools be required to provide improved
transparency on their trading services and the nature of their
participants? If so, what disclosures should be required and in what
manner should ATSs provide such disclosures?
Are there any other aspects of ATS regulation that should
be enhanced for dark pools or for all ATSs, including ECNs?
Are there any ways in which Regulation ATS should be
modified or supplemented to appropriately reflect the significant role
of ATSs in the current market structure?
The Commission received 20 comment letters that addressed these
questions as they relate to the proposal.\175\ The 20 comment letters
offered contrasting views.
---------------------------------------------------------------------------

\175\ See letters from Theodore R. Lazo, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association, dated October 24, 2014 (``SIFMA letter #2); Richie
Prager, Hubert De Jesus, Supurna Vedbrat, and Joanne Medero,
BlackRock, Inc., dated September 12, 2014 (``Blackrock letter'');
Micah Hauptman, Consumer Federation of America, dated September 9,
2014 (``Consumer Federation of America letter''); Christopher Nagy
and Dave Lauer, KOR Group LLC, dated April 4, 2014 (``KOR Group
letter''); Bill Neuberger, Andrew Silverman, Paul Fitzgerald, and
Sapna Patel, Morgan Stanley, dated March 7, 2011 (``Morgan Stanley
letter''); Raymond M. Tierney III and Gary Stone, Bloomberg
Tradebook LLC, dated June 28, 2013 (``Bloomberg Tradebook letter'');
Greg Tusar, Goldman Sachs Execution & Clearing, L.P., and Matthew
Lavicka, Goldman Sachs & Co., dated June 25, 2010 (``Goldman Sachs
letter''); Jeffrey S. Wecker, Lime Brokerage LLC, dated May 21, 2010
(``Lime Brokerage letter''); Andrew C. Small, Scottrade, dated May
19, 2010 (``Scottrade letter''); Kimberly Unger, The Security
Traders Association of New York, Inc., dated May 10, 2010
(``Security Traders Association of New York letter''); Stuart J.
Kaswell, Managed Funds Association, dated May 7, 2010 (``Managed
Funds Association letter''); Raymond M. Tierney III, Bloomberg L.P.,
dated May 7, 2010 (``Bloomberg L.P. letter''); James J. Angel,
Georgetown University, McDonough School of Business, dated January
16, 2011 (``Angel letter''); Joan C. Conley, Nasdaq OMX Group, Inc.,
dated April 30, 2010 (``Nasdaq OMX letter''); Ann Vlcek, Securities
Industry and Financial Markets Association, dated April 29, 2010
(``SIFMA letter #1''); Joseph M. Velli, BNY ConvergEx Group, LLC,
dated April 29, 2010 (``BNY CovergEx Group letter''); O. Mason
Hawkins, Richard W. Hussey, Deborah L. Craddock, Jeffrey D.
Engelberg, and W. Douglas Schrank, Southeastern Asset Management,
Inc., dated April 28, 2010 (``Southeastern Asset Management
letter''); Janet M. Kissane, NYSE Euronext, dated April 23, 2010
(``NYSE Euronext letter #2''); David C. Cushing, Wellington
Management Company, LLP, dated April 21, 2010 (``Wellington
Management Company letter''); Seth Merrin, Howard Meyerson, and Vlad
Khandros, Liquidnet, Inc., dated March 26, 2010 (``Liquidnet letter
#2'').
---------------------------------------------------------------------------

Five commenters expressed support for Commission action to address
the regulatory disparity between national securities exchanges and
ATSs, particularly where such trading venues perform similar functions.
Security Traders Association of New York noted that it has ``called for
the harmonization of regulatory oversight and the need for similar
rules across venues, including exchanges, ATSs and other liquidity
sources that are connected through the

[[Page 81013]]

Reg. NMS regulatory framework.'' \176\ Nasdaq OMX expressed the view
that the ``Commission has flexibility to adopt a more principles-based
regulatory structure'' which it could use to ``level the competitive
playing field between ATSs and exchanges,'' and that ``[i]n areas where
ATS and exchange activities overlap, differences in [regulatory]
approach should persist only if there is a clear policy basis for those
differences.'' \177\ NYSE Euronext opined that the ``lighter regulatory
oversight for ATSs puts transparent, regulated markets at a competitive
disadvantage, to the potential detriment of investors'' and that ``now
that ATSs represent a significant share of trading volume in NMS
stocks, . . . the Commission should address the regulatory disparity
between registered exchanges and ATSs that engage in trading activities
analogous to traditional exchange trading.'' \178\ Wellington
Management Company expressed the view that ``regulatory requirements
for types of venues should differ only to the extent the differentiated
requirements are specifically designed to address clearly identifiable
and compelling needs'' and that ``material disparities in regulatory
requirements could make it difficult for exchanges to compete with ATSs
and broker-dealers and could threaten their long-term survival.'' \179\
Liquidnet stated that ``[t]o the extent that an exchange conducts the
equivalent business function as a broker or an ATS, regulators should
ensure that levels of regulation are consistent.'' \180\
---------------------------------------------------------------------------

\176\ Security Traders Association of New York letter, supra
note 175, at 2.
\177\ Nasdaq OMX letter, supra note 175, at 13, 16.
\178\ NYSE Euronext letter #2, supra note 175, at 7.
\179\ Wellington Management Company letter, supra note 175, at
3.
\180\ Liquidnet letter #2, supra note 175, at F-7.
---------------------------------------------------------------------------

However, three commenters expressed the view that in order to
rectify the regulatory disparity, the Commission should lessen
regulatory burdens on exchanges, rather than enhance its regulation of
ATSs. Goldman Sachs urged the Commission to ``consider expanding the
types of rule changes that exchanges . . . can propose on an
immediately effective basis,'' which ``would help to level the playing
field between exchanges and ATSs.'' \181\ Wellington Management Company
opined that ``the burden of regulation should be shared fairly by
execution venues'' and that ``exchanges should be granted the ability
to make certain rule changes in a manner similar to ATSs (i.e., as a
notification with SEC veto authority, and not as part of a lengthy
notice, comment, and approval process).'' \182\ Liquidnet stated that
``regulators should not impose unnecessary burdens on ATSs and brokers,
but rather should remove unnecessary regulatory burdens from exchanges,
to the extent that they exist.'' \183\
---------------------------------------------------------------------------

\181\ Goldman Sachs letter, supra note 175, at 10.
\182\ Wellington Management Company letter, supra note 175, at
3.
\183\ Liquidnet letter #2, supra note 175, at F-7.
---------------------------------------------------------------------------

Ten commenters expressed the view that ATSs and broker-dealers
should be required to provide more enhanced disclosures regarding their
operations, and described specific disclosures that the Commission
should require of ATSs. SIFMA stated that the Commission ``should
require broker-dealers to publish on their Web sites, on a monthly
basis, a standardized disclosure report that provides an overview of
key macro issues that are of interest to clients,'' including, among
other things, ``order types supported on the broker-dealer's ATS (if
applicable).'' \184\ Blackrock, Inc. expressed the view that although
some ATSs voluntarily publish their Form ATS filings and supplemental
materials, the ``particular operational features specified and degree
of detail lack consistency from one [Form ATS] submission to another''
and that ``[a]dditional standardization and information are required in
disclosures about ATS practices.'' \185\ Blackrock further stated that
``[m]andatory ATS disclosures should include greater detail on how the
platform calculates reference prices, determines order priority,
matches orders between client segments, monitors execution quality,
advertises orders, interacts with affiliates and is compensated by
subscribers.'' \186\ The Consumer Federation of America stated 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.'' \187\ The
Consumer Federation of America further opined that ``the Commission
should undertake an exhaustive investigation of the current order
types, requiring exchanges and all ATSs, including dark pools, to
disclose in easily understandable terms what their purpose is, how they
are used in practice, who is using them, and why they are not
discriminatory or resulting in undue benefit or harm to any traders.''
\188\
---------------------------------------------------------------------------

\184\ SIFMA letter #2, supra note 175, at 13.
\185\ Blackrock letter, supra note 175, at 4.
\186\ Id.
\187\ Consumer Federation of America letter, supra note 175, at
22.
\188\ Id. at 37-38.
---------------------------------------------------------------------------

Bloomberg Tradebook LLC noted that buy-side representatives with
whom it met at a workshop for members of equity trading desks of asset
managers stated that although they periodically send questionnaires to
their brokers regarding order handling and internalization (dark pool)
matching protocols, because the buy-side representatives might not be
customers of all ATSs, they could not assess order interaction that
occurs across the market structure.\189\ Bloomberg Tradebook also
recommended that the Commission ask exchanges and ATSs to complete a
questionnaire with ``Yes'' and ``No'' checkboxes that would provide an
overview of each exchange's or ATS's operations, and which Bloomberg
Tradebook suggested could be posted on the Commission's Web site.
Bloomberg Tradebook provided a sample questionnaire that included
questions relating to, among other things, affiliations, riskless
principal trades, trades effected in a proprietary capacity, sharing of
orders or order information with affiliates or other trading venues and
compensation for such sharing, operation of a smart order router and
whether it gives preference to the exchange or ATS or an affiliate,
priority rules, order types that enable customers to gain preference,
and special fees or rebates which lead to a preference of one order
over another.\190\
---------------------------------------------------------------------------

\189\ Bloomberg Tradebook letter, supra note 175, at 1.
\190\ Id. at 2-3.
---------------------------------------------------------------------------

Goldman Sachs recommended an enhanced disclosure regime for
exchanges and ATSs consisting of four components. First, exchanges and
ATSs would be required to ``provide descriptions of the types of
functionalities that they provide, such as types of orders (e.g.,
flash/pinging orders, conditional orders), services (e.g., co-location,
special priority), and data (e.g., depth-of-book quotations, per order
information).'' Second, they would ``disclose the basis upon which
members/subscribers access the type of order, service or data,'' and
``whether only a certain class of market participants has access.''
Third, they would be required to disclose how commonly the
functionality is used. Fourth, the exchanges and ATSs would disclose
more market quality statistics ``so that investors and other market

[[Page 81014]]

participants could better gauge execution quality.'' \191\
---------------------------------------------------------------------------

\191\ Goldman Sachs letter, supra note 175, at 9-10.
---------------------------------------------------------------------------

Lime Brokerage, LLC recommended that the Commission should require
``transparency around pricing, access criteria and membership of dark
pools.'' \192\ Managed Funds Association stated that ``as long as co-
location is available to investors, traders and larger brokers on an
equal basis, the secondary market for such services to smaller
customers from their brokers should be competitive and thus, fairly
priced,'' and therefore, ``we believe market centers should disclose if
they or third parties offer co-location services on a priority basis
other than first available.'' \193\ SIFMA stated its belief that
``added disclosure about co-location and other market access
arrangements would be beneficial to market participants,'' and that
``[s]uch disclosure might describe standard, high speed, co-location,
or other means by which members may access an exchange or ATS, and
provide market participants with details regarding the categories of
market participants that use each means of access, the data capacity
associated with each arrangement, and the quotation and transaction
volume attributable to each arrangement.'' \194\
---------------------------------------------------------------------------

\192\ Lime Brokerage letter, supra note 175, at 7.
\193\ Managed Funds Association letter, supra note 175, at 27.
\194\ SIFMA letter #1, supra note 175, at 7.
---------------------------------------------------------------------------

Southeastern Asset Management, Inc. commented that brokers and
trading venues should disclose to investors information such as
payments, rebates, and fees related to execution venues, venue rankings
by routing brokers and routing venues, and the inputs that create the
routing rankings, and the transparency of customer specific order
routing and execution available to the specific customer.\195\
Liquidnet recommended that institutional ATSs make similar disclosures
to those it recommended when commenting on the Regulation of Non-Public
Interest proposing rules and amendment to joint-industry plans.\196\
---------------------------------------------------------------------------

\195\ See Southeastern Asset Management letter, supra note 175,
at 7.
\196\ See Liquidnet letter #2, supra note 175, at F-1-F-2; see
also supra note 129.
---------------------------------------------------------------------------

In addition to the ten commenters that provided specific Form ATS
disclosure recommendations, one commenter provided some examples of
customer questions and requests specific to dark pools that it
received. Such questions and requests related to, among other things,
whether the commenter's dark pool is truly dark, categorization or
tagging of order flow, whether participants may opt out of or into
interaction with certain flow, proprietary orders interaction with the
dark pool, priority rules, requests to exclude certain types of venues
for routing of orders, maintenance of confidential trading information,
use of direct market data feeds by the dark pool's servers and
algorithmic strategies, and co-location of servers and algorithmic
strategies to exchange and ATS servers.\197\ The commenter also
provided some sample questions for its clients to ask of their dark
pool providers. These included questions relating to the dark pools
methods of access, client/subscriber base, types of orders permitted,
matching of dark pool orders at the NBBO, price improvement,
interaction of the dark pool's principal and proprietary orders with
client orders on the dark pool, categorization or tagging of order
flow, and order types.\198\ The commenter also included several
questions that clients should ask dark pools about the sell-side
broker-dealers and exchanges that the dark pools access.
---------------------------------------------------------------------------

\197\ See Morgan Stanley letter, supra note 175, at 12-14.
Additionally, representatives from Morgan Stanley met with staff
from the Commission's Division of Trading and Market to discuss
market structure issues. During that meeting, Morgan Stanley
provided, among other things, examples of frequently asked questions
that it believes could be standardized to provide mandated
transparency about how orders are handled on dark pools. See
Memorandum from the Division of Trading and Markets regarding an
October 1, 2015, meeting with representatives of Morgan Stanley,
https://www.sec.gov/comments/s7-02-10/s70210.shtml.
\198\ See Morgan Stanley letter, supra note 175.
---------------------------------------------------------------------------

In response to the questions the Commission raised in the Equity
Market Structure Release, one commenter raised questions relating to
the transparency of ATSs' operations. The commenter asked, among other
things, whether:
Form ATS filings provide the Commission with complete and
timely information about the operation of ATSs, and whether such
filings are sufficiently frequent and detailed to allow the Commission
to understand planned system changes by ATSs;
the Commission has adequate tools to respond to concerns
about the operations of ATSs;
the Commission has adequate information about the
relationships between ATSs and their subscribers, including how
``toxicity'' ratings are assigned to subscribers, and their impact on
individual subscriber's access and fees, and whether it is acceptable
that ATS subscribers can assign such ratings to counterparties within
and outside the ATS without disclosing objective criteria;
the Commission has adequate information about ATS pricing,
noting that but for the Rule 3a1-1 exemption from exchange
registration, ATSs would be required to charge fees that are fair and
not unreasonably discriminatory; and
the Commission receives enough information from ATSs about
their access policies to make comprehensive assessment about
competitive dynamics at work in the market.\199\
---------------------------------------------------------------------------

\199\ See Nasdaq OMX letter, supra note 175, at 14-16.
---------------------------------------------------------------------------

The commenter stated its belief that responding to the Commission's
questions in the Equity Market Structure Release with the commenter's
own responsive questions was ``entirely appropriate'' because the
``public cannot comment on the adequacy of Form ATS filings,'' and
therefore, ``the Commission and its staff are uniquely qualified to
assess whether the requirements of the Form and the content of actual
submitted filings provide adequate and timely information.'' \200\
---------------------------------------------------------------------------

\200\ Id. at 16.
---------------------------------------------------------------------------

One commenter discussed a May 2009 Opinion Research Corporation
survey of 284 executives from NYSE-listed companies, noting that only
17% of the executives were satisfied with the transparency of trading
in their company's stock, and that 69% of the executives ``indicated
there is inadequate regulatory oversight of non-exchange trading
venues, including dark pools.'' \201\
---------------------------------------------------------------------------

\201\ NYSE Euronext letter #2, supra note 175, at 7.
---------------------------------------------------------------------------

Five commenters expressed the view that Form ATS filings should be
made publicly available. SIFMA opined that ``[t]o enhance transparency
and confidence, all ATSs should publish the Form ATS and make their
forms available on their Web sites.'' \202\ Blackrock stated that
current and historical Form ATS filings for active ATSs ``should be
made immediately available to the public, subject to appropriate
redaction of confidential information,'' noting that some ATS operators
``have already displayed exemplary transparency by voluntarily
publishing their Form ATS filings and supplemental materials.'' \203\
The Consumer Federation of America stated its support for requiring all
ATSs, including dark pools, to publicly disclose their Forms ATS ``so
that the public can see how these venues operate.'' \204\ KOR Group LLC
opined that the fact that ``ATS filings are hidden from the public
while the burden is on SROs to file publicly . . . does not serve the
public interest in any

[[Page 81015]]

way, and makes it easy for media and others to sensationalize and
demonize what is occurring in this part of the market,'' further
opining that there ``should not be any reasoned argument against''
making Form ATS publicly available.\205\ Goldman Sachs recommended
disclosing Form ATS publicly because ``[s]uch disclosure would provide
investors with useful information regarding the business practices of
ATSs,'' and supported a requirement for ``ATSs to provide public notice
of material changes to their business practices,'' but also stated its
opposition to ``any requirement that ATSs disclose information about
their matching algorithms or the nature of their subscribers'' because
such disclosure ``could result in information leakage that would
detrimentally impact liquidity.'' \206\ James J. Angel commented that
Form ATS should be publicly available on the Commission's Electronic
Data Gathering, Analysis, and Retrieval System (``EDGAR'').\207\ As it
had done when commenting on the Regulation of Non-Public Interest
proposing rules and amendment to joint-industry plans,\208\ Liquidnet
recommended that ATS filings with the Commission be made publicly
available.\209\
---------------------------------------------------------------------------

\202\ SIFMA letter #2, supra note 175, at 13.
\203\ Blackrock letter, supra note 175, at 4.
\204\ Consumer Federation of America letter, supra note 175, at
22.
\205\ KOR Group letter, supra note 175, at 12.
\206\ Goldman Sachs letter, supra note 175, at 10.
\207\ See Angel letter, supra note 175, at 13.
\208\ See Liquidnet letter #1 supra note 166.
\209\ See Liquidnet letter #2, supra note 175, at F-8.
---------------------------------------------------------------------------

Three commenters expressed their opposition to enhanced regulation
of ATSs. Scottrade, Inc. stated it believed that ATSs had ``brought
innovation and better execution quality to the equity markets,'' and
that it ``would not be in favor of additional regulation that would
reduce competition, raise barriers to entry for ATSs or force orders to
be routed to specific destinations.'' \210\ Bloomberg L.P. stated that
it had ``heard exchanges argue it would be in the interest of the
exchanges to regulate ATSs more aggressively,'' but that it had ``not
seen evidence why that which is in the exchanges' interest is
necessarily in the public interest,'' and suggested that the Commission
should ``look to investors' needs,'' which Bloomberg L.P. thought ``do
not . . . justify increasing the regulatory burdens on alternative
trading systems.'' \211\ BNY ConvergEx Group stated its belief that
``the current system of ATS regulation works well and structural
changes are not necessary,'' and that because ``[d]ark ATSs market
their services to institutional customers and prospective customers on
a continuous basis . . . institutions know full well what types of
customers each ATS caters to and the services they offer.'' \212\ BNY
ConvergEx Group acknowledged that ``some retail investors may not
understand precisely how dark ATSs operate,'' but opined that ``[a]ny
perceived lack of information for retail investors about an ATS's
trading services would only become an issue if the ATS was to become
subject to the Fair Access provisions of Regulation ATS,'' and that
``because retail investors are unlikely to pass the objective credit
and other financial standards that would be required under a Fair
Access regime to become subscribers of the ATS, this may not be a real
issue.'' \213\
---------------------------------------------------------------------------

\210\ Scottrade letter, supra note175, at 4.
\211\ Bloomberg L.P. letter, supra note175, at 4-5.
\212\ BNY ConvergEx Group letter, supra note175, at 18, 21.
\213\ See id. at 21.
---------------------------------------------------------------------------

The Commission received two comment letters on its Market Structure
Web site relevant to the Commission's proposal to amend Regulation
ATS.\214\
---------------------------------------------------------------------------

\214\ See Blackrock letter, supra note 175; letter from John C.
Nagel, Managing Director and Senior Deputy Counsel, Citadel LLC,
dated July 21, 2014 (``Citadel letter''). See also Securities and
Exchange Commission Market Structure Web site (``Market Structure
Web site''), https://www.sec.gov/marketstructure/.
---------------------------------------------------------------------------

Blackrock submitted the same comment letter to the Market Structure
Web site that it submitted with respect to the 2010 Equity Market
Structure Release.\215\ Citadel expressed the view that ``dark pools
should be subject to increased transparency,'' and that ``ATS
operational information and filings should be publicly available.''
\216\
---------------------------------------------------------------------------

\215\ See Blackrock letter, supra notes 175, 185, 186, and 203
and accompanying text.
\216\ See Citadel letter, supra note 214, at 4.
---------------------------------------------------------------------------

The Commission has considered these comments, and, for the reasons
set forth throughout this release, is proposing the amendments to
Regulation ATS and Exchange Act Rule 3a1-1 as described herein.

IV. Proposed Amendments to Regulation ATS and Rule 3a1-1 to Heighten
Regulatory Requirements for ATSs That Transact in NMS Stocks

A. Proposed Definition of NMS Stock ATS

The Commission is proposing to amend Rule 300 of Regulation ATS to
provide for the definition of ``NMS Stock ATS'' in a new paragraph (k).
The purpose of proposed Rule 300(k) is to specify the type of ATS that
would be subject to the heightened conditions under Exchange Act Rule
3a1-1, as described further below. Proposed Rule 300(k) would define
``NMS Stock ATS'' to mean an ``an alternative trading system, as
defined in Exchange Act Rule 300(a), that facilitates transactions in
NMS stocks, as defined in Exchange Act Rule 300(g).'' \217\ Rule 300(g)
of Regulation ATS currently provides, and would continue to provide,
that the term ``NMS stock'' has the meaning provided in Exchange Act
Rule 600 of Regulation NMS; provided, however, that a debt or
convertible debt security shall not be deemed an NMS stock for purposes
of Regulation ATS.\218\ Pursuant to Exchange Act Rule 600(b), an NMS
stock is any NMS security other than an option,\219\ and an NMS
security is ``any security or class of securities for which transaction
reports are collected, processed, and made available pursuant to an
effective transaction reporting plan, or an effective national market
system plan.'' \220\ Thus, under the proposed amendment to Regulation
ATS, an NMS Stock ATS would include

[[Page 81016]]

any ATS that effects transactions in securities that are listed on a
national securities exchange (other than options, debt or convertible
debt). In addition, to meet the definition of an NMS Stock ATS, the
organization, association, person, group of persons or system must meet
the definition of an alternative trading system under Rule 300(a) of
Regulation ATS.\221\
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\217\ See proposed Rule 300(k).
\218\ See 17 CFR 242.300(g).
\219\ See 17 CFR 242.600(b)(47).
\220\ See 17 CFR 242.600(b)(46). Transaction reports for
securities that are listed and registered, or admitted to unlisted
trading privileges on a national securities exchange, are collected,
processed, and made available pursuant to the Consolidated Tape
Association (``CTA'') plan (``CTA Plan'') and the OTC/UTP Plan. See,
e.g., CTA Plan (dated as of October 1, 2013), https://www.ctaplan.com/publicdocs/ctaplan/notifications/plans/trader-update/5929.pdf at 34 (describing the types of securities to which
the CTA plan applies).
See also Joint Self-Regulatory Organization Plan Governing the
Collection, Consolidation and Dissemination of Quotation and
Transaction Information for Nasdaq-Listed Securities Traded on
Exchange on an Unlisted Trading Privilege Basis, https://web.archive.org/web/20070114023844/https://www.utpdata.com/docs/UTP_PlanAmendment.pdf at 2, 10-13 (``OTC/UTP Plan'') (describing the
securities for which transaction information is collected and
disseminated as any Nasdaq Global Market or Nasdaq Capital Market
security, as defined in then-operative NASDAQ Rule 4200). Nasdaq
Rule 5005(a)(26) defines Nasdaq Global Market security as: Any
security listed on Nasdaq that (1) satisfies all applicable
requirements of the Rule 5100 and 5200 Series and meets the criteria
set forth in the Rule 5400 Series; (2) is a right to purchase such
security; (3) is a warrant to subscribe to such security; or (4) is
an Index Warrant which meets the criteria set forth in Rule 5725(a).
Nasdaq Rule 5005(a)(28) defines Nasdaq Capital Market security as:
Any security listed on The Nasdaq Capital Market that (1) satisfies
all applicable requirements of the Rule 5100, 5200 and 5500 Series
but that is not a Nasdaq Global Market security; (2) is a right to
purchase such security; or (3) is a warrant to subscribe to such
security.
These plans are filed with, and approved by, the Commission in
accordance with the requirements of Rule 608 of Regulation NMS, and
pursuant to Rule 601 of Regulation NMS, which requires every
national securities exchange to ``file a transaction reporting plan
regarding transactions in listed equity and Nasdaq securities
executed through its facilities'' and every national securities
association to ``file a transaction reporting plan regarding
transactions in listed equity and Nasdaq securities executed by its
members otherwise than on a national securities exchange.''
\221\ 17 CFR 242.300(a).
As it did in the Regulation ATS Adopting Release, the Commission
notes that whether the actual execution of the order takes place on
the system is not a determining factor of whether a system falls
under Rule 3b-6. A trading system that falls within the Commission's
functional definition of ``exchange'' pursuant to Rule 3b-6 will
still be an ``exchange,'' even if it matches two trades and routes
them to another system or exchange for execution. See Regulation ATS
Adopting Release, supra note 7, at 70851-70852.
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The Commission requests comment on the proposed definition of NMS
Stock ATS. In particular, the Commission solicits comment on the
following:
1. Do you believe the Commission should adopt a more limited or
expansive definition of NMS Stock ATS? Why or why not? Please support
your arguments.
2. Should the Commission create the NMS Stock ATS category? Why or
why not? Please support your arguments.
3. Should the Commission modify its proposed definition in any way?
If so, in what way and why? If not, why not? Please support your
arguments.

B. Rule 3a1-1(a)(2): Proposed Amendments to the Exemption From the
Definition of ``Exchange'' for NMS Stock ATSs

Exchange Act Rule 3a1-1(a) exempts from the definition of
``exchange'': (1) Any alternative trading system operated by a national
securities association,\222\ (2) any alternative trading system that
complies with Regulation ATS,\223\ and (3) any alternative trading
system that under Rule 301(a) of Regulation ATS is not required to
comply with Regulation ATS.\224\ Most ATSs fall within the second prong
of Exchange Act Rule 3a1-1 and thus, must comply with Regulation ATS to
qualify for an exemption from the statutory definition of an
``exchange.''
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\222\ 17 CFR 240.3a1-1(a)(1).
\223\ 17 CFR 240.3a1-1(a)(2).
\224\ 17 CFR 240.3a1-1(a)(3).
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As discussed in more detail below, the Commission is now proposing
to expand the conditions with which NMS Stock ATSs would be required to
comply in order to use the exemption from the definition of
``exchange.'' To provide for these new conditions, the Commission is
proposing to amend Rules 3a1-1(a)(2) and (3) to include proposed Rule
304 within the scope of Regulation ATS.\225\ Amended Rule 3a1-1(a)(2)
would condition the exemption for any ATS that meets the definition of
``NMS Stock ATS'' on compliance with Rules 300 through 303 of
Regulation ATS (except Rule 301(b)(2)) and proposed Rule 304.\226\ The
Commission is proposing to amend Rule 3a1-1(a)(3) by changing the
reference to Rule 303 to proposed Rule 304. This is merely a conforming
change 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. Rule 3a1-1(a)(1), which
exempts any ATS that is operated by a national securities association,
is not impacted by the amendments the Commission is proposing today.
---------------------------------------------------------------------------

\225\ In Exchange Act Rules 3a1-1(a)(2) and (3), Regulation ATS
is currently defined as ``17 CFR 242.300 through 242.303.'' The
Commission is proposing to amend these references to Regulation ATS
to define Regulation ATS as ``17 CFR 242.300 through 242.304.''
\226\ See infra Section IV.C. Specifically, the Commission is
proposing to amend Rule 3a1-1(a)(2) by changing the reference to
Rule 303 to proposed Rule 304. Under the proposal, an NMS Stock ATS
would not be required to file the reports and amendments that it is
currently required to file on Form ATS pursuant to Rule 302(b)(2),
unless the ATS also effects transactions in securities other than
NMS stock and is not otherwise exempt. See proposed Rule
301(b)(2)(viii).
---------------------------------------------------------------------------

The Commission preliminarily believes that amending the conditions
to the Rule 3a1-1(a) exemption would more appropriately calibrate the
level of operational transparency between registered national
securities exchanges and NMS Stock ATSs, which in many regards, are
functionally similar trading centers, while maintaining the regulatory
framework that permits NMS Stock ATSs to decide whether to register and
be regulated as broker-dealers or as national securities
exchanges.\227\ The Commission notes, as it has in other contexts,\228\
that SRO and non-SRO markets, such as NMS Stock ATSs, are subject to
different regulatory regimes, with a different mix of benefits and
obligations. Pursuant to this proposal, NMS Stock ATSs would continue
to be able to choose to register as national securities exchanges or as
broker-dealers. The Commission is proposing, however, to increase the
scope of the conditions to the exemption for the purpose of providing
more transparency around the operations of NMS Stock ATSs and potential
conflicts of interest resulting from the unique relationship between
the broker-dealer operator and the NMS Stock ATS, as discussed further
below. While questions have been raised in other contexts as to whether
the broader regulatory framework for national securities exchanges and
ATSs should be harmonized,\229\ the Commission preliminarily believes
that the proposals are an appropriate response to concerns about the
need for transparency about the operations of NMS Stock ATSs and
potential conflicts of interest resulting from the activities of their
broker-dealer operators and the broker-dealer operators' affiliates.
The Commission preliminarily believes that the proposals would help
market participants make better informed decisions about where to route
their orders for execution; the proposed disclosures would also provide
the Commission with improved tools to carry out its oversight of NMS
Stock ATSs. Moreover, as explained above, the Commission is concerned
that market participants have limited information about the
increasingly complex operations of NMS Stock ATSs,\230\ and need more
transparency on NMS Stock ATSs to fully evaluate how their orders are
handled and executed on NMS Stock ATSs. The Commission preliminarily
believes that the enhanced disclosures about the operations of NMS
Stock ATSs elicited by proposed Form ATS-N would provide better
information about how NMS Stock ATSs operate and, thereby, enable the
Commission to determine whether additional regulatory changes for
either or both national securities exchanges and ATSs are necessary.
---------------------------------------------------------------------------

\227\ See Regulation ATS Adopting Release, supra note 7, at
70856-70857.
\228\ See, e.g., SCI Adopting Release, supra note 17, at 72264.
\229\ See id.
\230\ See supra Sections III.B and C.
---------------------------------------------------------------------------

The Commission has considered the alternative of requiring
different levels of disclosure among NMS Stock ATSs based on
volume.\231\ However, the Commission preliminarily believes that it is
necessary and appropriate for the protection of market participants to
apply the proposed heightened conditions for the Rule 3a1-1(a)(2)
exemption to all NMS Stock ATSs. The Commission notes that market
participants may subscribe to multiple ATSs and route orders in NMS
stocks among various ATSs prior to receiving an execution. The
Commission preliminarily believes that because orders in NMS stocks may
be routed to any NMS Stock ATS, regardless of the volume traded on the
NMS Stock ATS, all market participants would benefit from the
disclosures provided pursuant to proposed Rule 304. Accordingly, the

[[Page 81017]]

Commission believes that the proposed rules addressing greater
operational transparency should apply equally to all NMS Stock ATSs.
---------------------------------------------------------------------------

\231\ See infra Section XIII.D.4.
---------------------------------------------------------------------------

The Commission requests comment on the scope of the proposed
amendments to Rules 3a1-1(a)(2) and (3), which would apply the proposed
new conditions of Rule 304 to all NMS Stock ATSs. In particular, the
Commission solicits comment on the following:
4. Do you believe that the current conditions to the exemption from
the definition of ``exchange'' for NMS Stock ATSs are appropriate in
light of market developments since Regulation ATS was adopted in 1998?
Why or why not? Please support your arguments.
5. Do you believe there is sufficient transparency with respect to
the operations of NMS Stock ATSs? If not, what information do you
believe should be disclosed regarding the operations of an NMS Stock
ATS, how frequently should it be disclosed, and why? Does the need for,
and availability of, information about the operations of NMS Stock ATSs
vary among market participants? If so, how? Please explain in detail.
6. Do you believe there is sufficient transparency with respect to
the activities of the broker-dealer operator and its affiliates in
connection with NMS Stock ATSs? If not, what information do you believe
should be disclosed regarding the activities of the broker-dealer
operator and its affiliates and why? Does the need for, and
availability of, information about the activities of the broker-dealer
operator and its affiliates vary among market participants? If so, how?
Please explain in detail.
7. Should the Commission adopt the proposal to apply the
requirements of proposed Rule 304 to all NMS Stock ATSs? Why or why
not? Please support your arguments.
8. Do you believe that the Commission should provide any exceptions
to the application of proposed Rule 304 to NMS Stock ATSs seeking to
operate pursuant to the Rule 3a1-1(a)(2) exemption? Why or why not? For
example, should the requirements to comply with proposed Rule 304,
including the disclosure requirements of proposed Form ATS-N, only be
applicable to NMS Stock ATSs that meet certain thresholds (such dollar
volume, trading volume, or number of subscribers)? If so, what should
the threshold be, and why? If not, why not? Please support your
arguments.
9. Do you believe that the Commission should require different
levels of disclosure for any proposed Form ATS-N items based on the NMS
Stock ATS's volume? If so, why, what should the different thresholds
be, and which items on proposed Form ATS-N should depend on an NMS
Stock ATS's volume? If not, why not? Please support your arguments.
At this time, the Commission preliminarily believes that the above
operational transparency conditions to the exemption to Exchange Act
Rule 3a1-1(a) should only apply to NMS Stock ATSs. The Commission,
however, requests comment and data on whether its preliminary view is
warranted for each category of non-NMS stock ATS.
First, approximately 27 ATSs that currently have a Forms ATS on
file with the Commission disclose that they exclusively trade fixed
income securities, such as corporate or municipal bonds, and
approximately 2 ATSs effect transactions in both fixed income
securities and other securities, including NMS stocks.\232\ Based on
Commission experience, the equity markets, which are generally highly
automated trading centers that are connected through routing networks,
operate and execute orders at rapid speeds using a variety of order
types. Unlike the complex trading centers of the equity markets, the
Commission preliminarily believes that fixed income markets currently
rely less on speed, automation, and electronic trading to execute
orders and other trading interest,\233\ although that may be changing
in some fixed income markets such as those that trade certain
government securities.\234\ Generally, fixed income ATSs offer less
complex order types to their subscribers than those offered by NMS
Stock ATSs, sometimes restricting incoming orders to limit orders, and
the execution of matched interest involves negotiation or a process. In
addition, the municipal and corporate fixed income markets tend to be
less liquid than the equity markets, with slower execution times and
less complex routing strategies.\235\
---------------------------------------------------------------------------

\232\ Data compiled from Forms ATS and ATS-R submitted to the
Commission as of November 1, 2015.
\233\ See SCI Adopting Release, supra note 17, at 72270.
\234\ See October 15 Staff Report, infra note 247 at 35-36.
\235\ See SCI Adopting Release, supra note 17, at 72270.
---------------------------------------------------------------------------

Furthermore, market participants trading fixed income securities
are typically not comparing transparent trading venues against non-
transparent trading venues in the same manner as market participants
seeking to execute NMS stock orders. Although two affiliated national
securities exchanges operate electronic systems for receiving,
processing, executing, and reporting bids, offers and executions in
fixed income debt securities,\236\ the Commission preliminarily
believes that the majority of trading in fixed income securities occurs
on the bilateral market.\237\ As such, ATSs that effect trades in fixed
income securities primarily compete against other trading venues with
limited or no operational transparency requirements or standards. By
contrast, NMS Stock ATSs, which provide limited information to market
participants about their operations, compete directly with national
securities exchanges, which are required to publicly disclose
information about their operations in the form of proposed rule changes
and a public rule book. Accordingly, the Commission preliminarily
believes that any proposed revisions to the disclosure requirements for
fixed income ATSs under Regulation ATS should be specifically tailored
to the attributes of the fixed income market and, therefore, may
require different changes to the current Regulation ATS regime and Form
ATS than those being proposed herein, which are in direct response to
specific transparency concerns related to the operational complexities
of NMS Stock ATSs and market participants' general inability to compare
NMS Stock ATSs to one another and to national securities exchanges.
---------------------------------------------------------------------------

\236\ See Securities Exchange Act Release Nos. 55496 (March 20,
2007) 72 FR 14631 (March 28, 2007) (NYSE-2006-37) (approving the
establishment of NYSE Bonds as an electronic order-driven matching
system for debt securities, including, but not limited to corporate
bonds (including convertible bonds), international bank bonds,
foreign government bonds, U.S. government bonds, government agency
bonds, municipal bonds, and debt-based structured products under
NYSE Rule 86) and 58839 (October 23, 2008) 73 FR 64645 (October 30,
2008) (NYSEALTR-2008-03) (notice of filing and immediate
effectiveness of the Exchange's proposal to relocate the Exchange's
debt trading and adopt NYSEAlternext Equities Rule 86 (now NYSEMKT--
Equities Rule 86) in order to facilitate trading on the system NYSE
Alternext Bonds system (now NYSEMKT Bonds)).
\237\ For interdealer trading for ``benchmark'' U.S. Treasury
securities, however, trading occurs mainly on centralized electronic
trading platforms using a central limit order book, namely ATSs. See
October 15 Staff Report, infra note 247 at 11.
---------------------------------------------------------------------------

The Commission recognizes, however, that trading on fixed income
ATSs continues to evolve as fixed income securities are increasingly
being traded on ATSs and that trading is occurring in an automated
manner. Furthermore, while the specific conflicts of interest that
might arise on NMS Stock ATSs operated by multiservice broker dealers
may not be identical to the potential conflicts of interest that might
arise on

[[Page 81018]]

a fixed income ATS,\238\ the current operations of fixed income ATSs
may give rise to potential conflicts of interest between the non-ATS
operations of a broker-dealer operator, or its affiliates, and the
fixed income ATS. Accordingly, the Commission seeks comment on the
following:
---------------------------------------------------------------------------

\238\ For instance, the Commission preliminarily believes that
non-ATS business units of broker-dealer operators of fixed income
ATSs may not trade proprietarily on their ATSs to the same extent
that proprietary trading desks, or other business units, of
multiservice broker-dealer operators trade on NMS Stock ATSs.
---------------------------------------------------------------------------

10. Do you believe that market participants have sufficient
information about the operations of fixed income ATSs to evaluate such
ATSs as potential trading venues? Why or why not? Please support your
arguments.
11. Do you believe that the Commission should apply proposed Rule
304, in whole or in part, to fixed income ATSs, or some subset of fixed
income ATSs? Why or why not? If proposed Rule 304 should be applied
only in part to fixed income ATSs, which parts should be applied and
why? What, if any, specific modifications or additions to proposed Rule
304 should be made in any application of it to fixed income ATSs?
Please support your arguments.
12. Do you believe that fixed income ATSs raise the same or similar
operational transparency concerns that the Commission preliminarily
believes to exist for NMS Stock ATSs? Why or why not? Please support
your arguments. If not, do you believe that fixed income ATSs raise
other operational transparency concerns that warrant inclusion of fixed
income ATSs within the scope of proposed Rule 304? Why or why not?
Please support your arguments.
13. Do you believe that there are potential conflicts of interest
for broker-dealer operators of fixed income ATSs, or their affiliates,
that may warrant inclusion of fixed income ATSs within the scope of
proposed Rule 304? Why or why not? Please support your arguments. If
yes, what are those potential conflicts of interest and how do those
potential conflicts of interest differ from or resemble the potential
conflicts of interest for broker-dealer operators of NMS Stock ATSs and
their affiliates? Please be specific.
14. Do you believe that the current conditions to the exemption
from the definition of ``exchange'' are appropriate for fixed income
ATSs? Why or why not? Please support your arguments.
15. Do you believe that applying proposed Rule 304 to fixed income
ATSs would place them at a competitive disadvantage with respect to
non-ATS trading venues that trade fixed income securities and would not
be subject to such disclosure requirements? Why or why not? Please
support your arguments.
16. Should the Commission adopt a new form that is designed
specifically to solicit information about the operations of fixed
income ATSs or the operations of certain types of fixed income ATSs? If
so, please explain, in detail, the information the new form should
require. If not, why not? Please support your arguments. Do you believe
that part or all of any new form designed specifically for fixed income
ATSs should be made available to the public? Why or why not? Please
support your arguments.
As noted above, the Commission recognizes that fixed income
securities markets continue to evolve as fixed income securities are
increasingly being traded on ATSs in an automated manner. Thus, under
the current regulatory requirements, market participants generally do
not have information about how fixed income ATSs operate as ATSs are
not otherwise required to publicly disclose such information \239\ and
Forms ATS filed with the Commission by fixed income ATSs are deemed
confidential.
---------------------------------------------------------------------------

\239\ The Commission does note, however, that some ATSs may
currently make voluntary public disclosures. See, e.g., infra note
156.
---------------------------------------------------------------------------

As such, the Commission is seeking public comment on whether it
should make public current Forms ATS filed by fixed income ATSs. Though
the solicitations on current Form ATS are not specifically tailored to
fixed income ATSs like proposed Form ATS-N would be tailored to NMS
Stock ATSs, market participants could use the information to assess and
compare fixed income ATSs when deciding where to trade fixed income
securities. The Commission is cognizant, however, that fixed income
ATSs currently file Form ATS with the understanding that the Form ATS
is deemed confidential and thus, a fixed income ATS may not have chosen
to operate as an alternative trading system if its Form ATS filing was
originally intended to be made public. In response to any change in the
regulatory requirements, a fixed income ATS may change its business
model and choose to curtail its activities or cease operating as an
ATS.
Accordingly, the Commission seeks comment on the following:
17. Do you believe that the current Forms ATS initial operation
report, or parts thereof, filed by fixed income ATSs should be made
available to the public? Why or why not? Please support your arguments.
18. Do you believe that amendments to Form ATS initial operation
reports, or parts thereof, filed by fixed income ATSs should be made
available to the public? Why or why not? Please support your arguments.
19. Do you believe that current Form ATS is sufficient to elicit
useful information about the operations of fixed income ATSs? If so,
why? If not, in what ways should Form ATS be modified to better inform
the Commission about the operations of fixed income ATSs? Please
explain in detail the manner in which Form ATS should be modified for
fixed income ATSs.
20. Do you believe that fixed income ATSs may curtail or cease
operations if the Commission rescinded the confidential treatment of
Form ATS and made Forms ATS filed by fixed income ATSs public? Why or
why not? Please support your arguments.
21. Do you believe that if fixed income ATSs curtail or cease
operations in response to the Commission rescinding the confidentiality
of the Form ATS, the limitation or exit of those ATSs from the fixed
income market would impact the quality of the fixed income markets in
any way? Why or why not? Please support your arguments.
The questions above relate to all fixed income securities, but the
Commission is also interested in learning commenters' specific views
about whether ATSs that effect transactions in fixed income securities
that are government securities, as defined under the Exchange Act,\240\
should be subject to increased regulation, operational transparency
requirements, or both. Under Rule 301(a)(4) of Regulation ATS, an ATS
that solely trades government securities and is registered as a broker-
dealer or is a bank is exempt from the requirement to either register
as a national securities exchange or comply with Regulation ATS.\241\
If an ATS trades both government securities and non-government
securities--such as NMS stocks, corporate or municipal fixed income
securities--it must either register as a national securities exchange
or comply with Regulation ATS. However, these ATSs are not subject to
several requirements under Regulation ATS with regard to their trading
in government securities. First, ATSs that

[[Page 81019]]

do not trade NMS stocks are not subject to the order display and
execution access provisions under Rule 301(b)(3).\242\ Additionally,
the government securities activities of ATSs that trade both government
and other securities are not subject to either the fair access
provisions of Rule 301(b)(5) \243\ or the capacity, integrity, and
security of automated systems provisions under Rule 301(b)(6).\244\
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\240\ See 15 U.S.C. 78c(a)(42) (defining ``government
securities'' as, among other things, ``securities which are direct
obligations of, or obligations guaranteed as to principal or
interest by, the United States'').
\241\ See 17 CFR 242.301(a)(4)(i) and (ii)(A).
\242\ See supra notes 86-90 and accompanying text.
\243\ See supra notes 92-94 and accompanying text.
\244\ See supra notes 96-97 and accompanying text.
---------------------------------------------------------------------------

Pursuant to the Exchange Act (particularly the provisions of the
Government Securities Act of 1986, as amended \245\) and federal
banking laws, brokers and dealers in the government securities market
are regulated jointly by the Commission, the United States Department
of the Treasury (``U.S. Treasury Department''), and federal banking
regulators.\246\ Recently, staff members from the U.S. Treasury
Department, the Board of Governors of the Federal Reserve System, the
Federal Reserve Bank of New York, the Commission, and the U.S.
Commodity Futures Trading Commission issued a joint report about the
unusually high level of volatility and rapid round-trip in prices that
occurred in the U.S. Treasury market on October 15, 2014 (the ``October
15 Staff Report'').\247\ The October 15 Staff Report discusses the
conditions that contributed to the October 15, 2014 developments and
key findings from the analysis of data from that day.
---------------------------------------------------------------------------

\245\ See Public Law 99-571, October 28, 1986, and Public Law
103-202, December 17, 1993.
\246\ The Government Securities Act authorized the U.S. Treasury
Department to promulgate rules governing transactions in government
securities by government securities brokers and dealers. See October
15 Staff Report, infra note 247, at 9. The Commission, FINRA, and
federal bank regulators--in consultation with the U.S. Treasury
Department--also have the authority to issue sales practice rules
for the government securities secondary market. See id.
\247\ See Joint Staff Report: The U.S. Treasury Market on
October 15, 2014 (July 13, 2015) (the ``October 15 Staff Report''),
https://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2015.pdf.
---------------------------------------------------------------------------

The October 15 Staff Report also provides an overview of the market
structure, liquidity, and applicable regulations of the U.S. Treasury
market, as well as the broad changes to the structure of the U.S.
Treasury market that have occurred over the past two decades.\248\ For
the secondary market in cash U.S. Treasury securities (``Treasury
securities''), the October 15 Staff Report explains that trading
occurs: (1) In bilateral transactions via voice or a variety of
electronic means; or (2) on centralized electronic trading platforms
using a central limit order book.\249\ The October 15 Staff Report
notes that the structure of the U.S. Treasury market has ``evolved
notably in recent years'' and electronic trading has become an
increasingly important feature of the modern interdealer market for
Treasury securities.\250\ Like modern-day trading in NMS stocks, the
majority of interdealer trading in benchmark Treasury securities,\251\
which is the most liquid type of Treasury security, currently occurs on
centralized electronic trading platforms using a central limit order
book, namely ATSs.\252\
---------------------------------------------------------------------------

\248\ See October 15 Staff Report, supra note 247, at 8-14, 35-
44.
\249\ See id. at 11.
\250\ See id. at 35.
\251\ Benchmark issues are the most recently issued nominal
coupon securities. See id. at 11. Nominal coupon securities pay a
fixed semi-annual coupon and are currently issued at original
maturities of 2, 3, 5, 7, 10, and 30 years. See id. at 11, n.6.
\252\ See id. at 11, 35-36. The October 15 Staff Report also
notes that the majority of interdealer trading of ``seasoned''
Treasury securities and the majority of dealer-to-customer trading
is via bilateral transactions. See id. at 11, 35-36 n.31.
---------------------------------------------------------------------------

The October 15 Staff Report notes that the growth in high-speed
electronic trading has contributed to the growing presence of Principal
trading firms (``PTFs'') in the Treasury market, with these firms
accounting for the majority of trading and providing the vast majority
of market depth.\253\ PTFs, which have direct access to electronic
trading platforms for Treasury securities, now represent more than half
of the trading activity on electronic interdealer trading platforms for
Treasury securities.\254\ Similar to HFTs in the equity markets, PTFs
trading on the electronically brokered interdealer market for Treasury
securities often employ automated algorithmic trading strategies that
rely on speed and allow the PTFs to cancel or modify existing quotes in
response to perceived market activity.\255\ Furthermore, most PTFs
trading Treasury securities on electronic platforms also restrict their
activities to proprietary trading and do not hold long positions.\256\
---------------------------------------------------------------------------

\253\ See id. at 36.
\254\ See id.
\255\ See id. at 32, 35-36, 39.
\256\ See id. at 38.
---------------------------------------------------------------------------

The October 15 Staff Report also notes that increased trading speed
due to automated trading in the U.S. Treasury market has challenged the
traditional risk management protocols for market participants, trading
platforms, and clearing firms.\257\ The October 15 Staff Report notes
that automated trading can occur at speeds that exceed the capacity of
manual detection and intervention, posing a challenge to traditional
risk management protocols, and forcing market participants, trading
platforms, and clearing firms to develop internal risk controls and
processes to manage the potential for rapidly changing market and
counterparty risk exposures.\258\
---------------------------------------------------------------------------

\257\ See id. at 36.
\258\ See id. at 36-37.
---------------------------------------------------------------------------

As indicated in the October 15 Staff Report, the staff of the U.S.
Treasury Department, the Board of Governors of the Federal Reserve
System, the Federal Reserve Bank of New York, the Commission, and the
U.S. Commodity Futures Trading Commission plan to continue to analyze
the events of October 15, 2014 and examine changes to the U.S. Treasury
market structure. The October 15 Staff Report identified four areas for
further work. One of the four areas includes the continued monitoring
of trading and risk management practices across the U.S. Treasury
market and a review of the current regulatory requirements applicable
to the government securities market and its participants.\259\ In
connection with this, the cross-agency staff expressed support for a
review of the current regulatory requirements applicable to the
government securities market and its participants and suggested
studying the implications of a registration requirement for firms
conducting certain types of automated trading in the U.S. Treasury
market and for government securities trading venues.\260\ The staff
also recommended an assessment of the data available to the public and
to the official sector on U.S. Treasury cash securities markets, which
would include efforts to enhance public reporting on U.S. Treasury
market venue policies and services.\261\
---------------------------------------------------------------------------

\259\ See id. at 45.
\260\ See id. at 47.
\261\ See id. at 48.
---------------------------------------------------------------------------

Based on the rapid and continued evolution of the market for
government securities, the Commission is seeking comment on whether as
part of its continued cooperation and coordination with other
regulators, it should include ATSs whose trading activity is solely in
government securities within the scope of current Regulation ATS and
amend Regulation ATS to provide for enhanced operational transparency
for ATSs that trade government securities.\262\

[[Page 81020]]

Specifically, the Commission seeks comment on the following:
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\262\ Prior to adopting any changes to Regulation ATS with
regard to ATSs that trade government securities, the Commission
would, as appropriate, consult with and consider the views of the
Secretary of the Treasury and any other appropriate regulatory
agencies. See 15 U.S.C. 78o(c)(2)(E).
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22. Do you that believe market participants have sufficient
information about the operations of ATSs that effect transactions in
government securities in order to evaluate such ATSs as potential
trading venues? Why or why not? Please support your arguments.
23. Do you believe that the Commission should adopt amendments to
Regulation ATS to remove the exemption under Rule 301(a)(4)(ii)(A) of
Regulation ATS for ATSs whose trading activity is solely in government
securities? Why or why not? Please support your arguments. If so, do
you believe that the Commission should make public Form ATS filings or
otherwise increase the transparency requirements under Regulation ATS
for ATSs whose sole trading activity is in government securities? Why
or why not? Please support your arguments.
24. Do you believe that the Commission should adopt amendments to
Regulation ATS to enhance the transparency requirements applicable to
ATSs that effect transactions in both government securities and non-
government securities? Why or why not? If so, how? Please support your
arguments.
25. Do you believe that ATSs that effect transactions in government
securities raise the same operational transparency concerns that the
Commission preliminarily believes to exist for NMS Stock ATSs? Why or
why not? Please support your arguments. If not, do you believe that
ATSs that effect transactions in government securities raise other
operational transparency concerns that warrant expanding the scope of
Regulation ATS to encompass ATSs whose sole trading activity is in
government securities or increasing the transparency requirements for
ATSs that effect transactions in both government securities and non-
government securities? Why or why not? Please support your arguments.
26. Do you believe that there are potential conflicts of interest
for broker-dealer operators of ATSs, or their affiliates, that effect
transactions in government securities that may justify greater
operational transparency for ATSs that effect transactions in
government securities? Why or why not? Please support your arguments.
If yes, what are those potential conflicts of interest and how do those
potential conflicts of interest differ from or resemble the potential
conflicts of interest for broker-dealer operators of NMS Stock ATSs and
their affiliates? Please be specific.
27. Do you believe that current Form ATS is sufficient to elicit
information about the operations of ATSs that effect transactions in
government securities? If not, in what ways should Form ATS be modified
to better inform the Commission about the operations of ATSs that
effect transactions in government securities? Please explain in detail
the manner in which Form ATS should be modified. Do you believe that
the current Forms ATS, or parts thereof, for ATSs that effect
transactions in government securities and non-government securities
should be made available to the public? Why or why not? Please support
your arguments.
28. Do you believe that the Commission should adopt amendments to
existing rules under Regulation ATS, including, Rules 301(b)(3) (order
display and execution access), 301(b)(5) (fair access), and 301(b)(6)
(capacity, integrity, and security of automated systems), to make those
rules applicable to trading in government securities on ATSs? Why or
why not? If so, how? Please provide support for your arguments. Should
the Commission adopt amendments to Rule 301(b)(3) of Regulation ATS to
require ATSs that trade government securities to report quotes and/or
trade information for public dissemination after crossing certain
volume thresholds in a government security? Should such information be
reported only after a delay? Why or why not? Please support your
arguments.
29. Do you believe that the Commission should apply proposed Rule
304, in whole or in part, to ATSs that effect transactions in
government securities? Why or why not? Please support your arguments.
30. Do you believe that the Commission should adopt a new form that
is specifically designed to solicit information about the operations of
ATSs that effect transactions in government securities? If so, please
explain, in detail, the information the new form should require from
ATSs that effect transactions in government securities. If not, why
not? Please support your arguments. Do you believe that any new form
designed specifically for ATSs that effect transactions in government
securities should be made available to the public? Why or why not?
Please support your arguments.
31. Do you believe that broker-dealers that effect transactions in
government securities may modify their business models in order to need
not comply with Regulation ATS in response to enhanced regulatory or
operational transparency requirements for ATSs that effect transactions
in government securities? Why or why not? Please support your
arguments.
There are also ATSs whose activity is solely the facilitation of
trading in OTC Equity Securities.\263\ At this time, the Commission
preliminarily believes that many of its specific concerns related to
the current operations of NMS Stock ATSs, which proposed Rule 304 and
proposed Form ATS-N seek to address directly, are not equally
applicable to OTC Equity Securities ATSs. The Commission preliminarily
believes that OTC Equity Securities ATSs do not currently operate with
the same complexities as NMS Stock ATSs. Additionally, trading in OTC
Equity Securities is almost always facilitated through ATSs, through
inter-dealer quotation systems that are not ATSs,\264\ or elsewhere in
the bilateral market. Accordingly, trading in the market for OTC Equity
Securities is typically facilitated by platforms or amongst market
participants that are not subject to operational transparency
requirements comparable to those imposed on national securities
exchanges (i.e., the self-regulatory organization rule filing process).
The Commission also preliminarily believes that OTC Equity Securities
ATSs are evolving and, therefore, the Commission seeks comment on the
following:
---------------------------------------------------------------------------

\263\ For the purposes of this analysis and request for comment,
the Commission is using the term ``OTC Equity Security'' as it is
defined in FINRA's 6400 rule series for quoting and trading in OTC
Equity Securities. FINRA defines OTC Equity Security as ``any equity
security that is not an `NMS stock' as that term is defined in Rule
600(b)(47) of SEC Regulation NMS; provided, however, that the term
`OTC Equity Security' shall not include any Restricted Equity
Security,'' which FINRA defines as ``any equity security that meets
the definition of `restricted security' as contained in Securities
Act Rule 144(a)(3).'' See FINRA Rules 6420(f), (k).
\264\ FINRA Rule 6420 defines an interdealer quotation system as
``any system of general circulation to brokers or dealers which
regularly disseminates quotations of identified brokers or
dealers.'' See FINRA Rule 6420(c). An example of an interdealer
quotation system is the OTC Bulletin Board that FINRA operates.
---------------------------------------------------------------------------

32. Do you believe that market participants have sufficient
information about the operations of OTC Equity Securities ATSs to
evaluate such ATSs as potential trading venues? Why or why not? Please
support your arguments.
33. Do you believe that OTC Equity Securities ATSs raise the same
operational transparency concerns that the Commission preliminarily
believes to exist for NMS Stock ATSs? Why or why not? Please support
your arguments. If not, do you believe that OTC Equity Securities ATSs
raise other operational transparency concerns that warrant inclusion of
OTC Equity

[[Page 81021]]

Securities ATSs within the scope of proposed Rule 304? Why or why not?
Please support your arguments.
34. Do you believe that there are potential conflicts of interest
for broker-dealer operators of ATSs, and their affiliates, that
facilitate transactions in OTC Equity Securities that may justify
greater operational transparency for OTC Equity Securities ATSs? Why or
why not? Please support your arguments. If yes, what are those
potential conflicts of interest and how do those potential conflicts of
interest differ from or resemble the potential conflicts of interest
for broker-dealer operators of NMS Stock ATSs and their affiliates?
Please be specific.
35. Do you believe that the Commission should apply proposed Rule
304, in whole or in part, to OTC Equity Securities ATSs? Why or why
not? Please support your arguments.
36. Do you believe that applying proposed Rule 304 to OTC Equity
Securities ATSs would place them at a competitive disadvantage with
respect to other trading venues that facilitate transactions in OTC
Equity Securities in the bilateral market, which would not be subject
to such disclosure requirements? Why or why not? Please support your
arguments.
37. Do you believe that current Form ATS is sufficient to elicit
relevant information about the operations of OTC Equity Securities
ATSs? If so, why? If not, in what ways should Form ATS be modified to
better inform the Commission about the operations of OTC Equity
Securities ATSs? Please explain in detail the manner in which Form ATS
could be modified. Do you believe that the current filed Forms ATS, or
parts thereof, for OTC Equity Securities ATSs should be made available
to the public? Why or why not? Please support your arguments.
38. Do you believe that the Commission should adopt a new form that
is designed specifically for OTC Equity Securities ATSs to promote
operational transparency of such ATSs? If so, please explain, in
detail, the information the new form should require. If not, why not?
Please support your arguments. Do you believe that any new form
designed specifically for OTC Equity Securities ATSs should be made
available to the public? Why or why not? Please support your arguments.
Additionally, the Commission notes that there are active ATSs that
trade in securities other than NMS stocks, fixed income securities, or
OTC Equity Securities.\265\ For example, an ATS might help match orders
for options contracts or facilitate trades in cooperative interests or
membership units in limited liability companies. At this time, the
Commission does not believe that these ATSs raise the same operational
transparency concerns as NMS Stock ATSs. The products traded on these
ATSs are not traded on national securities exchanges and, therefore,
these ATSs are not competing against platforms with greater
transparency requirements. Furthermore, the Commission preliminarily
believes that ATSs that trade in securities other than NMS stocks,
fixed income securities, or OTC Equity Securities do not currently
operate with the same complexities as NMS Stock ATSs. For such ATSs,
however, the Commission seeks comment on the following:
---------------------------------------------------------------------------

\265\ The Commission notes that, based on information provided
on Forms ATS and ATS-R as of November 1, 2015, 5 ATSs may trade such
securities.
---------------------------------------------------------------------------

39. Do you believe that market participants have sufficient
information about the operations of ATSs that effect or facilitate
transactions in securities other than NMS stocks, fixed income
securities, or OTC Equity Securities as potential trading venues? Why
or why not? Please support your arguments.
40. Do you believe that ATSs that effect or facilitate transactions
in securities other than NMS stocks, fixed income securities, or OTC
Equity Securities raise the same operational transparency concerns that
the Commission preliminarily believes to exist for NMS Stock ATSs? Why
or why not? Please support your arguments.
41. Do you believe that there are potential conflicts of interest
for broker-dealer operators of ATSs, and their affiliates, that effect
or facilitate transactions in securities other than NMS stocks, fixed
income securities, or OTC Equity Securities that may justify greater
operational transparency for ATSs that effect or facilitate
transactions in securities other than NMS stocks, fixed income
securities, or OTC Equity Securities? Why or why not? Please support
your arguments. If yes, what are those potential conflicts of interest
and how do those potential conflicts of interest differ from or
resemble the potential conflicts of interest for broker-dealer
operators of NMS Stock ATSs and their affiliates? Please be specific.
42. Do you believe that the Commission should apply proposed Rule
304, in whole or in part, to ATSs that effect or facilitate
transactions in securities other than NMS stocks, fixed income
securities, or OTC Equity Securities? Why or why not? Please support
your arguments. If so, please explain the types of ATSs to which
proposed Rule 304 should apply and why. If not, why not? Please support
your arguments.
43. Do you believe that Form ATS is sufficient to elicit useful
information about the operations of ATSs that effect or facilitate
transactions in securities other than NMS stocks, fixed income
securities, or OTC Equity Securities? If so, why? If not, in what ways
should Form ATS be modified to better inform the Commission about the
operations of ATSs that effect or facilitate transactions in securities
other than NMS stocks, fixed income securities, or OTC Equity
Securities? Please explain in detail the manner in which Form ATS could
be modified. Do you believe that current filed Forms ATS, or parts
thereof, for ATSs that effect or facilitate transactions in securities
other than NMS stocks, fixed income securities, or OTC Equity
Securities should be made available to the public? Why or why not?
Please support your arguments.
44. Do you believe that the Commission should adopt a new form
specifically designed for ATSs that effect or facilitate transactions
in securities other than NMS stocks, fixed income securities, or OTC
Equity Securities in order to promote operational transparency of such
ATSs? If so, please explain, in detail, the information the new form
should elicit from ATSs that effect or facilitate transactions in such
securities. If not, why not? Please support your arguments. Do you
believe that any new form designed specifically for ATSs that effect or
facilitate transactions in securities other than NMS stocks, fixed
income securities, or OTC Equity Securities should be made available to
the public? Why or why not? Please support your arguments.

C. Proposed Rule 304: Enhanced Filing Requirements for NMS Stock ATSs

1. Application of Existing Requirements to NMS Stock ATSs
Proposed Rule 304(a) would require 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), as discussed in Section IV.C.2 below) to be
exempt from the definition of an exchange pursuant to Rule 3a1-
1(a)(2).\266\ The Commission is not proposing to change Rule 301(a) as
part of this proposal, but is simply making

[[Page 81022]]

clear that Rule 301(a) continues to apply to NMS Stock ATSs, unless
otherwise exempt.\267\ Thus, NMS Stock ATSs would still be required to
comply with the existing requirements of Rules 300 through 303 of
Regulation ATS, and would additionally be required to comply with
proposed Rule 304.
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\266\ As discussed above, the Commission is proposing to amend
Rule 3a1-1(a) to provide for modified conditions to the exemption
set forth in proposed Rule 304. See supra Section IV.B.
\267\ 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 an
exchange under Section 6 of the Exchange Act; exempt from exchange
registration based on limited volume; operated by a national
securities association; registered as a broker-dealer, under
Sections 15(b) or 15C of the Exchange Act, or that is a bank, that
limits its securities activities to certain instruments; or
exempted, conditionally or unconditionally, by Commission order,
after application by such alternative trading system from one or
more of the requirements of Rule 301(b). See 17 CFR 242.301(a). See
also Regulation ATS Adopting Release, supra note 7, at 70859-63.
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The Commission also notes that the requirements of Rule 301(b)
(except Rule 301(b)(2)) of Regulation ATS \268\ would continue to apply
to NMS Stock ATSs. As discussed above, Rule 301(b) sets forth the
conditions with which an ATS must comply to benefit from the exemption
provided by Exchange Act Rule 3a1-1(a).\269\ The Commission continues
to believe that compliance by NMS Stock ATSs with the provisions of
Rule 301(b) of Regulation ATS (except Rule 301(b)(2)), as amended, is a
necessary and appropriate condition to the Rule 3a1-1(a)(2) exemption
from the definition of exchange in that the purpose of such condition
is the protection of investors.\270\ The Commission would no longer
require an NMS Stock ATS to comply with the reporting and amendment
requirements of Rule 301(b)(2) because such conditions would be
replaced with the more specific disclosure requirements of proposed
Rule 304 for NMS Stock ATSs, discussed in further detail below. The
Commission is also proposing to make non-substantive amendments to Rule
301(b)(2)(i) and Rule 301(b)(2)(vii) \271\ to delete outdated
references to dates for phased in compliance with Regulation ATS for
ATSs that were operational as of April 21, 1999, and to update the name
of the Division of Trading and Markets, respectively.\272\
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\268\ See 17 CFR 242.301(b)(1), (b)(3)-(11).
\269\ See supra Section II.B.
\270\ See, e.g., Regulation ATS Adopting Release, supra note 7,
at 70856. In adopting the existing conditions in Rule 301, the
Commission determined that the exemption in Rule 3a1-1 was
consistent with the protection of investors because the Commission
believed that investors would benefit from the conditions governing
an alternative trading system, in particular Regulation ATS's
enhanced transparency, market access, system integrity, and audit
trail provisions. See id.
\271\ See proposed Rules 301(b)(2)(i) and (vii), respectively.
\272\ See 17 CFR 242.301(b)(2)(i) and (vii), respectively.
---------------------------------------------------------------------------

The Commission requests comment generally on all aspects of
proposed Rule 304(a).
2. Rule 301(b)(2) and Form ATS; ATSs That Trade in Non-NMS Stocks
The Commission is proposing Rule 301(b)(2)(viii) to provide that an
NMS Stock ATS shall file the reports and amendments required by
proposed Rule 304 and would not be subject to the requirements of Rule
301(b)(2). Existing Rule 301(b)(2) requires an ATS to file with the
Commission a Form ATS initial operation report, amendments to the Form
ATS initial operation report, and cessation of operations reports on
Form ATS, all of which are ``deemed confidential when filed.'' \273\
Because the Commission is proposing rules to govern the content and
manner in which an NMS Stock ATS would be required to disclose
information to the public and the Commission on proposed Form ATS-N,
existing Rule 301(b)(2), which applies, and will continue to apply, to
ATSs that do not effect transactions in NMS stocks would be duplicative
of the proposed amendments.\274\
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\273\ See 17 CFR 242.301(b)(2).
\274\ See supra Section IV.B. (discussing the proposed
conditions to the exemption in Rule 3a1-1(a) for ATSs that trade NMS
stocks, as compared to the conditions for ATSs that trade other
securities or that trade NMS stocks as well as other securities).
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Proposed Rule 301(b)(2)(viii) would also provide that an ATS that
effects transactions in both NMS stocks and non-NMS stocks would be
subject to the requirements of proposed Rule 304 with respect to NMS
stocks and Rule 301(b)(2) with respect to non-NMS stocks. The
Commission recognizes that some existing ATSs that would meet the
definition of NMS Stock ATS also transact in securities other than NMS
stocks. For these ATSs to be eligible for the exemption under Rule 3a1-
1(a)(2), the Commission preliminarily believes that it is not necessary
to mandate compliance with the heightened transparency requirements
under proposed Rule 304 with respect to their non-NMS stock operations.
Based on Commission experience, these ATSs are designed so that the
platform on which non-NMS stock order flow interacts and executes
differs from the platform on which NMS stock order flow interacts and
executes. Furthermore, as explained above, the Commission preliminarily
believes that the operational transparency concerns for NMS Stock ATSs
do not apply equally to the markets for non-NMS stocks.\275\ As such,
the Commission has tailored proposed Form ATS-N to address the specific
operational transparency concerns raised by the current functionalities
of the ATS platforms on which NMS stock order flow interacts and
executes. Additionally, the Commission preliminarily believes that
applying proposed Rule 304 to the non-NMS stock operations of ATSs that
trade both NMS stocks and non-NMS stocks would impose unequal
regulatory burdens across ATSs that transact in non-NMS stocks. Under
such a rule, ATSs that trade both NMS stocks and non-NMS stocks would
be required to meet the heightened standards of proposed Rule 304 to be
eligible for the exemption under Rule 3a1-1(a)(2) with regard to their
non-NMS stock operations, whereas ATSs that only trade non-NMS stocks
would not be subject to the standards under proposed Rule 304.
---------------------------------------------------------------------------

\275\ See supra Section IV.B.
---------------------------------------------------------------------------

The Commission also proposes to amend Rule 301(b)(9),\276\ which
requires an ATS to report transaction volume on Form ATS-R on a
quarterly basis and within 10 calendar days after it ceases operation.
The Commission proposes to amend Rule 301(b)(9) to require an ATS that
trades both NMS stocks and non-NMS stocks to separately report its
transactions in NMS stocks on one Form ATS-R, and its transactions in
non-NMS stocks on another Form ATS-R. The information filed on Form
ATS-R permits the Commission to monitor trading on an ATS.\277\ As
noted above, the Commission proposes to require each ATS with both NMS
stock and non-NMS stock operations to file a Form ATS-N for its NMS
stock operations and a separate Form ATS for its non-NMS stock
operations. Because the proposed Form ATS-N and Form ATS filings of
such ATSs would describe separate functionalities--the functionalities
for the trading of NMS stocks and those for the trading of non-NMS
stocks, respectively--the Commission preliminarily believes that these
ATSs should file a separate Form ATS-R to report the trading activity
for each functionality to avoid confusion and for regulatory
efficiency. Accordingly, the Commission is proposing to require that
these ATSs file a Form ATS-R to report transaction volume resulting
from their NMS stock operations, as disclosed on a Form ATS-N, and a
separate Form ATS-R to

[[Page 81023]]

report transaction volume resulting from their non-NMS stock
operations, as disclosed on Form ATS. The Commission notes that Form
ATS-R would continue to be deemed confidential.
---------------------------------------------------------------------------

\276\ See 17 CFR 242.301(b)(9).
\277\ See Regulation ATS Adopting Release, supra note 7, at
70878.
---------------------------------------------------------------------------

The Commission requests comment on the proposed amendments to Rules
301(b)(2) and 301(b)(9). In particular, the Commission solicits comment
on the following:
45. Should the Commission require ATSs that trade both NMS stocks
and non-NMS stocks to make filings on both proposed Form ATS-N, with
respect to its NMS stock operations, and Form ATS, with respect to its
non-NMS stock operations? Why or why not? Please support your
arguments.
46. Should the Commission require ATSs that trade both NMS stocks
and non-NMS stocks to file a Form ATS-R with respect to their NMS stock
operations and a separate Form ATS-R with respect to their non-NMS
stock operations? Why or why not? Please support your arguments.
47. Do you believe that ATSs that trade both NMS stocks and non-NMS
stocks should be subject to proposed Rule 304, in whole or in part, for
both their NMS stock operations and non-NMS stock operations? Why or
why not? Please support your arguments.
Do you believe that ATSs that trade both NMS stocks and non-NMS
stocks should be required to disclose their NMS stock and non-NMS stock
operations solely on proposed Form ATS-N? If so, why, and what
additional disclosures should be required on proposed Form ATS-N to
reflect non-NMS stock operations? If not, why not? Please support your
arguments.
3. Proposed Rule 304(a)(1)(i) and (ii): Filing and Review of Form ATS-N
Proposed Rule 304(a)(1)(i) would provide that no exemption from the
definition of ``exchange'' is available to an NMS Stock ATS pursuant to
Exchange Act Rule 3a1-1(a)(2) unless the NMS Stock ATS files with the
Commission a Form ATS-N and the Commission declares the Form ATS-N
effective. The Commission preliminarily believes that an NMS Stock ATS
that is not operating on the effective date of proposed Rule 304 should
not be permitted to commence operations until the Commission has had
the opportunity to assess whether the NMS Stock ATS qualifies for the
Rule 3a1-1(a)(2) exemption. As discussed above,\278\ the current
requirements of the Rule 3a1-1(a)(2) exemption mandate that an ATS only
provide notice of its operation on a Form ATS initial operation report
20 days prior to commencing operations.\279\ The Commission's review of
Form ATS-N would help ensure that an NMS Stock ATS's disclosures comply
with the requirements of proposed Rule 304 and that a consistent level
of information is made available to market participants in evaluating
NMS Stock ATSs.\280\
---------------------------------------------------------------------------

\278\ See supra Section IV.B.
\279\ 17 CFR 242.301(b)(2).
\280\ The Commission notes, however, that Form ATS-N is intended
to provide regulatory and public transparency. As such, its review
of Form ATS-N will be focused on an evaluation of the completeness
and accuracy of the disclosure thereon, and compliance with federal
securities laws. Even if the Commission declares a Form ATS-N
effective, the Commission would not be precluded from later
determining that an NMS Stock ATS had violated the federal
securities laws or the rules and regulations thereunder. See infra
Section IV.C.8.
---------------------------------------------------------------------------

Proposed Rule 304(a)(1)(i) is also designed as a transition for
currently operating ATSs that meet the proposed definition of NMS Stock
ATS. Proposed Rule 304(a)(1)(i) would require an existing ATS that
facilitates transactions in NMS stocks and that operates pursuant to a
previously filed initial operation report on Form ATS as of the
effective date of proposed Rule 304 (i.e., a ``legacy NMS Stock ATS'')
to file a Form ATS-N with the Commission no later than 120 calendar
days after the effective date of proposed Rule 304. In other words, the
effectiveness of an existing Form ATS would not suffice for a legacy
NMS Stock ATS to retain its exemption from the definition of
``exchange'' with respect to its Rule 3b-16 activity in NMS stocks
beyond the transition period following the effectiveness of proposed
Rule 304. The Commission is also proposing in Rule 304(a)(1)(i) that a
legacy NMS Stock ATS may continue to operate pursuant to a previously
filed initial operation report on Form ATS pending the Commission's
review of the filed Form ATS-N.\281\ This provision would allow the NMS
Stock ATS to continue its current operations without disruptions to the
NMS Stock ATS or its current subscribers and provide the NMS Stock ATS
with sufficient time to make an orderly transition from compliance
under the current Regulation ATS requirements to compliance with the
proposed requirements of Rule 304. The Commission notes that during the
Commission's review of the filed Form ATS-N, the NMS Stock ATS would
continue to operate pursuant to its existing Form ATS initial operation
report and would continue to be required to file amendments on Form ATS
to provide notice of changes to the operations of its system.\282\
---------------------------------------------------------------------------

\281\ The NMS Stock ATS would be required to continue to comply
with Regulation ATS.
\282\ 17 CFR 242.301(b)(2)(ii) through (iv).
---------------------------------------------------------------------------

The Commission considered the alternative of allowing an existing
ATS that engages in Rule 3b-16 activity in NMS stocks to retain its
exemption from the definition of ``exchange'' by virtue of its existing
Form ATS, and to require only a new NMS Stock ATS to file Form ATS-N.
However, the Commission preliminarily believes that this alternative
would not be appropriate as it would create a significant competitive
disparity between a ``new'' and ``legacy'' NMS Stock ATS, with the
latter benefitting from substantially lighter disclosure requirements.
More importantly, it would perpetuate the problem of limited
information being available to market participants. Nevertheless, the
Commission preliminarily believes that it would be appropriate to
provide existing ATSs that engage in Rule 3b-16 activity with regard to
NMS stocks an adjustment period after the effective date of proposed
Rule 304 to file a Form ATS-N. The Commission preliminarily believes
that 120 calendar days is sufficient time for a legacy NMS Stock ATS to
respond to the disclosure requirements on the new Form ATS-N because an
ATS that is currently operating should be knowledgeable about the
operations of its system and the activities of its broker-dealer
operator and its affiliates.
Proposed Rule 304(a)(1)(ii)(A) would provide that the Commission
declare a Form ATS-N filed by an NMS Stock ATS operating as of the
effective date of proposed Rule 304 effective or ineffective no later
than 120 calendar days from filing with the Commission. Similarly,
Proposed Rule 304(a)(1)(ii)(B) would provide that the Commission
declare a Form ATS-N filed by an NMS Stock ATS that was not operating
as of the effective date of proposed Rule 304 effective or ineffective
no later than 120 calendar days from filing with the Commission. The
disclosures required by proposed Form ATS-N are more comprehensive than
those required on current Form ATS, particularly in terms of volume,
complexity, and detail. Based on its experience over the past seventeen
years of receiving and reviewing notices on Form ATS, the Commission
preliminarily believes that it would receive a large amount of
information provided in Form ATS-N filings. The Commission
preliminarily believes that 120 calendar days would provide the
Commission adequate time to carry out its oversight functions with
respect to its review of Forms ATS-N

[[Page 81024]]

filed by legacy and new NMS Stock ATSs, including its responsibilities
to protect investors and maintain fair, orderly, and efficient
markets.\283\
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\283\ As discussed above, a legacy NMS Stock ATS would be able
continue to operate pursuant to a previously filed initial operation
report on Form ATS pending the Commission's review of the filed Form
ATS-N.
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Proposed Rule 304(a)(1)(ii)(A) would further provide a process for
the Commission to extend the review period for Forms ATS-N filed by NMS
Stock ATSs operating as of the effective date of proposed Rule 304: (1)
An additional 120 calendar days, if the Form ATS-N is unusually lengthy
or raises novel or complex issues that require additional time for
review, in which case the Commission will notify the NMS Stock ATS in
writing within the initial 120-day review period and will briefly
describe the reason for the determination that additional time for
review is required; or (2) any extended review period to which the NMS
Stock ATS agrees in writing. Proposed Rule 304(a)(1)(ii)(B) would
include a similar provision for NMS Stock ATSs not operating as of the
effective date of proposed Rule 304, except that the Commission could
extend its review period up to 90 calendar days. The proposed
disclosure requirements require more detailed disclosures regarding the
operations of an NMS Stock ATS than do the current requirements;
thereby increasing the amount of information for the Commission to
review. The Commission preliminarily believes that the additional time
provided by the proposed rule is appropriate because it would allow
Commission and its staff to conduct a thorough review of certain
lengthy, novel, or complex Form ATS-N filings and provide sufficient
opportunity to discuss the filing with the NMS Stock ATS if necessary.
Request for Comment
48. Do you believe the Commission should adopt a rule in which it
is required to declare a Form ATS-N filed by an NMS Stock ATS effective
or ineffective within 120 calendar days of filing? Do you believe this
is an appropriate time frame in light of the amount and nature of
information to be submitted on Form ATS-N? Why or why not? Does any
experience with Exchange Act Rule 19b-4 filings by self-regulatory
organizations, either in draft or in formal submission, inform the
appropriate time frame?
49. Should the Commission adopt a process to further extend the
period of review under certain circumstances? If so, what circumstances
and why? Please support your arguments.
50. If the Commission does not declare a Form ATS-N filing
effective or ineffective within 120 calendar days from filing with the
Commission, or any extension of the 120-day period pursuant to proposed
Rule 304(a)(1)(ii), do you believe the Form ATS-N should be
automatically deemed effective? Why or why not? Please support your
arguments.
51. If the Commission does not declare a Form ATS-N filing
effective or ineffective within 120 calendar days from filing with the
Commission, or any extension of the 120-day period pursuant to proposed
Rule 304(a)(1)(ii), do you believe the Form ATS-N should be
automatically deemed ineffective? Why or why not? Please support your
arguments.
4. Proposed Rule 304(a)(1)(iii): Declarations of Effectiveness or
Ineffectiveness of Form ATS-N
Proposed Rule 304(a)(1)(iii) would provide that the Commission will
declare effective a Form ATS-N if the NMS Stock ATS qualifies for the
Rule 3a1-1(a)(2) exemption. Proposed Rule 304(a)(1)(iii) would also
provide that the Commission will declare ineffective a Form ATS-N if it
finds, after notice and opportunity for hearing, that such action is
necessary or appropriate in the public interest, and is consistent with
the protection of investors.\284\
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\284\ A submitted Form ATS-N that contains technical
deficiencies, such as missing pages or one in which the entity does
not respond to all questions, including all sub-questions, would not
be complete and would be returned to the NMS Stock ATS. See also 17
CFR 240.0-3. Return of a Form ATS-N would not prejudice any decision
by the Commission regarding effectiveness or ineffectiveness should
the NMS Stock ATS resubmit a Form ATS-N. The Commission notes an NMS
Stock ATS also can choose to withdraw a filed Form ATS-N.
---------------------------------------------------------------------------

Under the proposal, the Commission would use Form ATS-N to evaluate
whether an entity qualifies for an exemption under Rule 3a1-
1(a)(2).\285\ For the Commission to declare a Form ATS-N effective, it
would evaluate, among other things, whether the entity satisfies the
definition of ATS,\286\ and more specifically, the definition of NMS
Stock ATS.\287\ The Commission preliminarily believes that whether an
entity meets the definition of ``NMS Stock ATS'' should be a threshold
requirement for the Commission to declare a Form ATS-N effective, and
therefore for the ATS to qualify for the Rule 3a1-1(a)(2) exemption.
Proper classification of an entity would clearly indicate to market
participants, as well as the Commission, the functions that entity
performs and the regulatory framework and attendant obligations that
attach to that entity.\288\ Thus, if the proposed category of NMS Stock
ATS is adopted, the Commission preliminarily believes it needs to
mitigate concerns that market participants may be confused or misled
about whether an entity in fact meets the definition of an NMS Stock
ATS. If an entity does not meet the definition, market participants may
hold false expectations about how their orders may interact or be
matched with other orders or they may not fully understand whether the
entity with which they are doing business is required to comply with
Regulation ATS. For these reasons, the Commission preliminarily
believes that it would be necessary or appropriate in the public
interest, and consistent with the protection of investors, to declare
ineffective a Form ATS-N if it finds, after notice and opportunity for
hearing, that the Form ATS-N was filed by an entity that does not meet
the functional test under Exchange Act Rule 3b-16, does not perform
functions commonly performed by a stock exchange, or

[[Page 81025]]

exercises SRO powers.\289\ Similarly, the Commission preliminarily
believes that it would be necessary or appropriate in the public
interest, and consistent with the protection of investors, to declare
ineffective a Form ATS-N if it finds, after notice and opportunity for
hearing, that the Form ATS-N was filed by an entity that does not meet
the proposed definition of ``NMS Stock ATS.''
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\285\ An NMS Stock ATS would also be required to comply with
other requirements of Rules 300 through 303 of Regulation ATS
(except Rule 301(b)(2)) and proposed Rule 304.
\286\ Regulation ATS defines an ATS as any organization,
association, person, group of persons, or system that constitutes 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 Exchange Act Rule 3b-16, and does not set
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 discipline subscribers under
the Exchange Act other than by exclusion from trading. See 17 CFR
242.300(a).
Under Exchange Act Rule 3b-16, an organization, association, or
group of persons shall be considered to constitute, maintain, or
provide ``a marketplace 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. See supra note 48 and accompanying text. See also supra
Section IV.A (discussing the proposed definition of ``NMS Stock
ATS'').
\287\ See proposed Rule 300(k). See also supra Section IV.A
(discussing the proposed definition of NMS Stock ATS).
\288\ For example, an ATS that is not an NMS Stock ATS would be
subject to different conditions to be eligible for the Rule 3a1-
1(a)(2) exemption. Similarly, depending on the facts and
circumstances, an entity that is not an ATS may be subject to
requirements as a broker-dealer, but not the conditions of
Regulation ATS, or may be required to register as an exchange.
\289\ See supra Section IV.A. (discussing the definition of NMS
Stock ATS and the underlying definition of ATS).
The entity would not fall within the definition of an
``exchange'' under Section 3(a)(1) of the Exchange Act and the
exemption provided in Exchange Act Rule 3a1-1 would not be
applicable.
---------------------------------------------------------------------------

The Commission also preliminarily believes that it would be
necessary or appropriate in the public interest, and consistent with
the protection of investors, to declare ineffective a Form ATS-N if it
finds, after notice and opportunity for hearing, that one or more
disclosures on Form ATS-N are materially deficient with respect to
their accuracy, currency, or completeness. The requirements of proposed
Form ATS-N are set forth in proposed Rule 304(c)(1), which provides
that an NMS Stock ATS must respond to each item on Form ATS-N, as
applicable, in detail and disclose information that is accurate,
current, and complete. The Commission preliminarily believes that
market participants would use information disclosed on Form ATS-N to
evaluate whether a particular NMS Stock ATS would be a desirable venue
to which to route their orders. In addition, the Commission intends to
use the information disclosed on the Form ATS-N to exercise oversight
over and monitor developments of NMS Stock ATSs. Given these potential
uses, the Commission preliminarily believes that it is important that
Form ATS-N contain detailed disclosures that are accurate, current, and
complete.\290\
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\290\ Proposed Form ATS-N is designed to provide market
participants and the Commission with, among other things, current
information about the operations of the NMS Stock ATS and the
activities of the broker-dealer operator and its affiliates.
Accordingly, an NMS Stock ATS would be required to provide
information on proposed Form ATS-N that reflects the operations of
the NMS Stock ATS at the time its Form ATS-N is declared effective
by the Commission. Any changes in the operations of the NMS Stock
ATS must be disclosed by the NMS Stock ATS in a Form ATS-N
Amendment.
---------------------------------------------------------------------------

The following non-exhaustive examples are provided to illustrate
various applications of proposed Rule 304(a)(1)(iii) that could cause
the Commission to declare a Form ATS-N ineffective because it contains
one or more disclosures that appear to be materially deficient.\291\
For instance, if an NMS Stock ATS discloses an order type on Form ATS-N
but does not describe the key attributes of the order type, such as
time-in-force limitations that can be placed on the ability to execute
the order, the treatment of unfilled portions of orders, or conditions
for cancelling orders in whole or in part, the Form ATS-N would not be
sufficiently detailed. Likewise, if an NMS Stock ATS generally
describes some of its priority rules, but fails to describe conditions
or exceptions to its priority rules, or fails to describe any priority
overlays,\292\ the Form ATS-N would lack sufficient detail. If a Form
ATS-N states that the NMS Stock ATS has only one class of subscribers
but the Commission or its staff learns through discussions (during the
review period) with the NMS Stock ATS or otherwise that the NMS Stock
ATS in fact has several classes of subscribers, or if the Form ATS-N
states that two classes of subscribers are charged the same trading
fees but the Commission or its staff learns through discussions with
the NMS Stock ATS or otherwise that in fact one class receives more
favorable fees than the other, the Form ATS-N would not be accurate. If
a Form ATS-N includes inconsistent information, such as a statement in
one part of the form that the entity uses private feeds to calculate
the NBBO, but in another part of the form it indicates that it uses the
Securities Information Processor (``SIP''), the Form ATS-N would not be
accurate.
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\291\ The Commission notes that these are some, but not
necessarily all, of the types of circumstances that could result in
the Commission declaring a Form ATS-N ineffective under the proposed
rule.
\292\ In other words, if the NMS Stock ATS fails to describe
which order would receive priority when two or more orders are
otherwise on par, such as whether customer orders receive priority
in a price priority system if a customer and non-customer order are
at the same price, the disclosure would not be sufficient.
---------------------------------------------------------------------------

The Commission preliminarily believes that it would be necessary or
appropriate in the public interest, and consistent with the protection
of investors, to declare ineffective a Form ATS-N if it finds, after
notice and opportunity for hearing, that one or more disclosures
reveals non-compliance with federal securities laws, or the rules or
regulations thereunder, including Regulation ATS. The Commission notes
that the responsibility for accurate, current, and complete disclosures
on Form ATS-N lies with the NMS Stock ATS.\293\ The Commission's review
of Form ATS-N would focus on an evaluation of the completeness and
accuracy of the disclosures, and compliance with federal securities
laws, including Regulation ATS. The Commission's evaluation regarding
compliance with federal securities laws would involve a ``red-flag''
review of the Form ATS-N disclosures for apparent non-compliance with
federal securities laws, or other rules or regulations thereunder,
including Regulation ATS, and would focus on the disclosures made on
the Form ATS-N. For example, as a condition to the Rule 3a1-1(a)(2)
exemption, Rule 301(b)(1) of Regulation ATS requires that an ATS
register as a broker-dealer under Section 15 of the Exchange Act.\294\
Section 15(b)(8) of the Exchange Act\295\ prohibits a registered broker
or dealer from effecting a transaction unless the broker or dealer is a
member of a securities association registered pursuant to Section 15A
of the Exchange Act \296\ or effects transactions solely on a national
securities exchange of which it is a member. Therefore, to comply with
Regulation ATS, and thus qualify for the Rule 3a1-1(a)(2) exemption, an
ATS must become a member of an SRO. If an entity were to file a Form
ATS-N before registering as a broker-dealer under Section 15 of the
Exchange Act, the entity would not be in compliance with Rule 301(b)(1)
of Regulation ATS.\297\ Moreover, if the entity were to file a Form
ATS-N before becoming a member of an SRO, the entity would not be in
compliance with Rule 301(b)(1) of Regulation ATS because Section
15(b)(1) provides that a Commission order granting registration is not
effective until the broker-dealer has become a member of a national
securities association registered pursuant to Section 15A of the
Exchange Act,\298\ and the Commission's order granting broker-dealer
registration would not be effective.\299\ The Commission preliminarily
believes that it would be necessary or appropriate in the public
interest, and consistent with the protection of investors, to declare
ineffective a Form ATS-N if it finds, after notice and opportunity for
hearing, that a Form ATS-N reveals non-compliance with Regulation ATS
because such non-compliance would be inconsistent with proposed Rule
304(a), which requires that an NMS Stock ATS

[[Page 81026]]

comply with Rules 300 through 304 (except Rule 301(b)(2)) as a
condition to the exemption from the definition of exchange pursuant to
Rule 3a1-1(a)(2).\300\ As another example, if a Form ATS-N reveals non-
compliance with Rule 612 of Regulation NMS, known as the ``Sub-Penny
Rule,'' which prohibits market participants, including ATSs, from
displaying, ranking, or accepting orders, quotations, or indications of
interest in NMS stock priced in an increment smaller than $0.01,\301\
the Form ATS-N would not be consistent with the proposed Rule because
the NMS Stock ATS would operate in a manner that would violate the
federal securities laws.
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\293\ See infra Section IV.E. and accompanying discussion.
Proposed Rule 304(c)(1) would require NMS Stock ATSs to respond to
each item on Form ATS-N, as applicable, in detail and disclose
information that is accurate, current, and complete.
\294\ 17 CFR 242.301(b)(1).
\295\ 15 U.S.C. 78o(b)(8).
\296\ 15 U.S.C. 78o-3.
\297\ See 17 CFR 301(b)(1). Rule 301(b)(1) requires an ATS to
register as a broker-dealer under Section 15 of the Exchange Act.
\298\ See 15 U.S.C. 78o(b)(1).
\299\ See 17 CFR 242.301(b)(1).
\300\ The Commission notes that determining whether an NMS Stock
ATS qualifies for the exemption from the definition of ``exchange''
would be based on information as it appears in Form ATS-N. If the
Commission were to learn of different information, that
determination may change.
\301\ Specifically, Rule 612(a) of Regulation NMS provides that
``no national securities exchange, national securities association,
alternative trading system, vendor, or broker or dealer shall
display, rank, or accept from any person a bid or offer, an order,
or an indication of interest in any NMS stock priced in an increment
smaller than $0.01 if that bid or offer, order, or indication of
interest is priced equal to or greater than $1.00 per share.'' See
17 CFR 242.612(a).
---------------------------------------------------------------------------

During its review, the Commission and its staff may provide
comments to the entity, and may request that the entity supplement
information in the Form ATS-N or revise its disclosures on Form ATS-
N.\302\ An order declaring a Form ATS-N effective would not constitute
a finding that the NMS Stock ATS's operations are consistent with the
Exchange Act and the rules and regulations thereunder. Rather, the
declaration of effectiveness would only address the issue of whether
the NMS Stock ATS has complied with the requirements of Form ATS-N and
would focus on the disclosures made on the Form ATS-N. The Commission
would not be precluded from later determining that an NMS Stock ATS had
violated the federal securities laws or the rules and regulations
thereunder.
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\302\ The Commission notes, however, that Form ATS-N is intended
to provide regulatory and public transparency. As such, its review
of Form ATS-N will be focused on an evaluation of the completeness
and accuracy of the disclosure thereon, and compliance with federal
securities laws.
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Request for Comment
52. Should Form ATS-N be deemed immediately effective without
Commission action? Why or why not? Please support your arguments.
53. Should Form ATS-N be considered ineffective on filing with the
Commission until the Commission affirmatively declares the Form ATS-N
ineffective? Why or why not? Please support your arguments.
54. Should the process for making a Form ATS-N effective for a
legacy NMS Stock ATS be different from the process for making a Form
ATS-N effective for an NMS Stock ATS that files a Form ATS-N after the
effective date of the proposed rule? Why or why not? Please support
your arguments. If so, how should the processes for the two categories
of NMS Stock ATSs differ?
55. Do you believe that the proposed 120 calendar days after the
effective date of proposed Rule 304 is a reasonable amount of time for
legacy NMS Stock ATSs to complete and file a Form ATS-N? If so, why? If
not, why not, and what amount of time would be reasonable? Please
support your arguments.
56. Do you believe that new NMS Stock ATSs would be at a
competitive disadvantage if existing NMS Stock ATSs were not required
to file a Form ATS-N? Why or why not? Please support your arguments.
57. Do you believe that the proposed 120 calendar day period from
filing with the Commission is a reasonable amount of time for the
Commission to declare a Form ATS-N filed by an NMS Stock ATS that was
not operating as of the effective date of proposed Rule 304 effective
or ineffective? Do you believe the review period would place an undue
burden on the NMS Stock ATS that filed the Form ATS-N? If yes, what
amount of time would be reasonable? Please support your arguments.
58. Should the Commission adopt the proposal to allow a legacy NMS
Stock ATS to continue operations pursuant to an existing filed initial
operation report on Form ATS pending the Commission's review of its
Form ATS-N? Why or why not? Please support your arguments.
59. Do you believe that if a legacy NMS Stock ATS is allowed to
continue operations during the Commission's review of its Form ATS-N
the Commission should make such NMS Stock ATS's Form ATS-N publicly
available upon filing? Why or why not? Please support your arguments.
60. Should the Commission permit existing NMS Stock ATSs to be
exempt from the definition of ``exchange'' by virtue of the NMS Stock
ATS's current Form ATS on file with the Commission and require only new
NMS Stock ATSs to file Form ATS-N? Why or why not? Would this raise
competitive concerns with respect to disparate regulatory treatment of
``new'' and ``legacy'' NMS Stock ATSs? Why or why not? Please support
your arguments.
61. Do you believe that the proposed 90 calendar days for the
Commission to extend the Form ATS-N review period for new NMS Stock
ATSs where the Form ATS-N is unusually lengthy or raises novel or
complex issues is reasonable? Do you believe it would place an undue
burden on the NMS Stock ATS? If so, why, and what amount of time would
be reasonable? Do you believe that the proposed 90 calendar day
extension period disproportionately affects new NMS Stock ATSs? Please
support your arguments.
62. Should the Commission adopt the proposal to declare ineffective
a Form ATS-N if it finds, after notice and opportunity for hearing,
that such action is necessary or appropriate in the public interest,
and is consistent with the protection of investors? Please support your
arguments.
63. Do you believe that the Commission's examples of reasons that
the Commission might declare a proposed Form ATS-N ineffective are
appropriate? If yes, why? If not, why not? Please support your
arguments.
64. Do you believe that the Commission should consider any other
factors in determining whether a Form ATS-N should be declared
effective or ineffective? If so, what are they and why? If not, why
not? Please support your arguments.
65. Should the Commission require public notice and comment before
declaring a Form ATS-N effective or ineffective? Why or why not? Please
support your arguments.
5. Proposed Rule 304(a)(1)(iv): Orders Regarding Form ATS-N
Effectiveness
Proposed Rule 304(a)(1)(iv) would provide that the Commission will
issue an order to declare a Form ATS-N effective or ineffective.
Proposed Rule 304(a)(1)(iv) would also provide that upon the
effectiveness of the Form ATS-N, the NMS Stock ATS may operate pursuant
to the conditions in proposed Rule 304. Proposed Rule 304(a)(1)(iv)
would also provide that if the Commission declares a Form ATS-N
ineffective, the NMS Stock ATS shall be prohibited from operating as an
NMS Stock ATS. Proposed Rule 304(a)(1)(iv) would provide that a Form
ATS-N declared ineffective would not prevent the NMS Stock ATS from
subsequently filing a new Form ATS-N.
Proposed Rule 304(a)(1)(iv) is designed to provide notice to the
public that the NMS Stock ATS that filed a Form ATS-N qualifies for the
exemption provided under Exchange Act Rule 3a1-1(a)(2) and may commence
operations, or if the NMS

[[Page 81027]]

Stock ATS was operating pursuant to a previously filed Form ATS, may
continue to operate as an NMS Stock ATS. For an NMS Stock ATS operating
before the effective date of proposed Rule 304 pursuant to a current
Form ATS, the Form ATS for that NMS Stock ATS would no longer have any
legal effect with respect to the regulatory status of the NMS Stock ATS
upon the Commission declaring its Form ATS-N effective. As a result,
the effective Form ATS-N would supersede and replace the NMS Stock
ATS's previously filed Form ATS; and the NMS Stock ATS would no longer
be subject to Rule 301(b)(2) of Regulation ATS and would not be
required to file a Form ATS cessation of operation report because the
NMS Stock ATS would continue operations under the effective Form ATS-N.
Declaring a Form ATS-N ineffective would provide the public with notice
that an entity that filed a Form ATS-N does not qualify for the
exemption under Exchange Act Rule 3a1-1(a)(2) and would be precluded
from operating as an NMS Stock ATS.
Under Proposed Rule 304(a)(1)(iv), an entity that had filed a Form
ATS-N that had been declared ineffective by the Commission would be
able to subsequently file a new Form ATS-N. This would allow an entity
an opportunity to attempt to address any disclosure deficiencies or
compliance issues that caused the first Form ATS-N to be declared
ineffective.
Request for Comment
66. Do you believe that a Commission order declaring a Form ATS-N
ineffective would have an unduly prejudicial effect on an entity when
it refiles Form ATS-N, even where the Commission declares effective the
refiled Form ATS-N? Why or why not? Please support your arguments.
6. Proposed Rule 304(a)(2): Form ATS-N Amendments
The Commission is proposing Rule 304(a)(2) to provide the
requirements for filing a Form ATS-N Amendment, which would be a public
document that would provide information about the operations of the NMS
Stock ATS and the activities of its broker-dealer operator and its
affiliates. The information required to be filed on proposed Form ATS-N
is designed to enable market participants to make more informed
decisions about routing their orders to the NMS Stock ATS. The
Commission's proposal to require such public disclosure is designed, in
part, to bring operational transparency of NMS Stock ATSs more in line
with the operational transparency of national securities
exchanges.\303\ Proposed Form ATS-N is also designed to provide
information to the Commission that would allow it to monitor
developments among NMS Stock ATSs and carry out its oversight functions
of protecting investors and the public interest. Given these intended
uses, the Commission believes that it is important for an NMS Stock ATS
to maintain an accurate, current, and complete.
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\303\ See, e.g., supra notes 158-162 and accompanying text
(discussing generally differences in disclosure requirements for
national securities exchanges and ATSs). The Commission also notes
that Rule 19b-4(m)(1) of the Exchange Act (17 CFR 240.19b-4(m)(1)),
requires each SRO to post and maintain a current and complete
version of its rules on its Web site. This requirement was designed
to assure that SRO members and other interested persons have ready
access to an accurate, up-to-date version of SRO rules. See
Securities Exchange Act Release No. 50486 (October 5, 2004), 69 FR
60287 (October 8, 2004) (adopting amendments to Rule 19b-4 under the
Act).
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The Commission is proposing Rule 304(a)(2)(i) to require an NMS
Stock ATS to amend an effective Form ATS-N in accordance with the
instructions therein: (A) At least 30 calendar days prior to the date
of implementation of a material change to the operations of the NMS
Stock ATS or to the activities of the broker-dealer operator or its
affiliates that are subject to disclosure on Form ATS-N; (B) within 30
calendar days after the end of each calendar quarter to correct any
other information that has become inaccurate for any reason and has not
been previously reported to the Commission as a Form ATS-N Amendment;
or (C) promptly, to correct information in any previous disclosure on
Form ATS-N, after discovery that any information filed under Rule
304(a)(1)(i) or (a)(2)(i)(A) or (B) was inaccurate or incomplete when
filed.\304\
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\304\ The Commission notes that ATSs currently are required to
file amendments to the disclosures describing their operations on
Form ATS (see supra Section II.B describing the current requirements
applicable to ATSs), and that national securities exchanges, as
SROs, are required to file proposed rule changes with the Commission
before implementing such changes, even if such changes are non-
controversial (see generally supra note 161 and accompanying text).
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Proposed Rule 304(a)(2)(ii) would provide that the Commission will,
by order, if it finds that such action is necessary or appropriate in
the public interest, and is consistent with the protection of
investors, declare ineffective any Form ATS-N Amendment filed pursuant
to Rule 304(a)(2)(i)(A) through (C) no later than 30 calendar days from
filing with the Commission. If the Commission declares a Form ATS-N
Amendment ineffective, the NMS Stock ATS shall be prohibited from
operating pursuant to the ineffective Form ATS-N Amendment. The NMS
Stock ATS could, however, continue to operate pursuant to a Form ATS-N
that was previously declared effective. A Form ATS-N Amendment declared
ineffective would not prevent the NMS Stock ATS from subsequently
filing a new Form ATS-N Amendment that resolves the disclosure
deficiency that resulted in the declaration of ineffectiveness.
a. Proposed Rule 304(a)(2)(i)(A): Material Amendments
Proposed Rule 304(a)(2)(i)(A) would, in part, require an NMS Stock
ATS to amend an effective Form ATS-N in accordance with the
instructions therein at least 30 calendar days prior to the date of
implementation of a material change to the operations of the NMS Stock
ATS or to the activities of the broker-dealer operator or its
affiliates that are subject to disclosure on Form ATS-N. Proposed Rule
304(a)(2)(i)(A) is designed to provide advance notice to the Commission
and market participants of a material change to the operations of the
NMS Stock ATS and the disclosures regarding the activities of the
broker-dealer operator or its affiliates. The Commission notes that
under current Rule 301(b)(2)(ii) of Regulation ATS, ATSs are required
to file an amendment on Form ATS at least 20 calendar days prior to
implementing a material change to the operation of the ATS.\305\ The
Commission is proposing to apply a longer time period of 30 days in
proposed Rule 304(a)(2)(i)(A) due to the additional detail and
information that would be provided in response to the solicitations on
Form ATS-N as compared to Form ATS. As stated in the Regulation ATS
Adopting Release, the Commission believes that requiring an ATS to
provide the Commission advance notice of certain changes to its
operation is a reasonable means for the Commission to carry out its
market oversight and investor protection functions.\306\ The Commission
preliminarily believes that the 30 calendar day advance notice period
before material changes are implemented would give the Commission the
opportunity to make inquiries to clarify any questions that might arise
or to take appropriate action, if appropriate, regarding problems that

[[Page 81028]]

may impact market participants, including investors, before the NMS
Stock ATS implemented the changes. Because material changes would be
publicly disclosed upon filing, the 30 calendar day advance notice
would also allow market participants to evaluate the changes before
implementation and assess the NMS Stock ATS as a continued, or
potential, trading venue.\307\
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\305\ See 17 CFR 242.301(b)(2)(ii).
\306\ See Regulation ATS Adopting Release, supra note 7, at
70864. The Commission also stated that ``[i]f a system were only
required to provide notice after it commenced operations, the
Commission would have no notice of potential problems that might
impact investors before the system begins to operate.'' Id.
\307\ See infra Section IV.D (explaining proposed public
disclosure requirements for Form ATS-N filings under proposed Rule
304(b)(2)).
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The Commission preliminarily believes that a change to the
operations of an NMS Stock ATS, or the disclosures regarding the
activities of the broker-dealer operator and its affiliates, would be
material if there is a substantial likelihood that a reasonable market
participant would consider the change important when evaluating the NMS
Stock ATS as a potential trading venue. When the Commission adopted
Regulation ATS in 1998, it noted that ATSs ``implicitly make
materiality decisions in determining when to notify their subscribers
of changes.'' \308\ The Commission is proposing to modify the
conditions to the exemption to the definition of ``exchange'' under
Rule 3a1-1(a)(2) for NMS Stock ATSs, which includes, among other
things, the increased disclosure of information required on Form ATS-N.
Because proposed Form ATS-N would be a public document, the Commission
preliminarily believes that the use of this materiality standard
discussed below would be appropriate as it is similar to materiality
standards applied in the context of securities disclosures made
pursuant to other Commission rules.\309\
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\308\ See id. at 70864.
\309\ See, e.g., Securities Exchange Act Release No. 43154
(August 15, 2000), 65 FR 51716, 51721 (August 24, 2000) (Selective
Disclosure and Insider Trading) (stating that to satisfy the
materiality requirement, there must be a substantial likelihood that
a fact would be viewed by the reasonable investor as having
significantly altered the total mix of information made available);
see also Regulation C under the Securities Act of 1933, 17 CFR
230.405 (``The term material, when used to qualify a requirement for
the furnishing of information as to any subject, limits the
information required to those matters to which there is a
substantial likelihood that a reasonable investor would attach
importance in determining whether to purchase the security
registered.'').
---------------------------------------------------------------------------

To determine whether a change is material, and thus subject to the
30-day advance notice requirement, an NMS Stock ATS would need to
consider all the relevant facts and circumstances, including the reason
for the change and how it might impact the NMS Stock ATS and its
subscribers, as well as market participants that may be evaluating the
NMS Stock ATS as a potential trading venue. Scenarios that are
particularly likely to implicate a material change are (1) a broker-
dealer operator or its affiliates beginning to trade on the NMS Stock
ATS; (2) a change to the broker-dealer operator's policies and
procedures governing the written safeguards and written procedures to
protect the confidential trading information of subscribers pursuant to
Rule 301(b)(10)(i) of Regulation ATS; (3) a change to the types of
participants on the NMS Stock ATS; (4) the introduction or removal of a
new order type on the NMS Stock ATS; (5) a change to the order
interaction and priority procedures; (6) a change to the segmentation
of orders and participants; (7) a change to the manner in which the NMS
Stock ATS displays orders or quotes; and (8) a change of a service
provider to the operations of the NMS Stock ATS that has access to
subscriber confidential subscriber trading information. This list,
however, is not intended to be exhaustive, and the Commission does not
mean to imply that other changes to the operations of the NMS Stock ATS
or to the activities of the broker-dealer operator or its affiliates
could not constitute a material change. Rather an NMS Stock ATS should
be expected to consider the facts and circumstances of every change to
determine whether advance notice is required.
Request for Comment
67. Do you believe that the Commission's proposal to require an NMS
Stock ATS to file a Form ATS-N Amendment at least 30 calendar days
before implementing a material change is reasonable? Why or why not?
Please support your arguments. Do you believe that the advance notice
period for material change on Form ATS-N should be shorter (e.g., 20
calendar days, as is the case on current Form ATS) or longer (e.g., 45
calendar days)? Please support your arguments. Do you believe it would
place an undue burden on the NMS Stock ATS? If so, why, and how much
advance notice, if any, would be reasonable? Please support your
arguments.
68. Are the enumerated scenarios each particularly likely to
constitute a material change, such that the Commission and the public
should be provided with 30 calendar days advance notice pursuant to
proposed Rule 304(a)(2)(i)(A)? If yes, why? If not, why not? Are there
any other scenarios generally likely to constitute a material change?
If so, why, and what are those scenarios? Please support your
arguments.
69. Do you believe that the Commission should propose separate
tiers of material changes (e.g., based on the significance or number of
changes) to the operations of the NMS Stock ATS or disclosures on Form
ATS-N and that a different materiality analysis should be applied
depending on the tier of change to the operations of the NMS Stock ATS
or disclosures on Form ATS-N? Why or why not? Please support your
arguments.
70. Do you believe that any types of material changes to an NMS
Stock ATS should be eligible to be implemented immediately upon filing?
If so, what are such scenarios (regardless of facts and circumstances)?
Please support your arguments.
71. Do you believe that certain changes to the operations of the
NMS Stock ATS or to the activities of the broker-dealer operator or its
affiliates that would be subject to disclosure on Form ATS-N should
always be considered material changes? Why or why not? If so, please
explain in detail those changes to the operations of the NMS Stock ATS
or to the activities of the broker-dealer operator or its affiliates
that would be subject to disclosure on Form ATS-N that should always be
considered material changes.
72. Do you believe that certain changes to the operations of the
NMS Stock ATS or to the activities of the broker-dealer operator or its
affiliates on Form ATS-N, such as order types, should be subject to
Commission approval? Why or why not? If so, please identify such
changes and support your argument.
73. Should the Commission require public notice and comment for
determinations of ineffectiveness of Form ATS Amendments? Why or why
not? Please support your arguments.
74. Do you believe that the Commission should make public on its
Web site upon filing a Form ATS-N Amendment for a material change, as
proposed? Why or why not? Please support your arguments. Do you believe
that there should be a delay in when the Form ATS-N Amendment for a
material change is made public? Why or why not? Please support your
arguments.
75. Do you believe that making an NMS Stock ATS's Form ATS-N
Amendment public upon filing would affect competition? Why or why not?
Please support your arguments. If so, how?

[[Page 81029]]

b. Proposed Rule 304(a)(2)(i)(B): Periodic Amendments
Proposed Rule 304(a)(2)(i)(B) would require an NMS Stock ATS to
amend an effective Form ATS-N within 30 calendar days after the end of
each calendar quarter to correct any other information that has become
inaccurate for any reason and has not been previously reported to the
Commission as a Form ATS-N Amendment.\310\ The proposed rule would
enable NMS Stock ATSs to update information from the preceding quarter
that does not constitute a material change in the NMS Stock ATS's Form
ATS-N filing.\311\ The Commission preliminarily believes that providing
a mechanism for NMS Stock ATSs to disclose changes to their operations
or to update information that does not constitute a material change
within 30 calendar days after the end of each calendar quarter would
tailor the reporting burden on NMS Stock ATSs to the degree of
significance of the change in a manner that does not compromise the
Commission's oversight of NMS Stock ATSs or its ability to protect
investors and the public interest. The Commission preliminarily
believes that allowing NMS Stock ATSs to implement such changes
immediately would allow Stock ATSs to make periodic changes to their
operations without delay, while at the same time provide disclosure
about those changes to market participants and the Commission within an
appropriate time frame.
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\310\ The Commission notes that this requirement would be
substantively identical to the current requirement under Rule
301(b)(2)(iii) of Regulation ATS. See 17 CFR 242.301(b)(2)(iii).
\311\ That Form ATS-N Amendment, filed pursuant to proposed Rule
304(a)(2)(i)(B), would become public upon filing. See infra Section
IV.D (explaining proposed public disclosure requirements for Form
ATS-N filings under proposed Rule 304(b)(2)).
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Request for Comment
76. Should the Commission require NMS Stock ATSs to file a Form
ATS-N Amendment for periodic changes at the end of each calendar
quarter? Why or why not? Please support your arguments.
77. Do you believe that the Commission should require an NMS Stock
ATS to file a Form ATS-N Amendment before implementing a periodic
change? Why or why not? If so, what period of time should an NMS Stock
ATS be required to wait before implementing a periodic change? Please
explain in detail.
78. Do you believe that 30 calendar days after the end of each
calendar quarter is a reasonable amount of time for NMS Stock ATSs to
correct information that does not constitute a material change? If so,
why? If not, why not, and what amount of time would be reasonable?
Please support your arguments. Do you believe there are any processes
the Commission should consider for correcting information on a Form
ATS-N that does not constitute a material change? If so, what are such
processes? Please explain in detail.
79. Do you believe that certain changes to the operations of the
NMS Stock ATS or to the activities of the broker-dealer operator or its
affiliates that would be subject to disclosure on Form ATS-N should
always be considered periodic changes? Why or why not? If so, please
explain in detail those changes to the operations of the NMS Stock ATS
or to the activities of the broker-dealer operator or its affiliates
that should always be considered periodic changes.
Do you believe that the Commission should make public on its Web
site upon filing a Form ATS-N Amendment for a periodic change? Why or
why not? Please support your arguments. Do you believe that there
should be a delay in when the Form ATS-N Amendment for a periodic
change is made public? Why or why not? Please support your arguments.
c. Proposed Rule 304(a)(2)(i)(C): Amendment To Correct Information on
Previously Filed Form ATS-N
Proposed Rule 304(a)(2)(i)(C) would require an NMS Stock ATS to
amend an effective Form ATS-N promptly to correct information in any
previous disclosure on Form ATS-N after discovery that any information
filed in a Form ATS-N or Form ATS-N Amendment was inaccurate or
incomplete when filed.\312\ For example, if an NMS Stock ATS discovers
that information that it previously disclosed on Form ATS-N was
incorrect, such as an address or contact information, or that
information it previously disclosed was incomplete, such as where the
NMS Stock ATS failed to fully describe the characteristics of an order
type, it would be required to promptly amend its Form ATS-N. Although
the Commission recognizes that a change disclosed on a Form ATS-N
Amendment that is reported pursuant to proposed Rule 304(a)(2)(i)(C)
would likely be already implemented by the NMS Stock ATS, the
Commission believes that it would benefit market participants to
receive accurate and complete information about the NMS Stock ATS so
they can use the information in deciding where to route their
orders.\313\
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\312\ The Commission notes that this requirement would be
substantively identical to Rule 301(b)(2)(iv) of Regulation ATS that
an ATS ``promptly file an amendment on Form ATS correcting
information previously reported on Form ATS after discovery that any
information filed'' in a Form ATS initial operation report or
amendment ``was inaccurate when filed.'' See 17 CFR
242.301(b)(2)(iv).
\313\ That Form ATS-N Amendment, filed pursuant to proposed Rule
304(a)(2)(i)(C), would become public upon filing. See infra Section
IV.D (explaining proposed public disclosure requirements for Form
ATS-N filings under proposed Rule 304(b)(2)).
---------------------------------------------------------------------------

Request for Comment
80. Do you believe that making amendments ``promptly'' is a
reasonable requirement for NMS Stock ATSs to correct information that
was inaccurate or incomplete when filed? If so, why? If not, why not,
and what amount of time would be reasonable? Please support your
arguments.
81. Do you believe there are any other processes the Commission
should consider for correcting information on Form ATS-N that was
inaccurate at the time it was filed? If so, what are such processes?
Please explain in detail.
82. Do you believe that the Commission's proposal to provide an NMS
Stock ATS the opportunity to correct information that was inaccurate or
incomplete when filed creates an unreasonable risk to market
participants that an NMS Stock ATS might fail to provide accurate,
current, and complete information on Form ATS-N when filing the form?
Why or why not? Please support your arguments.
d. Proposed Rule 304(a)(2)(ii): Commission Review of Form ATS-N
Amendments
The Commission is proposing Rule 304(a)(2)(ii) to provide that the
Commission will, by order, if it finds that such action is necessary or
appropriate in the public interest, and is consistent with the
protection of investors, declare ineffective any Form ATS-N Amendment
filed pursuant to Rule 304(a)(2)(i)(A) through (C) no later than 30
calendar days from filing with the Commission.\314\ The Commission
could, for example, declare ineffective a Form ATS-N Amendment if one
or more disclosures on the amended Form ATS-N are materially deficient
with respect to their accuracy, currency, completeness, or fair
presentation. The Commission is concerned that an NMS Stock ATS whose
Form ATS-N filing was declared effective could file a Form

[[Page 81030]]

ATS-N Amendment that contains materially deficient disclosures. The
Commission is also concerned that market participants could use this
information in connection with their evaluation of an NMS Stock ATS and
potentially be confused or misinformed about the operations of an NMS
Stock ATS. The Commission preliminarily believes that a filed Form ATS-
N should contain detailed disclosures that are accurate, current, and
complete and therefore is proposing a mechanism for it to declare
amendments ineffective as appropriate.\315\
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\314\ A filed Form ATS-N Amendment that contains technical
deficiencies, such as missing pages or one in which the entity does
not respond to all questions, including all sub-questions, would not
be complete and would be returned to the NMS Stock ATS. See also 17
CFR 240.0-3.
\315\ See proposed Rule 304(c)(1).
---------------------------------------------------------------------------

The Commission could also declare ineffective a Form ATS-N
Amendment if it finds that such action is necessary or appropriate in
the public interest, and is consistent with the protection of
investors, because the amendment describes a change that, under a ``red
flag'' review, would not comply with the federal securities laws or the
rules or regulations thereunder, including Regulation ATS. The
Commission preliminarily believes that it would be hindered in
protecting investors and maintaining fair and orderly markets if an NMS
Stock ATS were allowed to implement or continue the use of a service,
functionality, or procedure that does not comply with the federal
securities laws or the rules or regulations thereunder, including
Regulation ATS.
Under proposed Rule 304(a)(2)(ii), the Commission could declare a
Form ATS-N Amendment ineffective within 30 calendar days from filing
with the Commission. During its review of a Form ATS-N Amendment, the
Commission and its staff may provide comments to the NMS Stock ATS, and
may request that the NMS Stock ATS supplement information in the Form
ATS-N Amendment or revise its disclosures on the Form ATS-N Amendment.
Like the Commission's review of a Form ATS-N initially filed by an
entity with the Commission,\316\ the Commission notes that its review
of a Form ATS-N Amendment would focus on the disclosures made on the
Form ATS-N. The Commission would not be precluded from later
determining that an NMS Stock ATS had violated the federal securities
laws or the rules and regulations thereunder. The Commission
preliminarily believes that the 30 calendar day review period would
provide the Commission with adequate time to review the Form ATS-N
Amendment, discuss the changes with the broker-dealer operator as
explained above and decide whether to declare the Form ATS-N Amendment
ineffective.
---------------------------------------------------------------------------

\316\ See supra Section IV.C.
---------------------------------------------------------------------------

Under proposed Rule 304(a)(2)(ii), if the Commission declares a
Form ATS-N Amendment ineffective, the NMS Stock ATS would be prohibited
from operating pursuant to the ineffective Form ATS-N Amendment. As
discussed above, under proposed Rule 304(a)(2)(i), an NMS Stock ATS
must amend its Form ATS-N at least 30 days before implementing a
material change to the operations of the NMS Stock ATS or to the
activities of the broker-dealer operator or its affiliates that are
subject to disclosure on Form ATS-N, or within 30 calendar days after
the end of each calendar quarter to correct any other information that
has become inaccurate for any reason and has not been previously
reported to the Commission as a Form ATS-N Amendment. The Commission
preliminarily believes the proposed rule strikes a proper balance
between, on the one hand, providing an NMS Stock ATS with the
flexibility to implement a change to its operations without unnecessary
delay, and on the other hand, giving the Commission time to adequately
review Form ATS-N Amendments and carry out its oversight functions and
responsibilities.\317\
---------------------------------------------------------------------------

\317\ The Commission also preliminarily believes that the
proposed process that would permit the Commission to declare Form
ATS-N Amendments ineffective, even if the change disclosed in the
Form ATS-N Amendments has already been implemented, would be
consistent with better aligning the Commission's oversight of NMS
Stock ATSs with its oversight of national securities exchanges. The
Commission notes, for example, that pursuant to Section 19(b)(3)(C)
of the Exchange Act, the Commission, at any time within the 60-day
period beginning on the date of filing of a proposed rule change
filed by a national securities exchange, ``summarily may temporarily
suspend the change in the rules of the [SRO] made thereby, if it
appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors,
or otherwise in furtherance of the purposes of [the Act].'' 15
U.S.C. 78s(b)(3)(C). As a result, the Commission may suspend a
national securities exchange's proposed rule change, even if the
change was eligible to be effective upon filing with the Commission.
---------------------------------------------------------------------------

Under proposed Rule 304(a)(1)(iv), an NMS Stock ATS that had filed
a Form ATS-N Amendment that has been declared ineffective would be able
to subsequently file a new Form ATS-N Amendment. This would allow an
NMS Stock ATS to attempt to address any disclosure deficiencies or
compliance issues that caused a Form ATS-N Amendment to be declared
ineffective.
Request for Comment
83. Should the Commission adopt the proposal to declare ineffective
any Form ATS-N Amendment if it finds that such action is necessary or
appropriate in the public interest, and is consistent with the
protection of investors? Why or why not? Please support your arguments.
84. Do you believe that the Commission should affirmatively declare
material amendments to Form ATS-N effective? Why or why not? If so, do
you believe the Commission should declare material changes to Form ATS-
N effective before the NMS Stock ATS implements the material change?
Why or why not? Please support your arguments.
85. Do you believe that the Commission should provide a longer time
period for the Commission to review material amendments to Form ATS-N
(e.g., 45 calendar days) and a shorter period of time for the NMS Stock
ATS to be able to implement the material change (e.g., 10, 20, or 30
calendar days)? Why or why not? Please support your arguments. Do you
believe that a longer Commission review period coupled with a shorter
advance notice period would balance the burdens on an NMS Stock ATS
that would be required to provide advance notice of a material change
to the operations of the NMS Stock ATS with the time necessary for the
Commission to review a Form ATS-N material amendment? Why or why not?
Please support your arguments. Do you believe a longer Commission
review period coupled with a shorter advance notice period would lead
to practical challenges (e.g., confusion among market participants or
difficulty to NMS Stock ATSs to unwind a change)? Please support your
arguments.
86. Do you believe that a Form ATS-N Amendment should become
effective by operation of rule if the Commission does not affirmatively
declare it ineffective? Why or why not? Please support your arguments.
87. Do you believe that the proposed 30 calendar days from filing
with the Commission is a reasonable time period for the Commission to
declare a Form ATS-N Amendment ineffective? Do you believe it would
place an undue burden on the NMS Stock ATS that filed the Form ATS-N
Amendment? If so, why, and what would be a reasonable amount of time?
Please support your arguments. Do you believe that a longer period of
time (e.g., 45 days) for the Commission to declare a Form ATS-N
Amendment ineffective would be reasonable? Why or why not? Please
support your arguments. Do you believe that a longer period of time
would place an undue burden on the NMS Stock ATS that filed the Form
ATS-N Amendment? Why or why not? Please support your arguments.

[[Page 81031]]

88. Do you believe the Commission should adopt a process to extend
its review period for a Form ATS-N Amendment similar to the processes
being proposed under proposed Rule 304(a)(1)(ii) for initial Form ATS-N
filings? Why or why not? Please support your arguments. If so, how long
should the extension of the review period be (e.g., 10, 15, 20, or 30
calendar days) and should the process apply to material amendments,
periodic amendments, amendments to correct information in any previous
Form ATS-N filing that was inaccurate or incomplete when filed, or all
categories of Form ATS-N Amendments? Should the process differ
depending on the category of amendment? Please be specific.
89. Should the Commission adopt the proposal that a Form ATS-N
Amendment should become effective without the Commission issuing an
order declaring effective the relevant Form ATS-N Amendment? Do you
believe that the lack of a Commission order declaring a Form ATS-N
Amendment ineffective within 30 calendar days from filing would provide
an NMS Stock ATS sufficient notice that a Form ATS-N Amendment has
become effective? Why or why not? Please support your arguments.
90. Do you believe that a determination of ineffectiveness of a
Form ATS-N Amendment should be subject to notice and hearing, as is the
case with initial determinations about Form ATS-N? Why or why not?
Please support your arguments.
7. Proposed Rule 304(a)(3): Notice of Cessation
Proposed Rule 304(a)(3) would require an NMS Stock ATS to notice
its cessation of operations on Form ATS-N at least 10 business days
before the date the NMS Stock ATS ceases to operate as an NMS Stock
ATS.\318\ The notice of cessation would cause the Form ATS-N to become
ineffective on the date designated by the NMS Stock ATS. Requiring an
NMS Stock ATS to file a Form ATS-N notice of cessation at least 10
business days before the date the NMS Stock ATS ceases operations would
provide notice to the public and the Commission that the NMS Stock ATS
intends to cease operations. By making the notices of cessation public,
as discussed herein,\319\ the Commission preliminarily believes that
all market participants that had routed orders to the NMS Stock ATS
would be able to make arrangements to select alternative routing
destinations for their orders. Regulation ATS currently requires an ATS
to ``promptly file a cessation of operations report on Form ATS'' upon
ceasing to operate.\320\ Proposed Rule 304(a)(3) would require an NMS
Stock ATS to disclose on Form ATS-N the date it will cease operating at
least 10 business days before doing so. The Commission preliminarily
believes that the proposal to require NMS Stock ATSs to provide notice
at least 10 business days before the date an NMS Stock ATS ceases to
operate is a reasonable period for the NMS Stock ATS to provide market
participants and the Commission with notice that it intends to cease
operations, as market participants would have adequate time to find and
select other routing destinations for their orders.
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\318\ The Commission would post a notice of cessation upon
completing its review for accuracy and completion.
\319\ See infra Section V (discussing public disclosure of
filings on Form ATS-N, including cessation of operation reports).
\320\ 17 CFR 242.301(b)(2)(v).
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Request for Comment
91. Should the Commission require an NMS Stock ATS to give notice
that it intends to cease operations 10 business days or more before
ceasing operations as an NMS Stock ATS? If so, why and how much advance
notice is appropriate? If not, why not? Please support your arguments.
92. Should the Commission allow an NMS Stock ATS to notice its
cessation of operations after it has ceased operations, as is currently
the requirement under Regulation ATS, or at the same time that it
ceases operations? If so, why and how long after the NMS Stock ATS has
ceased operations? If not, why not? Please support your arguments.
93. Should the Commission create a process to revoke the exemption
from Rule 3a1-1(a)(2) if the NMS Stock ATS reports no volume for two
consecutive quarters, four consecutive quarters, eight consecutive
quarters, or over some other time period? Why or why not? Are there any
other circumstances under which the Commission should revoke the
exemption if the NMS Stock ATS appears to be inactive? Please support
your arguments.
8. Proposed Rule 304(a)(4): Suspension, Limitation, or Revocation of
the Exemption From the Definition of Exchange
To rely on an exemption from the Exchange Act or the rules and
regulations thereunder granted by the Commission, the person seeking
the exemption must comply with the conditions to the exemption
established by the Commission. A person that fails to comply with those
conditions would therefore fall outside of the scope of the
exemption.\321\ In adopting Exchange Act Rule 3a1-1(a)(2) and
Regulation ATS, the Commission established conditions under which an
ATS would be exempt from the definition of ``exchange,'' and therefore
would not be required to register as a national securities exchange.
Rule 3a1-1(a)(2) provides that a system that meets the criteria of Rule
3b-16 is exempt from the definition of ``exchange'' on condition that
the system complies with Regulation ATS. As discussed above, the
Commission is proposing to expand the set of conditions that an NMS
Stock ATS would need to satisfy to qualify for the exemption provided
under Rule 3a1-1(a)(2).
---------------------------------------------------------------------------

\321\ See proposed Rule 304(a)(4)(iv).
---------------------------------------------------------------------------

The Commission is proposing to amend Regulation ATS to include
proposed Rule 304(a)(4), to provide a process for the Commission to
suspend for a period not exceeding twelve months,\322\ limit, or revoke
an NMS Stock ATS's exemption from the definition of the term exchange
pursuant to Rule 3a1-1(a)(2) under certain circumstances. Regulation
ATS currently does not provide a process for the Commission to suspend,
limit, or revoke the exemption under which an ATS operates other than
pursuant to the Commission's general enforcement authority.\323\ The
Commission is proposing Rule 304(a)(4)(i), which would provide that the
Commission will, by order, if it finds, after notice and opportunity
for hearing, that such action is necessary or appropriate in the public
interest, and is consistent with the protection of investors, suspend
for

[[Page 81032]]

a period not exceeding twelve months, limit, or revoke an NMS Stock
ATS's exemption from the definition of ``exchange'' pursuant to Rule
3a1-1(a)(2).\324\ Proposed Rule 304(a)(4)(ii) would make clear that if
an NMS Stock ATS's exemption is suspended or revoked pursuant to
proposed Rule 304(a)(4)(i), the NMS Stock ATS would be prohibited from
operating pursuant to the exemption from the definition of ``exchange''
provided under Rule 3a1-1(a)(2); if an NMS Stock ATS's exemption is
limited pursuant to proposed Rule 304(a)(4)(i), the NMS Stock ATS would
be prohibited from operating in a manner inconsistent with the terms
and conditions of the Commission order.
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\322\ The proposed limitation on the time frame for suspension
is consistent with federal securities law provisions pursuant to
which the Commission may suspend the activities or registration of a
regulated entity. See, e.g., Section 15(b)(4) (15 U.S.C. 78o(b)(4))
and 15B(c)(2) (15 U.S.C. 78o-4(c)(2)).
\323\ See generally Exchange Act Section 21C (15 U.S.C 78u-3).
Use of the proposed process whereby the Commission could suspend,
limit, or revoke an NMS Stock ATS's Rule 3a1-1(a)(2) exemption would
not preclude the Commission from using its general enforcement
authority, or other specific enforcement authority that may be
applicable such as, for example, pursuant to Section 15(b)(4) and
15(c) (15 U.S.C. 78o(b)(4); 15 U.S.C. 78o(c)). Rather, it would
provide an additional means of helping to ensure that NMS Stock ATSs
that no longer qualify for the Rule 3a1-1(a)(2) exemption are unable
to take advantage of it. For example, if an NMS Stock ATS failed to
file a Form ATS-N Amendment to disclose material changes to the
operation of the NMS Stock ATS, the Commission could invoke the
process to suspend, limit or revoke the NMS Stock ATS's exemption,
but would not be precluded from bringing an action against the
broker-dealer operator of the NMS Stock ATS for failing to comply
with Rule 304(a)(2), or violating the antifraud provisions of the
federal securities laws.
\324\ See proposed Rule 304(a)(4)(i).
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The Commission preliminarily believes that it is appropriate to
provide a process by which the Commission may, by order, suspend,
limit, or revoke an NMS Stock ATS's exemption from the definition of
``exchange'' if the NMS Stock ATS is operating in a manner such that
the exemption from the definition of ``exchange'' for the NMS Stock ATS
is not necessary or appropriate in the public interest, or consistent
with the protection of investors. For example, in making a
determination as to whether suspension, limitation, or revocation of an
NMS Stock ATS's exemption is necessary or appropriate in the public
interest, and is consistent with the protection of investors, the
Commission would take into account whether the entity no longer meets
the definition of NMS Stock ATS under Rule 300(a)(k), does not comply
with the conditions to the exemption (in that it fails to comply with
any part of Regulation ATS, including proposed Rule 304), or otherwise
violates any provision of federal securities laws.
The Commission preliminarily believes, for example, that it would
be appropriate to provide for the suspension, limitation, or revocation
of an NMS Stock ATS's exemption from the definition of ``exchange''
pursuant to Rule 3a1-1(a)(2) if the Commission finds that an NMS Stock
ATS no longer meets the definition of ``NMS Stock ATS.'' \325\ If a
system does not meet the functional test of an ``exchange'' under Rule
3b-16, it would not be eligible for the exemption from the definition
of ``exchange'' pursuant to Rule 3a1-1(a)(2) as it is not an
``exchange'' in the first instance.\326\ If an NMS Stock ATS no longer
meets the criteria of Rule 3b-16--or meets the criteria of Rule 3b-16
but no longer effects transactions in NMS stocks--or otherwise does not
meet the definition of an alternative trading system, it would not
continue to be eligible for the exemption in Rule 3a1-1(a)(2) even if
it had met the definition of an NMS Stock ATS at the time that the
Commission declared its Form ATS-N effective. Permitting a system to
operate that does not otherwise meet the definition of an NMS Stock ATS
would deny investors appropriate regulatory protection and could also
be misleading to investors.
---------------------------------------------------------------------------

\325\ The Commission preliminarily believes that a determination
as to whether to suspend, limit, or revoke an NMS Stock ATS's
exemption would depend on the particular facts and circumstances;
however, the Commission also preliminarily believes that revocation
would be the appropriate course of action if the Commission finds
that an entity no longer meets the definition of NMS Stock ATS or
otherwise satisfies the criteria of the functional test under Rule
3b-16.
\326\ See supra Section IV.A. (discussing the definition of NMS
Stock ATS and the availability of the Rule 3a1-1(a)(2) exemption).
---------------------------------------------------------------------------

The Commission also preliminarily believes that it would be
appropriate to provide for the suspension, limitation, or revocation of
an NMS Stock ATS's exemption from the definition of exchange pursuant
to Rule 3a1-1(a)(2) if, for example, the Commission finds that an NMS
Stock ATS fails to comply with any part of Regulation ATS, including
proposed Rule 304. As discussed in the Regulation ATS Adopting Release,
instead of imposing requirements applicable to national securities
exchanges, the Commission adopted enhanced regulation for ATSs that
would provide more protections for investors who used the systems.\327\
To the extent that an NMS Stock ATS fails to comply with the conditions
set forth in Regulation ATS, investors would no longer be protected by
the conditions of Regulation ATS or the protections afforded by the
provisions of the Exchange Act and the rules thereunder that apply to
national securities exchanges. For example, pursuant to proposed Rule
304(a)(4)(i), the Commission would suspend, limit, or revoke an NMS
Stock ATS's exemption from the definition of ``exchange'' if it finds,
after notice and opportunity for hearing, that such action is necessary
or appropriate in the public interest, and is consistent with the
protection of investors, because the NMS Stock ATS is no longer a
registered broker-dealer, which is a requirement of Regulation
ATS.\328\ The Commission would also suspend, limit, or revoke an NMS
Stock ATS's exemption if the Commission finds, after notice and
opportunity for hearing, that such action is necessary or appropriate
in the public interest, and is consistent with the protection of
investors, because, for example, the ATS's Form ATS-N contains
inaccurate or incomplete responses. Proposed Form ATS-N would be a
public reporting document that is designed to provide the Commission
and market participants with information about the operations of the
NMS Stock ATS and the circumstances under which the activities of the
broker-dealer operator of the NMS Stock ATS and its affiliates may give
rise to potential conflicts of interest. The Commission preliminarily
believes that market participants would likely use the information
provided on Form ATS-N to make decisions about where to route orders.
The Commission is concerned that information provided on Form ATS-N
that is inaccurate or incomplete could misinform or mislead market
participants about the operations of the NMS Stock ATS or the
activities of the broker-dealer operator, including how their orders
may be handled and executed, and impact their decisions about where
they should route their orders. To prevent an NMS Stock ATS from
potentially misinforming or misleading market participants about the
operations of the system, proposed Rule 304(a)(4) would provide a
process for the Commission to suspend, limit, or revoke the NMS Stock
ATS's Rule 3a1-1(a)(2) exemption.
---------------------------------------------------------------------------

\327\ See Regulation ATS Adopting Release, supra note 7, at
70857.
\328\ See 17 CFR 242.301(b)(1).
---------------------------------------------------------------------------

Additionally, the Commission preliminarily believes that it would
be appropriate to provide for the suspension, limitation, or revocation
of an NMS Stock ATS's exemption from the definition of exchange
pursuant to Rule 3a1-1(a)(2) if, for example, the Commission finds,
after notice and opportunity for hearing, that such action is necessary
or appropriate in the public interest, and is consistent with the
protection of investors, because that NMS Stock ATS has violated or is
violating any provision of the federal securities laws. The Commission
is concerned that market participants may be harmed by an NMS Stock ATS
that is, for example, providing false or misleading information to
market participants, and preliminarily believes that such an NMS Stock
ATS should not be able to continue to operate pursuant to an exemption
provided by the Commission.
Pursuant to proposed Rule 304(a)(4)(ii), an NMS Stock ATS whose
exemption had been suspended or revoked would be prohibited from
operating pursuant to the Rule 3a1-1(a)(2) exemption; and if an NMS
Stock ATS were to continue to engage in Rule 3b-16 activity in NMS
stocks without the exemption, it would be an

[[Page 81033]]

unregistered exchange because it would no longer qualify for the
exemption from the exchange definition.\329\ If an NMS Stock ATS's
exemption was limited pursuant to proposed Rule 304(a)(4)(iv), the NMS
Stock ATS would be prohibited from operating in a manner otherwise
inconsistent with the terms and conditions of the Commission order, and
if it did operate in a manner inconsistent with the terms and
conditions of the order, would risk operating as an unregistered
national securities exchange. The exemption provided under Rule 3a1-
1(a)(2) is conditional upon initial and ongoing compliance with
Regulation ATS. The proposed process for suspending, limiting, or
revoking an NMS Stock ATS's exemption, in the event the Commission
finds, for example, that there is a failure to adhere to the conditions
of the exemption and that suspending, limiting, or revoking the
exemption is necessary or appropriate in the public interest, and is
consistent with the protection of investors, is designed to protect
investors in the case of potential non-compliance by an NMS Stock ATS
with the conditions with which the NMS Stock ATS must adhere in order
to continue to qualify for an exemption from the statutory definition
of ``exchange.''
---------------------------------------------------------------------------

\329\ If the Commission revoked the exemption of an NMS Stock
ATS and the NMS Stock ATS wished to continue operations, the entity
could do so only if it was registered as a national securities
exchange pursuant to Section 6 of the Exchange Act or was exempted
by the Commission from such registration based on the limited volume
of transactions effected on such exchange, or seeks another
exemption. See 17 CFR 242.301(a)(1)-(2). The NMS Stock ATS would not
be prohibited from filing a new Form ATS-N, pursuant to proposed
Rule 304(a)(1).
An NMS Stock ATS that has had its exemption suspended or
limited may, depending on the facts and circumstances, be able to
file a Form ATS-N Amendment or revise its operations to come into
compliance with the conditions of the exemption or the provision of
any other federal securities law that may have been the basis of the
Commission's findings.
---------------------------------------------------------------------------

The Commission also preliminarily believes that providing a process
by which the Commission can determine to suspend, limit, or revoke an
NMS Stock ATS's exemption from the definition of ``exchange'' would
provide appropriate flexibility to address the specific facts and
circumstances of an NMS Stock ATS's failure to comply with Regulation
ATS or the nature of the violation of federal securities laws, and the
possible harm to investors as a result of the non-compliance or
violation. For example, the Commission preliminarily believes that
providing a process by which the Commission could limit the exemption
provided in Rule 3a1-1(a)(2) would provide flexibility to address
specific disclosures or activities that are the cause of the non-
compliance with Regulation ATS or that violate federal securities laws.
For illustration, if the Commission found that an NMS Stock ATS
implemented a material change to its operations, but failed to disclose
the material change on its Form ATS-N, the Commission could determine
to allow the NMS Stock ATS to continue to operate as disclosed on its
Form ATS-N, but prohibit the NMS Stock ATS from engaging in the
undisclosed activity until the NMS Stock ATS properly amends its Form
ATS-N in accordance with proposed Rule 304(a)(2). If the Commission
found that an NMS Stock ATS offered an order type that resulted in
violations of the Commission's rules restricting the acceptance and
ranking of orders in impermissible sub-penny increments, the Commission
could allow the NMS Stock ATS to continue to operate but prohibit the
NMS Stock ATS from offering the order type, if it found that doing so
was necessary or appropriate in the public interest, and consistent
with the protection of investors. The Commission preliminarily believes
that, depending on the facts and circumstances, it may be more
appropriate in the public interest, and consistent with the protection
of investors, to limit the scope of an NMS Stock ATS's exemption,
instead of revoking or suspending the exemption and causing the NMS
Stock ATS to cease operations. In comparison, the Commission
preliminarily believes it would be more appropriate to revoke the
exemption of an NMS Stock ATS that no longer meets the definition of
NMS Stock ATS or is no longer a registered broker-dealer, as these
conditions are fundamental to the exemption. Additionally, the
Commission preliminarily believes that it would be necessary or
appropriate in the public interest, and consistent with the protection
of investors, to revoke the exemption of an NMS Stock ATS if, for
example, the ATS is found to be violating the antifraud provisions of
the federal securities laws. Nonetheless, the entry of an order
revoking an NMS Stock ATS's exemption would not prohibit the broker-
dealer operator of the NMS Stock ATS from continuing its other broker-
dealer operations.
The Commission is also proposing that prior to issuing an order
suspending, limiting, or revoking an NMS Stock ATS's exemption pursuant
to proposed Rule 304(a)(4)(i), the Commission would provide notice and
opportunity for hearing to the NMS Stock ATS, and make the findings
specified in proposed Rule 304(a)(4)(i) described above, that, in the
Commission's opinion, the suspension, limitation or revocation is
necessary or appropriate in the public interest, and is consistent with
the protection of investors. The Commission preliminarily believes that
the proposed process of providing an NMS Stock ATS with notice and
opportunity for hearing provides the NMS Stock ATS with adequate
opportunity to respond before the Commission determines that the NMS
Stock ATS's exemption from the definition of ``exchange'' is no longer
appropriate in the public interest or consistent with the protection of
investors. The Commission also preliminarily believes that the
possibility that the Commission may suspend, limit, or revoke an NMS
Stock ATS's exemption from the definition of ``exchange'' would not be
unduly burdensome because an NMS Stock ATS would be given advance
notice and have an opportunity to respond, and, depending on the facts
and circumstances, revise its operations or disclosures on Form ATS-N
to bring its operations or disclosures into compliance with Regulation
ATS or federal securities laws. The Commission preliminarily believes
that proposed Rule 304(a)(4) would provide the Commission with an
appropriate tool, which is subject to notice and hearing safeguards, to
protect the investing public and the public interest from an NMS Stock
ATS that fails to comply with Regulation ATS or otherwise violates any
provision of the federal securities laws.
Request for Comment
94. Do you believe the proposed process for the Commission to
suspend, limit, or revoke an NMS Stock ATS's exemption from the
definition of ``exchange'' is necessary or appropriate to protect
investors and other market participants and maintain fair and orderly
markets? Why or why not? Please support your arguments.
95. What criteria should the Commission use in deciding whether to
suspend, limit, or revoke an NMS Stock ATS's exemption as proposed? Are
there alternative actions or processes the Commission should consider
for suspending, limiting, or revoking the exemption? Please support
your arguments and provide details.
96. Should the Commission adopt the proposal to provide flexibility
as to whether to suspend, limit, or revoke an NMS Stock ATS's exemption
depending on the facts and circumstances and possible harm to
investors? If so, why? If not, what other criteria, if any, should

[[Page 81034]]

the Commission use in deciding whether to suspend, limit, or revoke the
exemption? Please support your arguments.
97. Do you believe there should be a maximum time frame following
notice and opportunity for hearing within which the Commission should
be required to act? If so, why, and what would be the appropriate time
frame? If not, why not? Please support your arguments.
98. Do you believe that 12 months is the appropriate limit on the
amount of time by which the Commission could suspend an NMS Stock ATS's
exemption? If so, why? If not, why not, and what would be the
appropriate time frame? Please support your arguments.
99. Do you believe that the Commission's proposal to declare
ineffective a Form ATS-N Amendment if it finds that such action is
necessary or appropriate in the public interest, and is consistent with
the protection of investors, is appropriate as a supplement to the
proposal that the Commission suspend, limit, or revoke an NMS Stock
ATS's exemption from the definition of ``exchange'' under proposed Rule
304(a)(4)? Why or why not? Please support your arguments.
100. Do you believe there are other processes by which the
Commission should enforce the conditions to the Rule 3a1-1(a)(2)
exemption? If so, what are they and why would they be preferable to the
proposed process?

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

The Commission is proposing to make public certain Form ATS-N
reports filed by NMS Stock ATSs.\330\ Commission orders related to the
effectiveness of Form ATS-N will also be publicly posted on the
Commission's Web site. As discussed above, there currently is limited
information available to the public about the operations of ATSs that
trade NMS stocks and the activities of their broker-dealer operators
and the broker-dealer operators' affiliates.\331\ Furthermore, as
discussed further below, market participants may not be informed about
potential conflicts of interest that arise as a result of the other
business activities of the broker-dealer operator of the NMS Stock ATS,
or its affiliates, such as trading NMS stocks on the NMS Stock ATS or
operating multiple trading centers, including multiple ATSs.\332\ The
only information the Commission currently makes publicly available
regarding ATSs is a list, which is updated monthly, of ATSs with a Form
ATS on file with the Commission.\333\ Therefore, the Commission is
proposing Rule 304(b) to mandate greater public disclosure of NMS Stock
ATS operations through the publication of Form ATS-N and to provide for
the posting of Commission orders on the Commission's Web site related
to the effectiveness of Form ATS-N.
---------------------------------------------------------------------------

\330\ See proposed Rule 304(b)(1) (providing that every Form
ATS-N filed pursuant to Rule 304 shall constitute a ``report''
within the meaning of Sections 11A, 17(a), 18(a), and 32(a) and any
other applicable provisions of the Exchange Act).
\331\ See supra Section III.C.
\332\ See infra Section VII.
\333\ See Alternative Trading System (``ATS'') List, https://www.sec.gov/foia/docs/atslist.htm.
---------------------------------------------------------------------------

First, the Commission is proposing Rule 304(b)(1) to provide that
every Form ATS-N filed pursuant to Rule 304 shall constitute a
``report'' within the meaning of Sections 11A, 17(a), 18(a), and 32(a)
and any other applicable provisions of the Exchange Act. Because
proposed Form ATS-N is a report that is required to be filed under the
Exchange Act, it would be unlawful for any person to willfully or
knowingly make, or cause to be made, a false or misleading statement
with respect to any material fact in Form ATS-N.\334\ The Commission
notes that proposed Rule 304(b)(1) is nearly identical to current Rule
301(b)(2)(vi),\335\ which provides that every notice or amendment filed
pursuant to Rule 301(b)(2), including Form ATS, shall constitute a
``report'' within the meaning of Sections 11A, 17(a), 18(a), and 32(a),
and any other applicable provisions of the Exchange Act.\336\
---------------------------------------------------------------------------

\334\ See 15 U.S.C. 78ff(a).
\335\ 17 CFR 242.301(b)(2)(vi).
\336\ 15 U.S.C. 78k-1, 78q(a), 78r(a), and 78ff(a). See 17 CFR
242.301(b)(2)(vi).
---------------------------------------------------------------------------

Under proposed Rule 304(b)(2), the Commission would make public via
posting on the Commission's Web site, each: (i) Order of effectiveness
of a Form ATS-N; (ii) order of ineffectiveness of a Form ATS-N; (iii)
effective Form ATS-N; (iv) filed Form ATS-N Amendment; (v) order of
ineffectiveness of a Form ATS-N Amendment; (vi) notice of cessation;
and (vii) order suspending, limiting, or revoking the exemption from
the definition of an ``exchange'' pursuant to Exchange Act Rule 3a1-
1(a)(2). Proposed Rule 304(b)(3) would require each NMS Stock ATS to
make public via posting on its Web site a direct URL hyperlink to the
Commission's Web site that contains the documents enumerated in
proposed Rule 304(b)(2).
Once the Commission has declared a Form ATS-N effective, the
Commission preliminarily believes that making Form ATS-N public would
provide market participants with important information about the
operations of the NMS Stock ATS and its broker-dealer operator and the
broker-dealer operator's affiliates. As discussed further below,
proposed Form ATS-N would provide information about the broker-dealer
operator and the activities of the broker-dealer operator and its
affiliates in connection with the NMS Stock ATS, including: Their
operation of trading centers and other NMS Stock ATSs; products and
services offered to subscribers; arrangements with unaffiliated trading
centers; trading activities on the NMS Stock ATS; smart order router
(or similar functionality) and algorithms used to send or receive
orders or other trading interest to or from the ATS; personnel and
third parties used to operate the NMS Stock ATS; differences in the
availability of ATS services, functionalities, or procedures; and
safeguards and procedures to protect subscribers' confidential trading
information.\337\ Proposed Form ATS-N would also provide market
participants with important information about the manner of operations
of the NMS Stock ATS, including: subscribers; hours of operation; types
of orders; connectivity, order entry, and co-location procedures;
segmentation of order flow and notice about segmentation; display of
order and other trading interest; trading services, including matching
methodologies, order interaction rules, and order handling, and
execution procedures; procedures governing suspension of trading and
trading during a system disruption or malfunction; opening, re-opening,
closing, and after hours procedures; outbound routing services; fees;
market data; trade reporting; clearance and settlement; order display
and execution access; fair access; and market quality statistics
published or provided to one or more subscribers.\338\ Accordingly, the
Commission proposes to make public--via the public posting of Form ATS-
N on the Commission's Web site--information that it preliminarily
believes should be easily accessible to all market participants so that
market participants may better evaluate how to achieve their investing
or trading objectives.
---------------------------------------------------------------------------

\337\ See infra Section VII (discussing proposed disclosure
requirements related to broker-dealer operators under Form ATS-N).
\338\ See infra Section VIII (discussing proposed operational
disclosure requirements of Form ATS-N).
---------------------------------------------------------------------------

The Commission would not post on its Web site a filed Form ATS-N
before the Commission declares that Form ATS-N effective. Under the
proposal, an NMS Stock ATS that was not in

[[Page 81035]]

operation as of the effective date of proposed Rule 304 may not
commence operations as an NMS Stock ATS until the Commission issues an
order declaring its Form ATS-N effective.\339\ Additionally, if the
Commission declares ineffective a Form ATS-N filed by a legacy NMS
Stock ATS, that ATS would be prohibited from operating as an NMS Stock
ATS going forward.\340\ Furthermore, while the Commission is reviewing
a Form ATS-N prior to declaring it effective or ineffective, Commission
staff would likely engage in discussions with the entity regarding its
disclosures and could request that the entity revise or augment its
disclosures to provide market participants with greater clarity
regarding the entity's operations. Accordingly, the Commission
preliminarily believes that it would be premature to provide market
participants with information regarding an initial Form ATS-N filing
until after it is declared effective.
---------------------------------------------------------------------------

\339\ See proposed Rule 304(a)(1)(iv).
\340\ Id. Nothing would preclude the NMS Stock ATS from later
submitting a new or revised Form ATS-N for consideration by the
Commission.
---------------------------------------------------------------------------

The proposal to make public each Form ATS-N Amendment upon filing
with the Commission is to provide market participants with immediate
transparency into the operations of an NMS Stock ATS, which would be
operational and to which market participants might currently enter--or
consider entering--orders for execution. The Commission preliminarily
believes that making public Form ATS-N Amendments would benefit market
participants by allowing them to obtain current information regarding
changes to the operation of an NMS Stock ATS and its relationship with
its broker-dealer operator and the broker-dealer operator's affiliates;
if it would benefit their investment or trading strategies, market
participants would also be able to continually evaluate that NMS Stock
ATS as a potential destination to route their orders. The Commission
preliminarily believes that, while Form ATS-N Amendments would be
publicly posted before the Commission has completed its review, it
would be useful to market participants to have immediate access to the
disclosures contained in an amendment so market participants may, for
example, assess and prepare for upcoming material changes on an NMS
Stock ATS or more quickly understand any operational changes that have
occurred over the previous quarter on the NMS Stock ATS. The Commission
also proposes to make the public aware of which Form ATS-N Amendments
filed by NMS Stock ATSs posted on the Commission's Web site are pending
Commission review and could still be declared ineffective. The
Commission believes that publicly posting filed Form ATS-N Amendments
would strike the right balance of enabling market participants to
better understand upcoming or recent changes to an operational NMS
Stock ATS in a timely manner, while informing market participants that
the Form ATS-N Amendment is pending Commission review and could still
be declared ineffective.\341\
---------------------------------------------------------------------------

\341\ Market participants would also be made aware if the
Commission declares a Form ATS-N Amendment ineffective, because the
Commission would also post each order of ineffectiveness of a Form
ATS-N Amendment. See proposed Rule 304(b)(2)(E).
---------------------------------------------------------------------------

The Commission also preliminarily believes that making public each
properly filed Form ATS-N notice of cessation would provide the public
with notice that the NMS Stock ATS will cease operations and that the
organization, association, or group of persons no longer operates
pursuant to the exemption provided under Exchange Act Rule 3a1-1(a)(2).
The notice of cessation would provide market participants with the date
that the NMS Stock ATS will cease operations, as designated by the NMS
Stock ATS. Market participants would be able to use this information to
make arrangements to select alternative routing destinations for their
orders.
Furthermore, the Commission understands that many broker-dealer
operators maintain Web sites for their NMS Stock ATSs. The Commission
preliminarily believes that market participants would find it helpful
for an NMS Stock ATS to make market participants aware that certain of
the NMS Stock ATS's Form ATS-N filings are publicly posted on the
Commission's Web site. Therefore, to the extent that an NMS Stock ATS
has a public Web site, the Commission is proposing that Rule 304(b)(3)
require each NMS Stock ATS that has a Web site to post on the NMS Stock
ATS's Web site a direct URL hyperlink to the Commission's Web site that
contains the documents enumerated in proposed Rule 304(b)(2), which
includes the NMS Stock ATS's Form ATS-N filings. The Commission
preliminarily believes that this requirement would make it easier for
market participants to review an NMS Stock ATS's Form ATS-N filings by
providing an additional means for market participants to locate Form
ATS-N filings that are posted on the Commission's Web site.
The Commission preliminarily believes that publicly posting Form
ATS-N filings on the timelines described above is important because
most market participants do not have access to information that permits
them to adequately compare and contrast how some NMS Stock ATSs would
handle their orders against how a given national securities exchange or
other NMS Stock ATS would handle their orders. Currently, a Form ATS
filed with the Commission by an NMS Stock ATS is ``deemed confidential
when filed'' under Rule 301(b)(2)(vii) of Regulation ATS,\342\ whereas
a national securities exchange is required to both (i) make available
to the public its entire rule book and (ii) publicly file all proposed
rule changes pursuant to Section 19(b) of the Exchange Act.\343\ The
Commission preliminary believes 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.\344\ Unless an NMS
Stock ATS voluntarily publicizes how those functionalities operate and
affect the handling of subscriber orders, there is no publicly
available information for market participants to use in order to
compare and contrast the trading platform of an NMS Stock ATS with that
of a national securities exchange. Accordingly, through Form ATS-N, the
Commission proposes to require disclosures that would provide
information that market participants could use to compare and contrast
the important order handling features, and other important
functionalities, of an NMS Stock ATS with those of other NMS Stock ATSs
or national securities exchanges. The Commission therefore proposes to
make those disclosures public so that market participants would have
access to important information when evaluating trading venues.
---------------------------------------------------------------------------

\342\ See 17 CFR 240.301(b)(2)(vii).
\343\ See 15 U.S.C. 78s(b).
\344\ See supra Section III.B.
---------------------------------------------------------------------------

Additionally, the Commission preliminarily believes that, given
changes with respect to NMS Stock ATSs since the adoption of Regulation
ATS,\345\ the reasons given in the past for maintaining the
confidentiality of Form ATS filings are no longer justified for NMS
Stock ATSs in light of the benefits of operational transparency for NMS
Stock ATSs that are discussed above. First, when the Commission adopted
Regulation ATS, it chose, at that time, to deem Form ATS confidential
because ``[i]nformation required on Form ATS

[[Page 81036]]

may be proprietary and disclosure of such information could place
alternative trading systems in a disadvantageous competitive
position.'' \346\ As noted above, the Commission preliminarily believes
that NMS Stock ATSs have generally evolved to the point that their
trading functionalities often resemble those of national securities
exchanges.\347\ The Commission preliminarily believes that much of the
type and level of information that would have to be publicly disclosed
by an NMS Stock ATS pursuant to this proposal is very similar to
information that national securities exchanges must publicly disclose.
For instance, proposed Form ATS-N would require an NMS Stock ATS to
disclose, among other things, information about available order types
and modifiers, hours of operations, connectivity, order entry, co-
location, order display, matching methodologies, and order interaction
procedures, all of which must be publicly disclosed by national
securities exchanges. Accordingly, the Commission preliminarily
believes that, in the current market environment, the disclosures
mandated by Form ATS-N would not place NMS Stock ATSs at a competitive
disadvantage with respect to national securities exchanges.\348\
---------------------------------------------------------------------------

\345\ See generally supra Section III.
\346\ See Regulation ATS Adopting Release, supra note 7, at
70864.
\347\ See supra Section III.B.
\348\ See infra Section XIII.C.2.
---------------------------------------------------------------------------

Second, when the Commission adopted Regulation ATS, it sought to
``encourage candid and complete filings in order to make informed
decisions and track market changes,'' and believed that keeping the
reports filed on Form ATS confidential would ``provide[] respondents
with the necessary comfort to make full and complete filings.'' \349\
Based on Commission experience, however, many Form ATS filings
currently provide only rudimentary and summary information about the
manner of operation of NMS Stock ATSs, which often requires the
Commission and its staff to ask the ATSs follow-up questions, and
results in ATSs filing follow-up amendments, to fully disclose how they
operate. Thus, the Commission preliminarily believes that maintaining
the confidentiality of Form ATS filings with regard to NMS Stock ATSs
has not resulted uniformly in ATSs ``mak[ing] full and complete
filings.''
---------------------------------------------------------------------------

\349\ See Regulation ATS Adopting Release, supra note 7, at
70864.
---------------------------------------------------------------------------

Request for Comment
101. Do you believe market participants currently have access to
information about the operations of NMS Stock ATSs and the activities
of their broker-dealer operators and the broker-dealer operators'
affiliates, either through private disclosures from NMS Stock ATSs,
from NMS Stock ATSs that voluntarily make their Forms ATS public, or
from NMS Stock ATSs that issue frequently asked questions about their
operations, including changes to their operations, that is sufficient
to help market participants select the markets to which to route and
execute their orders? Why or why not? Please support your arguments.
102. Do you believe the Commission should adopt the proposal to
make public certain Form ATS-N filings by NMS Stock ATSs? Why or why
not? Please support your arguments.
103. Do you believe the Commission should adopt the proposal to
require an NMS Stock ATS to post on the NMS Stock ATS's Web site a
direct URL hyperlink to the Commission's Web site that contains the
documents enumerated in proposed Rule 304(b)(2)? Why or why not? Please
support your arguments.
104. Do you believe the Commission should require each NMS Stock
ATS to directly post its Form ATS-N filings on the NMS Stock ATS's Web
site? If so, why, and which Form ATS-N filings? If not, why not? Please
support your arguments.
105. Do you believe the Commission should require each NMS Stock
ATS to directly post Commission orders related to the effectiveness or
ineffectiveness of the NMS Stock ATS's Form ATS-N, Form ATS-N
Amendments, or both on the Web site of the NMS Stock ATS? If so, why,
and which orders should NMS Stock ATSs be required to post? If not, why
not? Please support your arguments.
106. Do you believe that the Commission should make public on its
Web site the Form ATS-N of an NMS Stock ATS that was not in operation
as of the effective date of proposed Rule 304 during the Commission's
review period and prior to declaring the Form ATS-N effective of
ineffective? Why or why not? Please support your arguments.
107. Do you believe that the Commission should make public on its
Web site a Form ATS-N that it has declared ineffective? Why or why not?
Please support your arguments.
108. Do you believe that the Commission should make public on its
Web site a Form ATS-N filed by a legacy NMS Stock ATS during the
Commission's review period and prior to its declaring the Form ATS-N
effective or ineffective? Why or why not? Please support your
arguments?
109. Do you believe that the Commission should adopt the proposal
to make public on its Web site all Form ATS-N Amendments during the
Commission's review period and prior to its determination as to whether
a Form ATS-N Amendment should be declared ineffective? If so, why? If
not, why not? Please support your arguments.
110. Do you believe that the Commission should adopt the proposal
whereby the Commission would continue to make public on its Web site a
Form ATS-N Amendment that it has declared ineffective? Why or why not?
Please support your arguments.
111. Do you believe the Commission's current practice of making
publicly available a list of ATSs with a Form ATS on file with the
Commission puts market participants on sufficient notice of the
regulatory status of NMS Stock ATSs with which they may do business?
Why or why not? Please support your arguments.
112. Does the Commission's current practice of making publicly
available a list of ATSs with a Form ATS on file with the Commission
create the potential for market participants to misunderstand the
operations of the market? If so, how? If not, why not? Please support
your arguments.
113. Do you believe that market participants currently have
sufficient information regarding the activities of an NMS Stock ATS's
broker-dealer operator and its affiliates as they relate to the ATS,
including changes to such activities, to evaluate conflicts of interest
that may arise out of the position that the broker-dealer occupies as
the operating entity of the NMS Stock ATS? Why or why not? Please
support your arguments.
114. Do you believe the Commission's proposal to make public
certain Form ATS-N filings would better enable market participants to
evaluate conflicts of interest that may arise out of the position that
the broker-dealer occupies as the operating entity of the NMS Stock
ATS? Why or why not? Please support your arguments.
115. Do you believe that making public Form ATS-N filings would
place NMS Stock ATSs at a competitive disadvantage with respect to
other trading centers, including national securities exchanges? Why or
why not? Please support your arguments.
116. Do you believe that making public Form ATS-N filings would
incentivize NMS Stock ATSs to make more accurate, current, and complete
disclosures? Why or why not? Please support your arguments.

[[Page 81037]]

117. Do you believe the Commission should continue to make public a
Form ATS-N or Form ATS-N Amendments where the Commission has suspended,
revoked, or limited the NMS Stock ATS's exemption pursuant to Rule
304(a)(4)? Why or why not? Please support your arguments.
118. Do you believe that responding to questions on proposed Form
ATS-N would require an NMS Stock ATS to disclose proprietary
information that could place the NMS Stock ATS or its broker-dealer
operator's other business activities at a competitive disadvantage? If
so, please identify the question on the Form ATS-N and specify what
information in response to that question would result in the disclosure
of proprietary information and describe why the disclosure could create
a competitive disadvantage for the NMS Stock ATS or its broker-dealer
operator's other business activities.
119. In light of the information that national securities
exchanges, which compete with NMS Stock ATSs, are required to disclose
regarding their operations, should NMS Stock ATSs continue to be
eligible for the exemption from the definition of exchange without
having to disclose such information? Why or why not? Please explain in
detail.

E. Rule 304(c)(1) and (2): Proposed Form ATS-N Requirements

Proposed Rule 304(c)(1) would require NMS Stock ATSs to respond to
each item on Form ATS-N, as applicable, in detail and disclose
information that is accurate, current, and complete. The Commission
preliminarily believes that market participants would use information
disclosed on proposed Form ATS-N to evaluate whether a particular NMS
Stock ATS would be a desirable venue to which to route their orders. In
addition, the Commission intends to use the information disclosed on
the Form ATS-N to exercise oversight over and monitor developments of
NMS Stock ATSs. Given these potential uses, the Commission
preliminarily believes that it is important that the Form ATS-N contain
detailed disclosures that are accurate, current, and complete.
The Commission notes that Regulation ATS requires NMS Stock ATSs to
be registered as broker-dealers with the Commission, which entails
becoming a member of FINRA and fully complying with the broker-dealer
regulatory regime. FINRA Rule 3130 requires each member to designate
and specifically identify to FINRA one or more principals to serve as a
chief compliance officer and each member to have its chief executive
officer certify annually that the member has in place processes to
establish, maintain, review, test and modify written compliance
policies and written supervisory procedures reasonably designed to
achieve compliance with applicable FINRA rules, MSRB rules and federal
securities laws and regulations, and that the chief executive
officer(s) has conducted one or more meetings with the chief compliance
officer(s) in the preceding 12 months to discuss such processes.\350\
The Commission requests comment on whether the certification required
under FINRA Rule 3130 will help ensure that the broker-dealer operator
of the NMS Stock ATS complies with proposed Rule 304, including
proposed Rule 304(c)(1), which would require the accurate, current, and
complete disclosures on Form ATS-N.
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\350\ See FINRA Rule 3130(b). FINRA Rule 3120(c) sets forth the
following:
The certification shall state the following:
The undersigned is/are the chief executive officer(s) (or
equivalent officer(s)) of (name of member corporation/partnership/
sole proprietorship) (the ``Member''). As required by FINRA Rule
3130(b), the undersigned make(s) the following certification:
1. The Member has in place processes to:
(A) establish, maintain and review policies and procedures
reasonably designed to achieve compliance with applicable FINRA
rules, MSRB rules and federal securities laws and regulations;
(B) modify such policies and procedures as business, regulatory
and legislative changes and events dictate; and
(C) test the effectiveness of such policies and procedures on a
periodic basis, the timing and extent of which is reasonably
designed to ensure continuing compliance with FINRA rules, MSRB
rules and federal securities laws and regulations.
2. The undersigned chief executive officer(s) (or equivalent
officer(s)) has/have conducted one or more meetings with the chief
compliance officer(s) in the preceding 12 months, the subject of
which satisfy the obligations set forth in FINRA Rule 3130.
3. The Member's processes, with respect to paragraph 1 above,
are evidenced in a report reviewed by the chief executive officer(s)
(or equivalent officer(s)), chief compliance officer(s), and such
other officers as the Member may deem necessary to make this
certification. The final report has been submitted to the Member's
board of directors and audit committee or will be submitted to the
Member's board of directors and audit committee (or equivalent
bodies) at the earlier of their next scheduled meetings or within 45
days of the date of execution of this certification.
4. The undersigned chief executive officer(s) (or equivalent
officer(s)) has/have consulted with the chief compliance officer(s)
and other officers as applicable (referenced in paragraph 3 above)
and such other employees, outside consultants, lawyers and
accountants, to the extent deemed appropriate, in order to attest to
the statements made in this certification.
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Request for Comment
120. Do you believe that the certification required under FINRA
Rule 3130 will help ensure an NMS Stock ATS's compliance with proposed
Rule 304, including the requirement that disclosures on Form ATS-N are
accurate, current, and complete? Why or why not? Please support your
arguments.
Proposed Rule 304(c)(2) would provide that any report required to
be filed with the Commission under proposed Rule 304 of Regulation ATS
must be filed electronically on Form ATS-N, and include all information
as prescribed in proposed Form ATS-N and the instructions thereto. The
Commission's proposal contemplates the use of the electronic form
filing system (``EFFS'') to file a completed Form ATS-N. Based on the
widespread use and availability of the Internet, the Commission
preliminarily believes that filing Form ATS-N in an electronic format
would be less burdensome and a more efficient filing process for NMS
Stock ATSs and the Commission, as it is likely to be less expensive and
cumbersome than mailing paper forms to the Commission. The proposed
Form ATS-N would require an electronic signature to help ensure the
authenticity of the filing. The Commission preliminarily believes these
proposed requirements would expedite communications between the
Commission and its staff and the broker-dealer operator concerning the
NMS Stock ATS and help to ensure that only personnel authorized by the
NMS Stock ATS are filing required materials. This proposed requirement
is intended to provide a uniform manner in which the Commission would
receive--and the broker-dealer operator would file--the Form ATS-N made
pursuant to proposed Rule 304 of Regulation ATS. Also, NMS Stock ATSs
would be able to review how other filers that were allowed to become
effective responded to the same questions on Form ATS-N for guidance on
how to respond. Additionally, the consistent framework would make it
easier and more efficient for the Commission and market participants
reviewing the disclosures to promptly review, analyze, and respond, as
necessary, to the information proposed to be provided.\351\
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\351\ This proposed requirement is consistent with electronic-
reporting standards set forth in Form SCI. See SCI Adopting Release,
supra note 17, at 72357 (discussing electronic filing requirements
of Form SCI).
---------------------------------------------------------------------------

Further, the Commission also is proposing that documents filed
through the EFFS system must be in a text-searchable format without the
use of optical character recognition. The Commission believes that
proposing to require documents to be filed in a text-searchable format
would allow the Commission and its staff and market

[[Page 81038]]

participants to efficiently review and analyze information provided on
proposed Form ATS-N. In particular, a text-searchable format would
allow the Commission and its staff to better gather, analyze, and use
data filed as exhibits, whereas a non-text-searchable format filing
would require significantly more steps and labor to review and analyze
data.
The Commission is proposing that proposed Form ATS-N be filed with
the Commission in a structured format. The Commission preliminarily
believes that proposing Form ATS-N to be filed with the Commission in a
structured format could allow the Commission and market participants to
better search and analyze information about NMS Stock ATSs. The
Commission is proposing that Parts I (Name) and II (Broker-Dealer
Operator Registration and Contact Information) of proposed Form ATS-N
would be provided as fillable forms on the Commission's EFFS system.
The Commission is proposing that Part III (Activities of the Broker-
Dealer Operator and Affiliates) of proposed Form ATS-N would be filed
in a structured format whereby the filer would provide checkbox
responses to certain questions and narrative responses that are block-
text tagged by Item. The Commission is proposing that Part IV (The NMS
Stock ATS Manner of Operations) of proposed Form ATS-N would also be
filed in a structured format in that the filer would block-text tag
narrative responses by Item. The Commission is proposing that Part V
(Contact Information, Signature Block, and Consent to Service) of
proposed Form ATS-N would be provided as fillable forms on the
Commission's EFFS system.
The Commission notes that there are a variety of methods by which
information can be collected and structured for review and analysis.
For example, some or all of the information provided on Form ATS-N
could be structured according to a particular standard that already
exists, or a new taxonomy that the Commission creates, or as a single
machine-readable PDF. Given the Commission's proposal that information
on Form ATS-N be filed in a structured format, the Commission seeks
comment on the manner in which proposed Form ATS-N could be structured
to better enable the Commission and market participants to collect and
analyze the data.
Request for Comment
121. Do you believe that the electronic filing requirement of
proposed Rule 304(c)(2) is appropriate? Do you believe that the
electronic filing of Form ATS-N would be less burdensome and/or a more
efficient filing process for NMS Stock ATSs compared to delivering the
Form ATS-N by mail on paper? Alternatively, would the submission of
proposed Form ATS-N via electronic mail to one or more Commission email
addresses be a more appropriate way for NMS Stock ATSs to file Form
ATS-N with the Commission? Are there other alternative methods that
would be preferable? If so, please describe. Is the proposal to require
an electronic signature appropriate? If not, why not? Please support
your arguments.
122. Should the Commission adopt the proposal that proposed Form
ATS-N should be filed with the Commission in a structured format? Why
or why not? If so, what standards of structuring should be used for
information to be provided on proposed Form ATS-N? Please explain. If
not, what format should proposed Form ATS-N take? Please identify the
format and explain.
123. Are there any specific aspects of proposed Form ATS-N that
should or should not be provided in a structured format? Please
identify those aspects of proposed Form ATS-N that should or should not
be provided in a structured format and explain why those aspects of the
form should or should not be structured.
124. Should the Commission adopt the proposal to require documents
to be filed in a text-searchable format on proposed Form ATS-N? Why or
why not? Please support your arguments.

V. Proposed Form ATS-N: Submission Type and Part I of Form ATS-N

Proposed Form ATS-N would require that an entity identify the type
of filing by marking the appropriate checkbox. The Form ATS-N filing
may either be a Form ATS-N, a Form ATS-N Amendment, or a notice of
cessation. In addition, proposed Form ATS-N would require the NMS Stock
ATS to indicate whether a Form ATS-N Amendment is being submitted as a
material amendment, periodic amendment, or correcting amendment. The
Commission is also proposing that, for an Form ATS-N Amendment, the NMS
Stock ATS provide a brief narrative description of the amendment so
market participants can quickly understand the nature of the Form ATS-N
Amendment.\352\ For notices of cessation, proposed Form ATS-N would
require the date that the NMS Stock ATS will cease to operate. A Form
ATS-N filer may also withdraw a previously filed Form ATS-N.\353\
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\352\ For a Form ATS-N Amendment, the NMS Stock ATS would also
be required to attach as Exhibit 3A and/or Exhibit 4A a redline(s),
showing changes to Part III and/or Part IV of proposed Form ATS-N,
respectively, in order to point out the amendment(s) to its prior
Form ATS-N filing. The Commission preliminarily believes that
requiring NMS Stock ATSs to attach redlines to their Form ATS-N
Amendments would better enable market participants and the
Commission to review Form ATS-N Amendments in a more efficient
manner.
\353\ Instruction B to proposed Form ATS-N would provide that if
an NMS Stock ATS determines to withdraw a Form ATS-N, it must select
the appropriate checkbox and provide the correct file number to
withdraw the submission.
---------------------------------------------------------------------------

Part I of proposed Form ATS-N would require the name of the broker-
dealer operator and the NMS Stock ATS. Rule 301(b)(1) requires that an
ATS, including an NMS Stock ATS, register as a broker-dealer under
Section 15 of the Exchange Act.\354\ Today, while some broker-dealers
are registered with the Commission for the sole purpose of operating as
an ATS, most broker-dealer operators of ATSs engage in brokerage and/or
dealing activities in addition to operating an NMS Stock ATS. In some
cases, broker-dealers operate multiple NMS Stock ATSs.\355\ To identify
the registered broker-dealer for an NMS Stock ATS and to assist the
Commission in collecting and organizing its filings, proposed Form ATS-
N would require the name of the registered broker-dealer for the NMS
Stock ATS (i.e., the broker-dealer operator), as it is stated on Form
BD, in Part I, Item 1 of proposed Form ATS-N. The name of the
registered broker-dealer for the NMS Stock ATS would also assist the
Commission in ensuring that the NMS Stock ATS has appropriately
registered as a broker-dealer as part of its exemption from exchange
registration under Exchange Act Rule 3a1-1(a)(2). To the extent that a
``DBA'' (doing business as) is used to identify the NMS Stock ATS to
the public or the Commission, or if a registered broker-dealer operates
multiple NMS Stock ATSs, proposed Form ATS-N would require the full
name of the NMS Stock ATS under which business is conducted, if any, in
Part I, Item 2 of proposed Form ATS-N. Part I, Item 3 of proposed Form
ATS-N would require the NMS Stock ATS to provide its Market Participant
Identifier (``MPID'') for the NMS Stock ATS.\356\ The Commission
preliminarily

[[Page 81039]]

believes that providing the name of the NMS Stock ATS or DBA and its
MPID would provide clarity to the public and Commission about the
identity under which the business of the NMS Stock ATS is conducted.
Proposed Form ATS-N would also require an ATS to identify whether it is
currently operating pursuant to a previously filed initial operation
report on Form ATS.
---------------------------------------------------------------------------

\354\ 17 CFR 242.301(b)(1); 15 U.S.C. 78o.
\355\ A broker-dealer operator would be required to file a
separate Form ATS-N for each NMS Stock ATS operated by the broker-
dealer. See Instruction A of proposed Form ATS-N.
\356\ An MPID, or other mechanism or mnemonic, is used to
identify a market participant for the purposes of electronically
accessing a national securities exchange or an ATS. See, e.g.,
Securities Exchange Act Release No. 63241 (November 3, 2010), 75 FR
69792 (November 15, 2010). ATSs are required to use a unique MPID
for the ATS when reporting trade information to FINRA. See FINRA ATS
Reporting Approval, supra note 122.
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Request for Comment
125. Do you believe that Part I of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required? If not, how should Part I of proposed Form ATS-N be revised
to provide additional clarity? Please explain in detail and support
your arguments.
126. Do you believe there is other information that market
participants might find relevant or useful with regard to the
disclosures in Part I? If so, describe such information and explain
whether, and if so why, such information should be required to be
provided under proposed Form ATS-N. Please support your arguments.
127. Do you believe that the broker-dealer operator should be
required to identify the type of Form ATS-N filing (i.e., Form ATS-N,
Form ATS-N Amendment, notice of cessation, or withdrawal) by marking
the appropriate checkbox, and for notices of cessation, provide the
date that the NMS Stock ATS will cease to operate? Why or why not?
Please support your arguments.
128. Do you believe that the broker-dealer operator should be
required to provide a brief summary of a Form ATS-N Amendment? Why or
why not? Please support your arguments.
129. Do you believe that a broker-dealer operator should be allowed
to withdraw a previously filed Form ATS-N? Why or why not? Please
support your arguments. If so, when should a broker-dealer operator be
permitted to withdraw a previously filed Form ATS-N? Please explain.
130. Do you believe that the broker-dealer operator should be
required to disclose the date on which it commenced, or intends to
commence, operation of the NMS Stock ATS in Part I of Form ATS-N? Why
or why not? Please support your arguments.
131. Do you believe that the Commission should require the MPID of
the NMS Stock ATS as a required disclosure on proposed Form ATS-N? Why
or why not? Please support your arguments.
132. What are the potential costs and benefits of disclosing the
information required by Part I of proposed Form ATS-N? Would the
proposed disclosures in Part I of proposed Form ATS-N require an NMS
Stock ATS to reveal too much (or not enough) information? Why or why
not? Please support your arguments.

VI. Part II of Proposed Form ATS-N: Broker-Dealer Operator Registration
Information

Part II of proposed Form ATS-N would require certain general
information regarding the broker-dealer operator and the NMS Stock ATS.
With respect to the broker-dealer operator, Part II of proposed Form
ATS-N would require registration information including: its SEC File
Number, Central Registration Depository (``CRD'') Number, effective
date of the broker-dealer operator's registration with the Commission,
the name of the national securities association with which it is a
member, and the effective date of broker-dealer operator's membership
with the national securities association (e.g., FINRA). The Commission
proposes to require this information to assess whether the NMS Stock
ATS has complied with the requirement to register as a broker-dealer
pursuant to Rule 301(b)(1) of Regulation ATS. This information also
would expedite the Commission's communications with the broker-dealer
operator's self-regulatory organization as needed.
Additionally, Part II of proposed Form ATS-N would require certain
information regarding the legal status of the broker-dealer operator.
Specifically, proposed Form ATS-N would require that the broker-dealer
operator provide its legal status (e.g., corporation, partnership, sole
proprietorship) and except in the case of a sole proprietorship, the
date of formation and state or country in which it is formed. The
Commission is proposing to require the information related to the
broker-dealer operator's legal status to help ensure that the broker-
dealer operator has appropriately filed as a legal entity (except in
the case of sole proprietorships).
Proposed Form ATS-N would also require the address of the physical
location of the NMS Stock ATS matching system and, if it is different
from the physical location, the mailing address of the NMS Stock ATS.
If the broker-dealer operator is a sole proprietorship and an address
of the NMS Stock ATS is a private residence, the Commission would not
make that information available on the Commission's Web site due to
concerns about the confidentiality of personally identifiable
information. Furthermore, Part II would require the NMS Stock ATS to
provide a URL address for the Web site of the NMS Stock ATS, and in the
signature block in Part V of proposed Form ATS-N, the representative of
the broker-dealer operator would also be required to provide his or her
business contact information, including the person's name and title,
telephone number, and email address.\357\ This information would
facilitate communication with the broker-dealer operator and the NMS
Stock ATS during the Commission's review of a Form ATS-N and later as
necessary as part of the Commission's ongoing monitoring of the NMS
Stock ATS. To the extent the broker-dealer operator's contact
information that is provided in Part II is made publicly available,
that information would also facilitate communication between
subscribers and the broker-dealer operator.
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\357\ The Commission would also keep the contact information of
the broker-dealer operator's representative confidential, subject to
applicable law.
Consistent with the requirements of proposed Form ATS-N, the
signature block in Part V would also require the NMS Stock ATS to
consent that service of any civil action brought by, or notice of
any proceeding before, the Commission or a SRO in connection with
the ATS's activities may be given by registered or certified mail or
email to the contact employee at the primary street address or email
address, or mailing address if different, given in Part I. The
signatory would further represent that the information and
statements contained on the submitted Form ATS-N, including
exhibits, schedules, attached documents, and any other information
filed, are current, true, and complete.
---------------------------------------------------------------------------

Part II of proposed Form ATS-N would also require an NMS Stock ATS
to attach, as Exhibit 1, a copy of any materials currently provided to
subscribers or other persons, related to the operations of the NMS
Stock ATS or the disclosures on Form ATS-N.\358\ The Commission
understands that some ATSs may provide to subscribers, or other
persons, marketing material or other material containing important
information about the ATS's operations in FIX protocol procedures,
rules of engagement/user manuals, or frequently asked questions. These
documents may include information regarding, among other things, the
order matching procedures, priority rules, order types, and order entry
and execution procedures of the ATS, and in some instances, such
documents may contain important information about an NMS Stock ATS that
may not be specified in the required disclosures under proposed Form
ATS-N. The Commission notes that the purpose of proposed Form

[[Page 81040]]

ATS-N is to provide operational transparency with regard to the NMS
Stock ATS. To the extent that the NMS Stock ATS discloses information
on standardized materials provided to certain subscribers, whether an
individual or on group basis, the Commission preliminarily believes the
NMS Stock ATS should make this information available to all
subscribers, and therefore the Commission is proposing to require these
materials be filed as an attachment to Exhibit 1 to proposed Form ATS-
N. The Commission further notes that this requirement is similar to the
requirement of subpart (f) of Exhibit F on existing Form ATS.\359\
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\358\ For currently operating NMS Stock ATSs that file a Form
ATS-N, each ATS would only be required to provide the materials it
currently provides to subscribers or other persons and would not be
required to attach materials provided to subscribers or other person
in the past.
\359\ Subpart (f) of Form ATS requires a copy of the ATS's
subscriber manual and any other materials provided to subscribers.
---------------------------------------------------------------------------

Proposed Form ATS-N also would require that the broker-dealer
operator attach, as Exhibits 2A and 2B (or provide a link to the
relevant URL address where the required documents can be found), a copy
of the most recently filed Schedule A of the broker-dealer operator's
Form BD disclosing information related to direct owners and executive
officers, and a copy of the most recently filed Schedule B of the
broker-dealer operator's Form BD disclosing information related to
indirect owners, respectively. The proposed Form ATS-N would require
information from the broker-dealer operator's Schedule A and Schedule B
of Form BD to help market participants understand the persons and
entities that directly and indirectly own the broker-dealer operator.
The Commission is requiring that NMS Stock ATSs provide names of the
direct and indirect owners of the broker-dealer operator on Form ATS-N,
even though the same information is provided on Form BD, because
information about the ownership of the broker-dealer operator will
enable market participants to understand better any potential conflicts
of interest that may arise therefrom, which is one of the central
purposes of proposed Form ATS-N. Also, providing this information on
Form ATS-N would facilitate the Commission's, as well as market
participants', analysis of the ownership and any potential for
conflicts arising therefrom by providing this information all on one
form. Moreover, the Commission preliminarily believes it is appropriate
for NMS Stock ATSs to provide this information using a URL address for
these documents in lieu of attaching the actual documents to their Form
ATS-N filings.
Request for Comment
133. Do you believe that Part II of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required? If not, how should Part II of proposed Form ATS-N be revised
to provide additional clarity? Please explain in detail.
134. Do you believe there is other information that market
participants might find relevant or useful with regard to the
disclosures in Part II? If so, describe such information and explain
whether, and if so why, such information should be required to be
provided under proposed Form ATS-N. Please support your arguments.
135. Do you believe that the Commission should require the
effective date of broker-dealer registration with the Commission as a
required disclosure on proposed Form ATS-N? Why or why not? Please
support your arguments.
136. Do you believe that the Commission should require the SEC File
number of the broker-dealer operator as a required disclosure on
proposed Form ATS-N? Why or why not? Please support your arguments.
137. Do you believe that the Commission should require the CRD
number of the broker-dealer operator as a required disclosure on
proposed Form ATS-N? Why or why not? Please support your arguments.
138. Do you believe that the Commission should require the address
of the physical location of the NMS Stock ATS's matching system as a
required disclosure on proposed Form ATS-N? Why or why not? Please
support your arguments.
139. Do you believe that the Commission should require the mailing
address of the NMS Stock ATS as a required disclosure on proposed Form
ATS-N? Why or why not? Please support your arguments.
140. Do you believe that the Commission should require the Web site
URL of the NMS Stock ATS as a required disclosure on proposed Form ATS-
N? Why or why not? Please support your arguments.
141. Do you believe that the Commission should require NMS Stock
ATSs to disclose materials provided to subscribers or other persons
related to the operations of the NMS Stock ATS on proposed Form ATS-N?
Why or why not? Please support your arguments. Do you believe such
materials should be provided to the Commission as an Exhibit? Why or
why not? Please support your arguments. Do you believe that the NMS
Stock ATS should be able to provide a URL where these documents can be
found in lieu of providing the documents as an Exhibit? Why or why not?
Please support your arguments.
142. Do you believe it is appropriate for the Commission to not
make public the address of the NMS Stock ATS that is a sole
proprietorship? Why or why not? Please support your arguments.
143. Do you believe it is appropriate for the Commission to not
make public the contact information of the broker-dealer operator's
representative? Why or why not? Please support your arguments.
144. Do you believe that there is any information, that would be
required to be disclosed in Part II of proposed Form ATS-N that the
Commission should not require to be disclosed due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
145. What are the potential costs and benefits of disclosing the
information required by Part II of proposed Form ATS-N? Would the
proposed disclosures in Part II of proposed Form ATS-N require an NMS
Stock ATS to reveal too much (or not enough) information? Why or why
not? Please support your arguments.
146. Do you believe there are there certain types of materials
provided to subscribers that would be responsive to Exhibit 1 that
should or should not be disclosed on Form ATS-N? If so, what types of
materials and why? Do you believe an NMS Stock ATS should provide in
response to Exhibit 1 the materials the NMS Stock ATS provides to
subscribers such as FIX protocol procedures, rules of engagement/user
manuals, frequently asked questions, or marketing materials? Why or why
not? Please support your arguments.
147. Do you believe the Commission should require NMS Stock ATSs to
provide on Form ATS-N information on Exhibits 2A and 2B, in light of
the fact that the information is already provided on Form BD?
148. Do you believe the Commission should require the NMS Stock ATS
to provide disclosure about its governance structure and compliance
programs and controls to comply with Regulation ATS? Why or why not? If
so, what aspects of the NMS Stock ATSs' governance structure and
compliance programs and controls to comply with Regulation ATS should
the NMS Stock ATS be required to disclose? Please support your
arguments.

[[Page 81041]]

VII. Part III of Proposed Form ATS-N: Activities of the Broker-Dealer
Operator and Its Affiliates

A. The Relationship Between the Broker-Dealer Operator's Operation of
the NMS Stock ATS and Its Other Operations

1. Background
The Commission preliminarily believes 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. As previously noted, Rule 301(b)(1) of
Regulation ATS requires that an ATS, including an NMS Stock ATS,
register as broker-dealer under Section 15 of the Exchange Act (the
``broker dealer operator'').\360\ The broker-dealer operator of the ATS
trading platform is legally responsible for all operational aspects of
the ATS and for ensuring that the ATS operates in compliance with
applicable federal securities laws and the rules and regulations
thereunder, including Regulation ATS. The broker-dealer operator, and
in some cases, its affiliates,\361\ controls access to the ATS and
provides the technology and systems that support the trading on the
ATS.\362\ Based on Commission experience, the broker-dealer operator,
or in some cases, its affiliates, directs the personnel that service
the ATS or otherwise manages service providers that may perform certain
functions of the ATS. The broker-dealer operator, or in some cases, its
affiliates, also determines, among other things: (1) What securities
will trade on the ATS; (2) who may become subscribers that will
participate on the ATS; (3) whether there will be segmented categories
of order flow in the ATS, and if so, how the order flow will be
segmented; (4) order matching methodologies and priority rules; (5) the
rules governing the interaction and execution of orders; and (6) the
display, if any, of orders and trading interest. Additionally, the
broker-dealer operator, or in some cases, its affiliates, determines
the means by which orders are entered on and subscribers access 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. The broker-dealer operator, or in some cases, its
affiliates, also controls the market data that the ATS uses to
prioritize, match, and execute orders and the transmission of and
access to confidential order and execution information sent to and from
the ATS.\363\ Based on Commission experience, the operations of the NMS
Stock ATS and the other operations of the broker-dealer operator are
usually closely intertwined as the broker-dealer operator generally
leverages its information technology, systems, personnel, and market
data, and those of its affiliates, to operate the ATS.
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\360\ 17 CFR 242.301(b)(1); 15 U.S.C. 78o. Additionally, as a
registered entity with the Commission, a broker-dealer operating an
ATS is subject to applicable federal securities laws, as well as
other requirements, including the rules of any SRO of which it is a
member.
\361\ The Commission is proposing to define ``affiliate'' for
purposes of Form ATS-N as described and discussed further below. See
infra note 378 and accompanying text. See also Instruction G of
proposed Form ATS-N.
\362\ 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.
\363\ 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.
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The Commission is also aware that most ATSs that currently transact
in NMS stocks are operated by broker-dealers that engage in significant
brokerage and dealing activities in addition to their operation of an
ATS(s).\364\ These multi-service broker-dealers may offer their
customers a variety of brokerage services, often with or through their
affiliates, including algorithmic trading strategy software, agency
sales desk support, and automated smart order routing services. Multi-
service broker-dealers that also operate an NMS Stock ATS may use the
ATS as a complement to the broker-dealer's other service lines and may
use the ATS as an opportunity to execute orders ``in house'' before
seeking contra-side interest at other execution venues. For instance, a
broker-dealer operator, or its affiliate, may operate, among other
things, an OTC market making desk or proprietary trading desks in
addition to operating an NMS Stock ATS.\365\ A multi-service broker-
dealer may also execute orders in NMS stocks internally (and not within
its respective NMS Stock ATS(s)) 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(s) or another external
trading center.\366\ Consequently, non-ATS trading centers operated by
the broker-dealer operator of an ATS (i.e., internal executions by the
broker-dealer outside of an ATS), or its affiliates, often compete with
the ATS as a trading venue for the execution of transactions in NMS
stocks.
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\364\ The Commission notes that, based on Form BD disclosures
from June of 2015, all but 7 of the 36 broker-dealer operators whose
ATSs trade NMS stocks disclose business activities other than
operating an ATS. The other business activities disclosed by broker-
dealer operators (and the number of such broker-dealer operators
providing such disclosure) include: Retailing corporate equity
securities over-the-counter (22); put and call broker or dealer or
option writer (18); exchange commission business other than floor
activities (18); private placements of securities (17); selling
corporate debt securities (17); government securities broker (15);
trading securities for own account (15); municipal securities broker
(13); exchange member engaged in floor activities (13); non-exchange
member arranging for transactions in listed securities by exchange
member (12); underwriter or selling group participant (corporate
securities other than mutual funds) (13); selling interests in
mortgages or other receivables (12); making inter-dealer markets in
corporate securities over-the-counter (11); government securities
dealer (11); municipal securities dealer (11); solicitor of time
deposits in a financial institution (7); investment advisory
services (7). This data does not include the business activities of
affiliates of the broker-dealer operators. Of the 10 ATSs that
traded the most NMS stock measured by total shares executed during
the second quarter of 2015, 6 disclose on Form BD that they engage
in proprietary trading and making inter-dealer markets in corporate
securities OTC, and 7 disclose retailing corporate equities OTC. See
FINRA's ATS Transparency Data Quarterly Statistics, 2nd Quarter of
2015, https://www.finra.org/industry/ats/ats-transparency-data-quarterly-statistics.
\365\ These non-ATS, OTC activities in NMS stocks may include
operating as an OTC market maker, block positioner, or operating an
internal broker-dealer system. See 2010 Equity Market Structure
Release, supra note 124 at 3599-3600. See also infra note 387 and
accompanying text. Additionally, an affiliate of the broker-dealer
operator of an NMS Stock ATS may also operate non-ATS trading
centers.
\366\ 17 CFR 242.600(b)(78).
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2. Potential Conflicts of Interest for the Broker-Dealer Operator or
Its Affiliates
Due to the frequent overlap between the operations of the broker-
dealer operator or its affiliates outlined above and the operations of
ATSs that trade NMS stocks, the Commission preliminarily believes that
the interests of the broker-dealer operator or its affiliates sometimes
compete with the interests of an ATS's subscribers, or customers of the
ATS's subscribers, for executions on the ATS. Accordingly, the
Commission preliminarily believes that these competing interests, at
times, may give rise to potential conflicts of interest for broker-
dealer operators of NMS Stock ATSs or their affiliates. Furthermore,
the Commission preliminarily believes that the frequent overlap between
the operation of ATSs that trade NMS stocks and the other operations of
broker-dealer operators or their affiliates gives rise to the potential
for information leakage of subscribers' confidential trading
information to other

[[Page 81042]]

business units of the broker-dealer operator or its affiliates.\367\
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\367\ 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
7, at 70879.
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When evaluating an NMS Stock ATS as a possible trading venue, a
market participant would likely want to know about the various
activities in which a broker-dealer operator and its affiliates engage
that may give rise to conflicts of interests. For example, as noted
above, the broker-dealer operator of an NMS Stock ATS may operate
multiple trading centers, which operate as competing trading venues for
the execution of trades in NMS stocks. Many broker-dealer operators or
their affiliates trade proprietarily on the NMS Stock ATS. If a broker-
dealer operator that operates an NMS Stock ATS is also able to trade on
that NMS Stock ATS, there may be an incentive for the broker-dealer
operator to operate its NMS Stock ATS in a manner that favors the
trading activity of the broker-dealer operator's business units or
affiliates. A broker-dealer operator of an NMS Stock ATS may provide
its other business units or affiliates, who may be subscribers to the
NMS Stock ATS, with access to certain services of the NMS Stock ATS
that are not provided to other subscribers, which may result in trading
advantages to those business units or affiliates.\368\ The Commission
preliminarily believes that market participants that subscribe and
route orders to NMS Stock ATSs would want to know how a broker-dealer
operator of an NMS Stock ATS treats subscriber orders versus orders of
its business units or its affiliates. The Commission preliminarily
believes that customers of the broker-dealer operator, who may also be
subscribers to the NMS Stock ATS, would also want to better understand
the circumstances in which the broker-dealer operator may send their
orders to its NMS Stock ATS, internalize their orders outside of the
NMS Stock ATS, or route to another trading venue.
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\368\ Such benefits or other advantages could include the NMS
Stock ATS providing itself or its affiliates with faster access to
the NMS Stock ATS or priority in executions over other subscribers.
Unlike registered national securities exchanges, ATSs are not
required to have rules that are designed not to permit unfair
discrimination; however, the advantages that a broker-dealer
operator may provide to itself or its affiliates may not be fully
disclosed to subscribers to an ATS.
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Concerns regarding potential conflicts of interests involving
trading venues that execute securities transactions are not novel.\369\
In the context of national securities exchanges, the Commission has
expressed concern that the affiliation of a registered national
securities exchange with one of its members raises potential conflicts
of interest, and the potential for unfair competitive advantage.\370\
Because the Commission reviews the rules of registered national
securities exchanges, a process which requires, among other things,
that to approve certain rule changes the Commission find that the
exchange's proposed rule changes are consistent with the Exchange
Act,\371\ 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.\372\
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\369\ See, e.g., Securities Exchange Act Release Nos. 50700, 69
FR 71256, 71257 (December 8, 2004) (discussing the inherent
conflicts of interest between a self-regulatory organization's
regulatory obligations and the interests of its members, its market
operations, its listed issuers, and, in the case of a demutualized
SRO, its shareholders); 50699, 69 FR 71126 (December 8, 2004)
(proposing rules that the Commission believed would help insulate
the regulatory activities of an exchange or national securities
association from the conflicts of interest that otherwise may arise
by virtue of its market operations); 63107, 75 FR 65882 (October 26,
2010) (proposing Regulation MC under the Exchange Act to mitigate
conflicts of interest regarding ownership interests and voting
rights with respect to security-based swap clearing agencies,
security-based swap execution facilities, and security-based swap
exchanges pursuant to the Dodd Frank Act, Pub. L. 111-203, Section
765).
\370\ See, e.g., Securities Exchange Act Release Nos. 66808
(April 13, 2012) 77 FR 23294 (April 18, 2012) (SR-BATS-2012-013)
(order approving a proposed rule change by BATS Exchange, Inc.
(``BATS Exchange'') relating to its ability to receive inbound
routes of equities orders through BATS Trading, Inc., BATS
Exchange's routing broker-dealer, from BATS-Y Exchange, Inc.) at
23295 n.16 and accompanying text; 59281 (January 22, 2009), 74 FR
5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a joint
venture between NYSE and BIDS Holdings L.P.) (``NYSE/BIDS Order'');
54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-
006) (order approving Nasdaq's proposal to adopt Nasdaq Rule 2140,
restricting affiliations between Nasdaq and its members) (``Nasdaq
Affiliation Order''); and 53382 (February 27, 2006), 71 FR 11251
(March 6, 2006) (SR-NYSE-2005-77) (order approving the combination
of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc.)
(``NYSE/Arca Order'').
\371\ See 15 U.S.C. 78s(b).
\372\ For example, registered national securities exchanges have
rules that prevent the national securities exchange from being
affiliated with a member of the exchange, or with an affiliate of a
member of the exchange, absent Commission approval. See, e.g., NYSE
Rule 2B, which provides, in part, that: ``Without prior SEC
approval, the [New York Stock Exchange LLC (``NYSE'')] or any entity
with which it is affiliated shall not, directly or indirectly,
acquire or maintain an ownership interest in a member organization.
In addition, a member organization shall not be or become an
affiliate of the [NYSE], or an affiliate of any affiliate of the
[NYSE] . . . .'' See also Nasdaq Rule 2160, and BZX Rule 2.10. In
cases where the Commission has approved exceptions to this
prohibition, there have been limitations and conditions on the
activities of the exchange and its affiliated member designed to
address concerns about potential conflicts of interest and unfair
competitive advantage. See, e.g., Securities Exchange Act Release
No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No.
10-182) (In the Matter of the Application of BATS Exchange, Inc. for
Registration as a National Securities Exchange; Findings, Opinion,
and Order of the Commission), at 49502 n.90-94 and accompanying text
(approving the affiliation between BATS Exchange and its affiliated
member BATS Trading in connection with the provision of routing
services by BATS Trading for BATS Exchange and subject to certain
limitations and conditions).
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In the context of a national securities exchange's affiliation with
one of its members, the Commission's concerns stem from, among other
things, the potential for unfair competitive advantages that the
affiliated member could have by virtue of informational or operational
advantages or the ability to receive preferential treatment.\373\ These
same concerns are present in the context of trading by the broker-
dealer operator, or its affiliates, on the ATS that the broker-dealer
operator operates. For example, the potential exists for the broker-
dealer operator of an NMS Stock ATS to place its commercial interests,
or those of its affiliates, before those of subscribers that route
orders to the NMS Stock ATS directly or indirectly through the broker-
dealer operator of the NMS Stock ATS or its affiliates. Some of the
settled enforcement actions against ATSs that trade NMS stocks
highlight this potential.\374\ Therefore, as

[[Page 81043]]

explained further below, the Commission proposes to require NMS Stock
ATSs to disclose information about certain aspects of the activities of
the NMS Stock ATS's broker-dealer operator, and its affiliates, in
connection with the NMS Stock ATS, to help market participants assess
potential conflicts of interest that may adversely impact their trading
on the NMS Stock ATS.
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\373\ See, e.g., Nasdaq Affiliation Order, supra note 370, at
42151. The Commission's concern with respect to a national
securities exchange's affiliation with one of its members also
stemmed from the possible conflicts of interest that could arise
between a national securities exchange's self-regulatory obligations
and its commercial interest. See id. Because ATSs are not SROs, and
therefore do not have self-regulatory obligations, this particular
concern is not present in the context of ATSs.
\374\ See, e.g., In the Matter of ITG Inc. and Alternet
Securities Inc., Securities Exchange Act Release No. 75672 (Aug. 12,
2015), https://www.sec.gov/litigation/admin/2015/33-9887.pdf (order
instituting administrative and cease-and-desist proceedings, making
findings, and imposing remedial sanctions and a cease-and-desist
order) (``ITG Settlement''); In the Matter of UBS Securities LLC,
Securities Exchange Act Release No. 74060 (Jan. 15, 2015), https://www.sec.gov/litigation/admin/2015/33-9697.pdf (order instituting
administrative and cease-and-desist proceedings, making findings,
and imposing remedial sanctions and a cease-and-desist order) (``UBS
Settlement''); In the Matter of Lavaflow, Inc., Securities Exchange
Act Release No. 72673 (Jul. 25, 2014), https://www.sec.gov/litigation/admin/2014/34-72673.pdf (order instituting administrative
and cease-and-desist proceedings, making findings, and imposing
remedial sanctions and a cease-and-desist order) (``LavaFlow
Settlement''); In the Matter of Liquidnet, Inc., Securities Exchange
Act Release No. 72339 (Jun. 6, 2014), https://www.sec.gov/litigation/admin/2014/33-9596.pdf (order instituting administrative and cease-
and-desist proceedings, making findings, and imposing remedial
sanctions and a cease-and-desist order) (``Liquidnet Settlement'');
In the Matter of eBX, LLC, Securities Exchange Act Release No. 67969
(Oct. 3, 2012), https://www.sec.gov/litigation/admin/2012/34-67969.pdf (order instituting administrative and cease-and-desist
proceedings, making findings, and imposing remedial sanctions and a
cease-and-desist order) (``LeveL Settlement''); In the Matter of
Pipeline Trading Systems LLC, Fred J. Federspiel, and Alfred R.
Berkeley III, Securities Exchange Act Release No. 9271 (Oct. 24,
2011) (order instituting administrative and cease-and-desist
proceedings, making findings, and imposing remedial sanctions and a
cease-and-desist order), https://www.sec.gov/litigation/admin/2011/33-9271.pdf (``Pipeline Settlement''); In the Matter of INET ATS,
Inc., Securities Exchange Act Release No. 53631 (Apr. 12, 2006),
https://www.sec.gov/litigation/admin/2006/34-53631.pdf (order
instituting administrative and cease-and-desist proceedings, making
findings, and imposing remedial sanctions and a cease-and-desist
order); and In the Matter of BRUT, LLC, Securities Exchange Act
Release No. 48718 (Oct. 30, 2003), https://www.sec.gov/litigation/admin/34-48718.htm (order instituting administrative and cease-and-
desist proceedings, making findings, and imposing remedial sanctions
and a cease-and-desist order).
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Finally, due to the overlap between the operation of NMS Stock ATSs
and the other operations of broker-dealer operators, the Commission is
concerned that market participants have limited information about how
the operations of the broker-dealer operator's business units or its
affiliates may give rise to information leakage of subscribers'
confidential trading information among those business units or
affiliates. For instance, if a proprietary trading desk of the broker-
dealer operator is able to enter orders or other trading interest to
the NMS Stock ATS, that trading desk may have means to see the incoming
order flow of unaffiliated subscribers to the NMS Stock ATS.
Furthermore, as demonstrated by several enforcement actions, a broker-
dealer operator may at times provide some subscribers--including its
business units or those of its affiliates--access to certain trading
information that it does not provide to others.\375\ Accordingly, the
Commission preliminarily believes that the disclosure of certain
information about the activities of the broker-dealer operator and its
affiliates with respect to the NMS Stock ATS would enable market
participants to better assess whether the potential for information
leakage exists. The Commission preliminarily believes that such
disclosures would help a market participant independently evaluate
whether submitting order flow to a particular NMS Stock ATS aligns with
its business interests and would help it achieve its investing or
trading objectives.
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\375\ See id.
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B. Disclosures Required Under Part III of Proposed Form ATS-N

Part III of proposed Form ATS-N would require that broker-dealer
operators of NMS Stock ATSs include, as applicable, disclosures that
pertain to the broker-dealer operator and its affiliates of an NMS
Stock ATS. The Commission preliminarily believes that these proposed
disclosure requirements would help ensure that market participants and
the Commission are adequately informed about: (1) The operation of the
NMS Stock ATS--regardless of the corporate structure of the NMS Stock
ATS and that of its broker-dealer operator, or any arrangements the
broker-dealer operator may have made, whether contractual or otherwise,
pertaining to the operation of its NMS Stock ATS; and (2) any potential
conflicts of interest the broker-dealer operator may have with respect
to the operation of its NMS Stock ATS.
The Commission has also considered other alternatives to address
the potential conflicts of interest between NMS Stock ATSs and their
broker-dealer operators.\376\ For example, the Commission could require
an NMS Stock ATS to operate as a ``stand-alone'' entity having no
affiliation with any broker-dealer that seeks to execute proprietary or
agency orders in the NMS Stock ATS. This alternative would eliminate
any potential conflicts of interest by requiring a broker-dealer that
operates an NMS Stock ATS to have only a single business function--
operating the NMS Stock ATS--and eliminating any other functions, such
as trading on a proprietary basis or routing customer orders. As
another alternative, and short of requiring NMS Stock ATSs to operate
on a stand-alone basis, the Commission could continue to permit broker-
dealer operators to continue to act as a broker-dealer operator of an
NMS Stock ATS and engage in non-ATS functions while imposing new
requirements designed to limit potential conflicts.
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\376\ See infra Section XIII.D.7 for a further discussion of
alternatives to address potential conflicts of interest.
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The Commission preliminarily believes that the above alternatives
could be significantly more intrusive and substantially affect or limit
the current operations of ATSs that trade NMS stocks relative to
requiring additional disclosures about the operations of the broker-
dealer operator and its affiliates, and therefore is not proposing such
alternatives at this time. The Commission is instead proposing that NMS
Stock ATSs and their broker-dealer operators provide additional
disclosures, both to the Commission and the public, about how they
interact.
Request for Comment
149. Do you believe that it is necessary to have some understanding
of the broader activities of the broker-dealer operator and its
affiliates in order to understand and evaluate the operation of an NMS
Stock ATS? Why or why not? Please support your arguments.
150. Do you believe that conflicts of interest could arise from a
broker-dealer's operation of an NMS Stock ATS? Why or why not? If so,
please explain what these conflicts of interest are. Do you believe
that potential conflicts of interest should be disclosed to the public?
Why or why not? Please support your arguments.
151. Do you believe that certain conflicts of interest arising out
of the broker-dealer's operation of the NMS Stock ATS should be
prohibited? Why or why not? Please support your arguments.
152. Do you believe that the Commission should adopt an alternative
approach, either those described above or any other alternative, such
as a prohibition, regarding potential conflicts of interest arising
from a broker-dealer's operation of an NMS Stock ATS? Why or why not?
Please support your arguments. If so, what approach should the
Commission adopt? Please be specific.
153. Do you believe that the Commission should require information
barriers between the ATS and non-ATS business units of the broker-
dealer operator? Why or why not? Please support your arguments.
154. Do you believe that the Commission should require an NMS Stock
ATS to operate as a ``stand-alone'' entity and have no affiliation with
any broker-dealer that seeks to execute proprietary or agency orders in
the ATS? Why or why not? Please support your arguments. Do you believe
that the proposed disclosures on Form ATS-N would help broker-dealers
better assess whether the routing of their customers' orders to a
particular NMS Stock ATS fulfills the broker-dealer's duty of best

[[Page 81044]]

execution? \377\ Why or why not? Please support your arguments.
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\377\ See supra notes 36-40 and accompanying text (relating to
the duty of best execution).
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155. Do you believe that the proposed disclosures on Form ATS-N
would help customers of broker-dealers to better evaluate whether their
broker-dealer is fulfilling its duty of best-execution with respect to
orders routed to NMS Stock ATSs? Why or why not? Please support your
arguments.
1. Proposed Definitions of ``Affiliate'' and ``Control''
For the purposes of the proposed disclosures regarding affiliates
of the broker-dealer operator, the Commission is proposing to define
the term ``affiliate'' to mean ``with respect to a specified person,
any person that directly, or indirectly, controls, is under common
control with, or is controlled by, the specified person.'' \378\ This
proposed definition is consistent with the definition of an
``affiliate'' for the purposes of Form 1 disclosures,\379\ and relates
closely to the definition of a similar term under Regulation ATS.\380\
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\378\ See Instruction G to proposed Form ATS-N.
\379\ See Instruction B to Form 1; 17 CFR 249.1.
\380\ See 17 CFR 242.300(c) (defining affiliate of a subscriber
as any person that, directly or indirectly, controls, is under
common control with, or is controlled by, the subscriber, including
any employee).
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The Commission also proposes to amend the existing definition of
the term ``control'' under Regulation ATS to add the phrase ``the
broker-dealer of'' before the two instances of the phrase ``an
alternative trading system'' and before the phrase ``the alternative
trading system'' in subsections (2) and (3) of the definition.\381\ As
proposed to be amended, ``control'' would mean ``the power, directly or
indirectly, to direct the management or policies of the broker-dealer
of an alternative trading system, whether through the ownership of
securities, by contract, or otherwise. A person is presumed to control
the broker-dealer of an alternative trading system, if that person (1)
is a director, general partner, or officer exercising executive
responsibility (or having similar status or performing similar
functions); (2) directly or indirectly has the right to vote 25% or
more of a class of voting securities or has the power to sell or direct
the sale of 25% or more of a class of voting securities of the broker-
dealer of the alternative trading system; or (3) in the case of a
partnership, has contributed, or has the right to receive, upon
dissolution, 25% or more of the capital of the broker-dealer of the
alternative trading system.'' \382\ The purpose of these amendments to
the definition of control under Regulation ATS is to make clear that,
because an ATS must register as a broker-dealer, control of the broker-
dealer of the ATS is control of the ATS, and that the broker-dealer
(also referred to as the broker-dealer operator) is legally responsible
for all operational aspects of the ATS and for ensuring that the ATS
complies with applicable federal securities laws and the rules and
regulations thereunder, including Regulation ATS.
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\381\ 17 CFR 242.300(f).
\382\ See id. and Instruction G to proposed Form ATS-N.
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The proposed disclosures of affiliate activities under Part III of
proposed Form ATS-N are designed to provide market participants and the
Commission with a comprehensive understanding of the potential
conflicts of interest that may arise from the broker-dealer operator's
other business activities and its operation of the NMS Stock ATS. Under
the proposed definition of ``affiliate'' and amended definition of
``control,'' any affiliate of the broker-dealer operator of the NMS
Stock ATS would be an affiliate of the NMS Stock ATS.\383\ The
Commission preliminarily believes that the proposed definition of an
``affiliate'' and amended definition of ``control'' would cover
entities that have a close relationship with the broker-dealer operator
and whose activities could raise potential conflicts of interest, or
could otherwise be relevant to market participants in evaluating an NMS
Stock ATS. Extending the proposed disclosures to affiliates of the
broker-dealer operator could also reduce the potential for an entity to
structure its organization in a way that would not provide complete
disclosure of information in response to Part III of proposed Form ATS-
N. The Commission notes that the proposed disclosures related to
affiliates extends to persons that control, are controlled by, or are
under common control with the broker-dealer operator, and, as a result,
parallels the disclosures related to ``control affiliates'' that are
required in Form BD, to which broker-dealer operators are already
subject.\384\
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\383\ The instructions in proposed Form ATS-N would require an
NMS Stock ATS to provide the identity of affiliates and business
units of the broker-dealer operator, provide the name under which
each affiliate or business unit conducts business (e.g., the formal
name under which a proprietary trading desk of the broker-dealer
operator conducts business) and the applicable CRD number and
MPID(s) under which the affiliate or business unit conducts
business.
\384\ See Form BD at 2 (defining ``control affiliate'').
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Request for Comment
156. Should the Commission adopt the proposal to define
``affiliate'' for purposes of proposed Form ATS-N as, with respect to a
specified person, any person that, directly or indirectly, controls, is
under common control with, or is controlled by, the specified person?
Why or why not? Please support your arguments. Do you believe that the
Commission should adopt a more limited or expansive definition of an
``affiliate''? Why or why not? Please support your arguments. What
advantages or disadvantages might result from a more limited or
expansive definition of an affiliate? Please support your arguments.
157. Do you believe that the Commission should use the definition
of an ``affiliated person'' as defined in the Exchange Act for purposes
of proposed Rule 304? \385\ Why or why not? Please support your
arguments. If so, do you believe that the Commission should require
disclosures about the activities of affiliated persons of the NMS Stock
ATS, and/or affiliated persons of an affiliated person of an NMS Stock
ATS? Why or why not? Please support your arguments.
---------------------------------------------------------------------------

\385\ Under the Exchange Act, an ``affiliated person'' of
another person means: Any person directly or indirectly owning,
controlling, or holding with power to vote, 5 percent or more of the
outstanding voting securities of such other person; any person 5
percent or more of whose outstanding voting securities are directly
or indirectly owned, controlled, or held with power to vote, by such
other person; any person directly or indirectly controlling,
controlled by, or under common control with, such other person; any
officer, director, partner, copartner, or employee of such other
person; if such other person is an investment company, any
investment adviser thereof or any member of an advisory board
thereof; and if such other person is an unincorporated investment
company not having a board of directors, the depositor thereof. 15
U.S.C. 78c(a)(19); 15 U.S.C. 80a-2(a)(3).
---------------------------------------------------------------------------

158. Do you believe that the proposed amendments to the definition
of ``control'' under Regulation ATS are appropriate in this context? Do
you believe the Commission should adopt a more limited or expansive
definition of ``control''? Why or why not? Please support your
arguments.
159. Do you believe the voting interest or partnership interest
thresholds for ``control'' of an entity (i.e., 25% or more) should be
higher or lower for purposes of Rule 304? For example, should the
voting interest or partnership interest threshold for control of an
entity to be presumed be 5%, 10%, 15%, 30%, or 50% for purposes of Rule
304? If so, what is the appropriate percentage threshold and why would
such alternate percentage threshold be more appropriate? Please support
your arguments.

[[Page 81045]]

160. Do you believe that the definition of ``control'' should deem
an affiliate of the broker-dealer of the NMS Stock ATS to be an
affiliate of the NMS Stock ATS, such that the ATS would be subject to
all of the proposed disclosures relating these entities? Should the
definition of ``control'' be amended? If so, how should it be amended?
Please support your arguments.
161. Do you believe that the information required to be filed on
proposed Form ATS-N about affiliates of the NMS Stock ATS would provide
useful information to market participants? Why or why not? Please
support your arguments.
162. Do you believe that the Commission should require that the
MPID and/or CRD number for affiliates and business units of the broker-
dealer operator be disclosed on proposed Form ATS-N? Would such
disclosure help market participants identify the broker-dealer
operator's affiliates and business units? Why or why not? Please
support your arguments.
2. Non-ATS Trading Centers of the Broker-Dealer Operator
Part III, Item 1 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether the broker-dealer operator or any of its
affiliates operate or control any non-ATS trading center(s) \386\ that
is an OTC market maker or executes orders in NMS stocks internally by
trading as principal or crossing orders as agent (``non-ATS trading
centers''),\387\ and if so, to (1) identify the non-ATS trading
center(s); and (2) describe any interaction or coordination between the
identified non-ATS trading center(s) and the NMS Stock ATS including:
(i) Circumstances under which subscriber orders or other trading
interest (such as quotes, indications of interest (``IOI''),
conditional orders or messages (hereinafter collectively referred to as
``trading interest'')) sent to the NMS Stock ATS are displayed or
otherwise made known to the identified non-ATS trading center(s)
identified in Item 1(a) before entering the NMS Stock ATS; (ii)
circumstances under which subscriber orders or other trading interest
received by the broker-dealer operator or its affiliates may execute,
in whole or in part, in the identified non-ATS trading center
identified in Item 1(a) before entering the NMS Stock ATS; and (iii)
circumstances under which subscriber orders or other trading interest
are removed from the NMS Stock ATS and sent to the identified non-ATS
trading center(s).\388\
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\386\ A trading center is defined under Regulation NMS as a
national securities exchange or national securities association that
operates an SRO trading facility, an alternative trading system, 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). The Commission
preliminarily believes that the last two components of the
definition of a trading center (i.e., an OTC market maker and any
other broker or dealer that executes orders internally by trading as
principal or crossing orders as agent) are the trading centers for
which conflicts of interests of the broker-dealer operator and its
affiliates are relevant, as such trading centers operate as
competing venues for the execution of NMS stock over-the-counter.
\387\ References to non-ATS trading centers, as used herein,
encompass all executions that occur off of an exchange and outside
of an ATS, including when a broker-dealer is acting as an OTC
market-maker, block positioner (i.e., any broker-dealer in the
business of executing, as principal or agent, block size trades for
its customers), or operation of an internal broker-dealer system.
See 17 CFR 242.600(b)(52) (defining ``OTC market maker'' as any
dealer that holds itself out as being willing to buy and sell to its
customers, or others, in the United States, an NMS stock for its own
account on a regular or continuous basis otherwise than on a
national securities exchange in amounts of less than block size); 17
CFR 242.600(b)(9) (defining ``block size'' as an order of at least
10,000 shares or for a quantity of stock having a market value of at
least $200,000); and 17 CFR 240.17a-3(a)(16)(ii)(A) (defining
``internal broker-dealer system'' as any facility, other than a
national securities exchange, an exchange exempt from registration
based on limited volume, or an alternative trading system as defined
in Regulation ATS that provides a mechanism, automated in full or in
part, for collecting, receiving, disseminating, or displaying system
orders and facilitating agreement to the basic terms of a purchase
or sale of a security between a customer and the sponsor, or between
two customers of the sponsor, through use of the internal broker-
dealer system or through the broker or dealer sponsor of such
system). See also 2010 Equity Market Structure Release, supra note
124, at 3599-3600.
\388\ See Part III, Item 1 of proposed Form ATS-N.
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The Commission is aware that many broker-dealer operators of ATSs
that currently trade NMS stocks facilitate the execution of NMS stock
outside of their ATSs.\389\ As discussed above, a broker-dealer
operator is permitted to engage in broker or dealer activities
independent of its operation of an ATS, such as operating proprietary
trading desks; the proposed rules do not eliminate or otherwise
restrict such activities. The Commission, however, is proposing to
require the public disclosure on proposed Form ATS-N of such activities
as they relate to the NMS Stock ATS. As noted above, the Commission
preliminarily believes that circumstances could arise whereby a broker-
dealer operator of an NMS Stock ATS may place the interests of its or
its affiliates' non-ATS trading center ahead of the interests of the
operations of the NMS Stock ATS and its subscribers. The Commission
recognizes the sensitive nature of the confidential trading information
of subscribers to an ATS and the potential for its misuse. The
Commission preliminarily believes that non-ATS trading centers of a
broker-dealer operator of an NMS Stock ATS or its affiliates may have
incentives, and the opportunity to access, NMS Stock ATS subscriber
orders received by the broker-dealer operator, which may result in
information leakage.
---------------------------------------------------------------------------

\389\ See, e.g., Laura Tuttle, Over-the-Counter Trading:
Description of Non-ATS OTC Trading in National Market System Stocks
(March 2014), https://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
---------------------------------------------------------------------------

Furthermore, the Commission preliminarily believes that subscribers
to NMS Stock ATSs currently have limited information about the various
non-ATS trading centers operated by an NMS Stock ATS broker-dealer
operator, or its affiliates, and the extent to which the operations of
these non-ATS trading centers may interact with subscriber orders or
other trading interest sent to the NMS Stock ATS. Orders or other
trading interest sent by subscribers to the NMS Stock ATS may pass
through the broker-dealer operator's systems or functionality before
being entered into the NMS Stock ATS. Such systems and functionalities,
which could include a common gateway function, algorithm, or smart
order router, may be used to support the broker-dealer operator's other
business units, including any non-ATS trading centers. The broker-
dealer operator typically controls the logic contained in these systems
or functionality that determines where an order that the broker-dealer
receives will be handled or sent. The Commission preliminarily believes
that it would be helpful for NMS Stock ATS subscribers to know the
extent to which subscriber orders received by the broker-dealer
operator may interact, or be handled in any coordinated manner, with a
non-ATS trading center of that broker-dealer operator or its
affiliates.\390\

[[Page 81046]]

In addition, Form ATS-N would require the disclosure of circumstances
under which subscriber orders or other trading interest received by the
broker-dealer operator may execute, in whole or in part, in a non-ATS
trading center(s) operated by the broker-dealer operator or its
affiliates before entering the NMS Stock ATS; the circumstances under
which subscriber orders or other trading interest would be displayed or
otherwise made known to the systems or personnel operating the non-ATS
trading center(s); and the circumstances under which subscriber orders
or other trading interest are removed from the NMS Stock ATS and sent
to the non-ATS trading center(s) for execution. To the extent that the
broker-dealer operator or its affiliates operate a non-ATS trading
center(s), but NMS Stock ATS subscribers' orders could not execute,
route, or otherwise be shared with that non-ATS trading center(s), the
NMS Stock ATS could note this fact in Part III, Item 1 of proposed Form
ATS-N.
---------------------------------------------------------------------------

\390\ As noted above, the Commission is aware that most of the
broker-dealer operators of ATSs that currently trade NMS stocks also
facilitate the execution of NMS stocks in non-ATS trading centers
outside of the NMS Stock ATS. See supra note 364 and accompanying
text. In October of 2013, the Commission and its staff estimated
that about 16.99% of total dollar volume (18.75% of share volume) of
NMS stocks is executed over-the-counter (``OTC'') without the
involvement of an ATS. In contrast, the Commission and its staff
estimated that ATSs comprise 11.31% of total dollar volume (12.04%
of share volume). See Tuttle: ATS Trading in NMS Stocks, supra note
126, at 2. Given that a greater percentage of OTC executions in NMS
stock occur outside of ATSs rather than inside of ATSs, the
Commission preliminarily believes that some disclosure of the
presence of these non-ATS trading centers is appropriate.
Accordingly, to the extent that an NMS Stock ATS subscriber's orders
may execute, be displayed, or otherwise made known in a non-ATS
trading center operated by or affiliated with the broker-dealer
operator, the Commission preliminarily believes that disclosure of
such possibility would be relevant to market participants in
deciding whether to subscribe or route orders to a particular NMS
Stock ATS.
---------------------------------------------------------------------------

The disclosures in Part III, Item 1 of proposed Form ATS-N are
designed to reduce information asymmetries between subscribers and the
broker-dealer operator regarding the operation of the NMS Stock ATS and
competing venues for the execution of NMS stock transactions (i.e.,
non-ATS trading centers) that the broker-dealer operator operates and
the circumstances in which the broker-dealer operator may handle or
choose to execute subscriber orders outside of the NMS Stock ATS that
might otherwise have been sent to the NMS Stock ATS.
Request for Comment
163. Do you believe the Commission should require the disclosure of
the information on Part III, Item 1 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
164. Do you believe Part III, Item 1 of proposed Form ATS-N
captures the information regarding non-ATS trading centers operated or
controlled by the broker-dealer operator or any of its affiliates that
is most relevant to understanding the operations of the NMS Stock ATS?
Why or why not? Please support your arguments.
165. Do you believe there is other information that market
participants might find relevant or useful regarding non-ATS trading
centers operated or controlled by the broker-dealer operator or any of
its affiliates? If so, describe such information and explain whether,
and if so why, such information should be required to be provided under
proposed Form ATS-N. Please support your arguments.
166. Do you believe that Part III, Item 1 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required? If not, how should Part III, Item 1 of proposed Form ATS-N be
revised to provide additional clarity? Please explain in detail.
167. Do you believe that the non-ATS trading centers operated by
the broker-dealer operator or its affiliates could raise potential
conflicts of interest? Why or why not? If so, do you believe that such
potential conflicts of interest should be disclosed? Please support
your arguments.
168. Part III, Item 1 of proposed Form ATS-N would require
disclosure about the non-ATS trading center activities of affiliates of
the broker-dealer operator. Do you believe that disclosure about the
activities of the broker-dealer operator's affiliates in this context
is necessary? Why or why not? Should disclosure of non-ATS trading
center activities extend to more remote affiliates under a revised
definition of ``affiliate''? \391\ Should disclosure of non-ATS trading
center activities apply to a more limited set of affiliates? Why or why
not? Please support your arguments.
---------------------------------------------------------------------------

\391\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

169. What are the potential costs and benefits of disclosing the
information required by Part III, Item 1 of proposed Form ATS-N? Do you
believe the proposed disclosures in Part III, Item 1 have the potential
to impact innovation? Why or why not? Do you believe that the proposed
disclosures in Part III, Item 1 of proposed Form ATS-N would require
broker-dealer operators of NMS Stock ATSs to reveal too much (or not
enough) information about their structure and operations? Why or why
not? Please support your arguments.
170. Do you believe there is other information that market
participants might find relevant or useful regarding the disclosure of
non-ATS trading centers operated by the broker-dealer operator or its
affiliates? If so, describe such information and explain whether or not
such information should be required to be provided under proposed Form
ATS-N. Please support your arguments.
171. Do you believe there is any information regarding the non-ATS
trading centers of the broker-dealer operator or its affiliates that
should not be required to be disclosed on proposed Form ATS-N due to
concerns regarding confidentiality, business reasons, trade secrets,
burden, or any other concerns? If so, what information and why? Please
support your arguments.
172. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
1 of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part III, Item 1?
3. Multiple NMS Stock ATS Operations of the Broker-Dealer Operator
Part III, Item 2 of proposed Form ATS-N would require an NMS Stock
ATS to state whether the broker-dealer operator, or any of its
affiliates, operates one or more NMS Stock ATSs other than the NMS
Stock ATS named on the Form ATS-N, and, if so, to (1) Identify the NMS
Stock ATS(s) and provide its MPID(s); and (2) describe any interaction
or coordination between the identified NMS Stock ATS(s) and the NMS
Stock ATS named on the Form ATS-N including: (i) The circumstances
under which subscriber orders or other trading interest received by the
broker-dealer operator or its affiliates to be sent to the NMS Stock
ATS named on the Form ATS-N may be sent to any identified NMS Stock
ATS(s); (ii) circumstances under which subscriber orders or other
trading interest to be sent to the NMS Stock ATS named on the Form ATS-
N are displayed or otherwise made known in any other identified NMS
Stock ATS(s); and (iii) the circumstances under which subscriber orders
or other trading interest received by the NMS Stock ATS named on the
Form ATS-N may be removed and sent to any other identified NMS Stock
ATS(s).\392\
---------------------------------------------------------------------------

\392\ See Part III, Item 2 of proposed Form ATS-N.
---------------------------------------------------------------------------

The Commission is aware that some broker-dealer operators operate
multiple ATSs that trade NMS stocks and that subscriber orders or other
trading interest received by such broker-dealer operators could be
routed between those NMS Stock ATSs. The Commission preliminarily
believes that--similar to the potential conflicts of interest that may
arise or information leakage that may occur when a broker-dealer
operator, or its affiliate, operates or controls a non-ATS trading
center--circumstances might arise whereby a broker-dealer that operates
multiple NMS Stock ATSs may place its interests ahead of the interests
of subscribers of

[[Page 81047]]

one or more of its NMS Stock ATSs.\393\ To the extent that the broker-
dealer operator or its affiliates operate multiple NMS Stock ATSs, but
the subscribers' orders of the NMS Stock ATS named in the Form ATS-N
filing could not execute, route, be displayed, or otherwise made known
to the NMS Stock ATS(s) identified in Item 2(a) of proposed Form ATS-N,
the NMS Stock ATS could note this fact in Part III, Item 2 of proposed
Form ATS-N.
---------------------------------------------------------------------------

\393\ See supra note 368.
---------------------------------------------------------------------------

Therefore, under Part III, Item 2 of proposed Form ATS-N, a broker-
dealer operator that operates multiple NMS Stock ATSs would be required
to disclose how these trading venues interact with one another, if at
all. To the extent that a broker-dealer operator could allocate
subscriber orders it receives among the various NMS Stock ATSs that it
or its affiliates operate, the broker-dealer operator would be required
to describe how it determines such allocation in response to Item 2.
For example, a broker-dealer operator may send all subscriber orders
that it receives first to one of its NMS Stock ATSs, and if there is no
execution after a certain period of time, the orders may then be routed
directly to a second NMS Stock ATS operated by the broker-dealer
operator or its affiliates, or may be returned to the broker-dealer
operator (or its SOR or similar functionality), and may then be routed
to a non-affiliated NMS Stock ATS for execution. Similarly, an NMS
Stock ATS would be required to describe the circumstances under which
subscriber orders on the NMS Stock ATS might be removed from the NMS
Stock ATS and routed to another NMS Stock ATS that is operated by that
broker-dealer operator or its affiliates.\394\
---------------------------------------------------------------------------

\394\ As is the case with the proposed disclosures under Part
III, Item 1 of proposed Form ATS-N in regard to non-ATS trading
centers, Part III, Item 2 of proposed Form ATS-N would require an
NMS Stock ATS to disclose whether any affiliates of the broker-
dealer operator operates an NMS Stock ATS. This disclosure is
designed to elicit certain information about the relationship of
related NMS Stock ATSs, regardless of the organizational structure
of the broker-dealer operator and its affiliates.
---------------------------------------------------------------------------

The Commission preliminarily believes that subscribers to NMS Stock
ATSs currently have limited information about the extent to which the
operations of other ATSs operated by the same broker-dealer operator,
or its affiliates, may interact with their orders sent to the NMS Stock
ATS. Specifically, because subscriber orders received by a broker-
dealer operator could be sent to multiple NMS Stock ATSs operated by
that broker-dealer operator, the Commission preliminarily believes that
subscribers should be provided with a better understanding of how their
orders may interact, if at all, with multiple NMS Stock ATSs operated
by the same broker-dealer operator or its affiliates. The proposed
disclosures in Part III, Item 2 of proposed Form ATS-N are designed to
help subscribers evaluate potential conflicts of interest for the
broker-dealer operator or the potential for information leakage in
connection with multiple NMS Stock ATSs that the broker-dealer
operator, or its affiliates, operates.\395\ Accordingly, the Commission
preliminary believes that the disclosures required under Part III, Item
2 of proposed Form ATS-N would provide market participants with better
information about how orders would be handled by a broker-dealer
operator that operates multiple NMS Stock ATSs and the potential
conflicts of interest and potential for information leakage that might
arise as a result of such a business structure.
---------------------------------------------------------------------------

\395\ The Commission notes that a broker-dealer operator may
have valid business reasons for operating multiple NMS Stock ATSs,
and the Commission is not proposing to limit the ability for a
broker-dealer operator to operate multiple NMS Stock ATSs. For
example, the broker-dealer operator may establish several NMS Stock
ATSs so that each NMS Stock ATS offers subscribers specific trading
services (block order executions) or other particular trading
functionalities (e.g., an auction mechanism or a limit order book).
---------------------------------------------------------------------------

Request for Comment
173. Do you believe the Commission should require the disclosure of
the information on Part III, Item 2 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
174. Do you believe Part III, Item 2 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding any other NMS Stock ATSs
(other than the one named on the Form ATS-N) operated or controlled by
the broker-dealer operator or any of its affiliates? Why or why not?
Please support your arguments.
175. Do you believe that Part III, Item 2 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required? If not, how should Part III, Item 2 of proposed Form ATS-N be
revised to provide additional clarity? Please explain.
176. Do you believe that the operation of multiple NMS Stock ATSs
by the broker-dealer operator or its affiliates could raise potential
conflicts of interest? Why or why not? If so, do you believe that such
potential conflicts of interest should be disclosed? Please support
your arguments.
177. Do you believe that the information that would be solicited by
Part III, Item 2 of proposed Form ATS-N would be useful to market
participants in deciding whether the participate on an NMS Stock ATS?
Why or why not? Please support your arguments.
178. Part III, Item 2 of proposed Form ATS-N would require
disclosure of whether the affiliates of the broker-dealer operator
operate an NMS Stock ATS (other than the NMS Stock ATS filing the Form
ATS-N). Do you believe that disclosure about affiliates of the broker-
dealer operator in this context is necessary? Why or why not? Should
disclosure of affiliates that operate another NMS Stock ATS be extended
to more remote affiliates under a revised definition of ``affiliate''?
\396\ Should disclosure apply to a more limited set of affiliates? Why
or why not? Please support your arguments.
---------------------------------------------------------------------------

\396\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

179. What are the potential costs and benefits of disclosing the
information required by Part III, Item 2 of proposed Form ATS-N? Do you
believe the disclosures in Part III, Item 2 of proposed Form ATS-N
would have the potential to impact innovation? Why or why not? Would
the proposed disclosures in Part III, Item 2 of proposed Form ATS-N
require broker-dealer operators of NMS Stock ATSs to reveal too much
(or not enough) information about their structure and operations? Why
or why not? Please support your arguments.
180. Do you believe there is other information that market
participants might find relevant or useful regarding the operation of
multiple NMS Stock ATSs by a broker-dealer operator or its affiliate?
If so, describe such information and explain whether, and if so why,
such information should be required to be provided under proposed Form
ATS-N. Please support your arguments.
181. Do you believe that the Commission should require NMS Stock
ATSs to disclose the names of any non-NMS stock ATSs that are operated
by its broker-dealer operator or one of its broker-dealer operator's
affiliates? Why or why not? If so, what information should the NMS
Stock ATS be required to disclose about such non-NMS stock ATSs? Please
support your arguments.
182. Do you believe there is any information regarding the multiple
NMS Stock ATS operations of a broker-dealer operator that the NMS Stock
ATS

[[Page 81048]]

should not be required to disclose on proposed Form ATS-N due to
concerns regarding confidentiality, business reasons, trade secrets,
burden, or any other concerns? If so, what information and why? Please
explain.
183. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
2 of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part III, Item 2?
4. Products or Services Offered to Subscribers by the Broker-Dealer
Operator
Part III, Item 3 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether the broker-dealer operator, or any of its
affiliates, offer subscribers of the NMS Stock ATS any products or
services used in connection with trading on the NMS Stock ATS (e.g.,
algorithmic trading products, market data feeds). If so, the NMS Stock
ATS would be required to describe the products and services and
identify the types of subscribers (e.g., retail, institutional,
professional) to which such services or products are offered, and if
the terms and conditions of the services or products are not the same
for all subscribers, describe any differences.\397\
---------------------------------------------------------------------------

\397\ See Part III, Item 3 of proposed Form ATS-N.
---------------------------------------------------------------------------

Based on the Commission's experience, broker-dealer operators of
NMS Stock ATSs may, directly or indirectly through an affiliate, offer
products or services to subscribers in addition to the trading services
of the NMS Stock ATS. For example, a broker-dealer operator may offer
subscribers the use of an order management system to allow them to
connect to or send orders or other trading interest to the NMS Stock
ATS. Some broker-dealer operators may also offer subscribers the use of
algorithmic trading strategies, which are computer assisted trading
tools that, for instance, may be used by or on behalf of institutional
investors to execute orders that are typically too large to be executed
all at once without excessive price impact, and divide the orders into
many small orders that are fed into the marketplace over time.\398\ In
some cases, a broker-dealer operator offering products or services in
connection with a subscriber's use of the NMS Stock ATS may result in
the subscribers receiving more favorable terms from the broker-dealer
operator with respect to their use of the NMS Stock ATS. For example,
if a subscriber purchases a service offered by the broker-dealer
operator of an NMS Stock ATS, the broker-dealer operator might also
provide that subscriber more favorable terms for their use of the NMS
Stock ATS than other subscribers who do not purchase the service. Such
favorable terms could include fee discounts or access to a faster
connection line to the NMS Stock ATS. Additionally, a broker-dealer
operator of an NMS Stock ATS may only offer certain products and
services to certain subscribers or may offer products and services on
different terms to different categories of subscribers. The Commission
preliminarily believes that market participants would want to know,
when assessing an NMS Stock ATS as a potential trading venue, the range
of services or products that the broker-dealer operator or its
affiliates may offer subscribers of the NMS Stock ATS because such
services or products may have an impact on the subscribers' access to,
or trading on, the NMS Stock ATS.
---------------------------------------------------------------------------

\398\ See Staff of the Division of Trading and Markets,
Commission, ``Equity Market Structure Literature Review, Part II:
High Frequency Trading,'' at 5 (March 18, 2014), https://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
---------------------------------------------------------------------------

Request for Comment
184. Do you believe the Commission should require the disclosure of
the information on Part III, Item 3 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
185. Do you believe Part III, Item 3 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding other products or services
offered to subscribers used in connection with trading on the NMS Stock
ATS by the broker-dealer operator or any of its affiliates? Why or why
not? Please support your arguments.
186. Do you believe that Part III, Item 3 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required? If not, how should Part III, Item 3 of proposed Form ATS-N be
revised to provide additional clarity? Please explain in detail.
187. Do you believe there is other information that market
participants might find relevant or useful regarding other products and
services offered to subscribers by broker-dealer operators or their
affiliates? If so, describe such information and explain whether, and
if so why, such information should be required to be provided under
proposed Form ATS-N. Please support your arguments.
188. Do you believe that the Commission should expand the proposed
disclosures in Part III, Item 3 of proposed Form ATS-N to products or
services offered by the broker-dealer operator or its affiliates that
are offered to subscribers, but not necessarily offered in connection
with transacting on the NMS Stock ATS? Why or why not? Please explain.
Do you believe there is other information that market participants
might find useful regarding the products or services offered to
subscribers by the broker-dealer operator or its affiliates? If so,
what information should be added to the disclosure requirements? Please
explain.
189. What are the potential costs and benefits of disclosing the
information required by Part III, Item 3 of proposed Form ATS-N? Do you
believe the disclosures in Part III, Item 3 of proposed Form ATS-N
would have the potential to impact innovation? Why or why not? Would
the proposed disclosures in Part III, Item 3 of proposed Form ATS-N
require broker-dealer operators of NMS Stock ATSs to reveal too much
(or not enough) information about their structure and operations? Why
or why not? Please support your arguments.
190. Do you believe there is any information regarding the products
or services offered to subscribers by the broker-dealer operator that
the NMS Stock ATS should not be required to disclose on proposed Form
ATS-N due to concerns regarding confidentiality, business reasons,
trade secrets, burden, or any other concerns? If so, what information
and why? Please support your arguments.
191. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
3 of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part III, Item 3?
5. Broker-Dealer Operator Arrangements With Unaffiliated Trading
Centers
Part III, Item 4 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether the broker-dealer operator or any of its
affiliates have any formal or informal arrangement with an unaffiliated
person(s), or affiliate(s) of such person, that operates a trading
center \399\ regarding access to the NMS Stock ATS,

[[Page 81049]]

including preferential routing arrangements. If so, the NMS Stock ATSs
would be required to identify the person(s) and the trading center(s)
and to describe the terms of the arrangement(s).\400\
---------------------------------------------------------------------------

\399\ See supra note 386 (defining trading center).
\400\ See Part III, Item 4 of proposed Form ATS-N.
---------------------------------------------------------------------------

Part III, Item 4 of proposed Form ATS-N is designed to inform
subscribers and the Commission about arrangements that may impact a
subscriber's experience on the NMS Stock ATS and allow market
participants to evaluate potential conflicts of interest of the broker-
dealer operator. For example, Part III, Item 4 of proposed Form ATS-N
would require an NMS Stock ATS to disclose whether its broker-dealer
operator has any arrangement with another unaffiliated NMS Stock ATS
pursuant to which the NMS Stock ATS would route orders or other trading
interest to the unaffiliated NMS Stock ATS for possible execution prior
to routing to any other destination. Similarly, Part III, Item 4 of
proposed Form ATS-N would require disclosure of an arrangement pursuant
to which any subscriber orders routed out of the unaffiliated NMS Stock
ATS would be routed first to the NMS Stock ATS before any other trading
center, and would also require disclosure of the terms of the
arrangement, for example, whether the NMS Stock ATS was providing
monetary compensation or some other brokerage service to the
unaffiliated NMS Stock ATS in exchange for the order flow.\401\
---------------------------------------------------------------------------

\401\ The Commission notes that a broker-dealer operator may
have valid business reasons for it or its affiliates to have formal
or informal arrangements with an unaffiliated person(s), or
affiliate(s) of such person, that operates a trading center
regarding access to the NMS Stock ATS. The Commission is not
proposing to limit the ability for a broker-dealer operator to have
such arrangements.
---------------------------------------------------------------------------

The Commission preliminarily believes that market participants
would consider information about any arrangements between a broker-
dealer operator of an NMS Stock ATS and other trading centers relevant
to their evaluation of an NMS Stock ATS as a potential trading venue.
The disclosure of such arrangements could reveal potential conflicts of
interest of the broker-dealer operator or could identify potential
sources of information leakage. For example, a potential conflict of
interest could arise where an NMS Stock ATS has a preferred routing
arrangement with an unaffiliated non-ATS trading center that provides
that all orders sent to the NMS Stock ATS would first be routed to the
unaffiliated non-ATS trading center before entering the NMS Stock ATS
in exchange for monetary compensation. Such an arrangement could also
pose a risk of information leakage in that the non-ATS trading center
would know that those orders that it does not execute would be routed
to the NMS Stock ATS.\402\ Part III, Item 4 of proposed Form ATS-N
would also require disclosure of mutual access arrangements between an
NMS Stock ATS and other trading centers whereby, for example, a broker-
dealer operator or its affiliates may offer access to its NMS Stock ATS
in exchange for access to the NMS Stock ATS of another broker-dealer
operator.
---------------------------------------------------------------------------

\402\ Alternatively, if an arrangement between the NMS Stock ATS
and unaffiliated trading center provided that any subscriber orders
routed out of the NMS Stock ATS would be first routed to the
unaffiliated non-ATS trading center, the NMS Stock ATS may have an
incentive to remove subscribers' orders from the NMS Stock ATS and
allow the unaffiliated non-ATS trading center the opportunity to
execute those orders.
---------------------------------------------------------------------------

The Commission notes that an NMS Stock ATS would not be prohibited
from establishing arrangements with other trading centers, provided
that such arrangements comply with other applicable laws and rules,
including applicable federal securities laws and Regulation ATS.
However, the Commission preliminarily believes that market participants
could benefit from disclosures about such arrangements and would use
such information when determining whether to subscribe, or route
orders, to a particular NMS Stock ATS. Additionally, the Commission
preliminarily believes that disclosure of such arrangements would help
the Commission perform its oversight functions by enabling it to better
evaluate an NMS Stock ATS's compliance with the requirements of
Regulation ATS, such as Rule 301(b)(10).
Request for Comment
192. Do you believe the Commission should require the disclosure of
the information on Part III, Item 4 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
193. Do you believe Part III, Item 4 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding any formal or informal
arrangement by the broker-dealer operator or any of its affiliates with
an unaffiliated person(s), or affiliate(s) of such person, that
operates a trading center \403\ regarding access to the NMS Stock ATS,
including preferential routing arrangements? Why or why not? Please
support your arguments.
---------------------------------------------------------------------------

\403\ See supra note 386 (defining trading center).
---------------------------------------------------------------------------

194. Do you believe that Part III, Item 4 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required relating to access arrangements and preferred routing
arrangements with other unaffiliated trading centers? If not, how
should Part III, Item 4 of proposed Form ATS-N be revised to provide
additional clarity? Please explain.
195. What are the potential costs and benefits of disclosing the
information required by Part III, Item 4 of proposed Form ATS-N? Do you
believe the disclosures in Part III, Item 4 of proposed Form ATS-N
would have the potential to impact innovation? Why or why not? Would
the proposed disclosures in Part III, Item 4 of proposed Form ATS-N
require broker-dealer operators of NMS Stock ATSs to reveal too much
(or not enough) information about their structure and operations? Why
or why not? Please support your arguments.
196. Do you believe that the Commission should include access
arrangements of affiliates of the broker-dealer operator in Part III,
Item 4 of proposed Form ATS-N? Why or why not? Please support your
arguments. Conversely, should disclosures of arrangements with other
trading centers by affiliates be extended to more remote affiliates
under a revised definition of ``affiliate''? \404\ Should disclosure
apply to a more limited set of affiliates? Why or why not? Please
support your arguments.
---------------------------------------------------------------------------

\404\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

197. Do you believe that the Commission should expand the proposed
disclosure requirements to other arrangements beyond access and
preferred routing that the broker-dealer operator or its affiliates
might have with other trading centers? If so, what other arrangements
do you believe should be disclosed? Please explain in detail.
198. Do you believe that the Commission should limit or expand in
any way the proposed disclosure requirements to require disclosure of
arrangements regarding access by the broker-dealer operator or its
affiliates to both other trading centers and affiliates of those other
trading centers? Why or why not? Please support your arguments.
199. Do you believe there is other information that market
participants might find relevant or useful regarding the broker-dealer
operator or its affiliates' arrangements with other trading centers? If
so, describe such information and explain whether, and if so why, such
information should be

[[Page 81050]]

required to be provided under proposed Form ATS-N. Please support your
arguments.
200. Do you believe there is any information regarding the broker-
dealer operator or its affiliates' arrangements with other trading
centers that the NMS Stock ATS should not be required to disclose on
proposed Form ATS-N due to concerns regarding confidentiality, business
reasons, trade secrets, burden, or any other concerns? If so, what
information and why? Please support your arguments.
201. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
4 of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part III, Item 4?
6. Trading on the NMS Stock ATS by the Broker-Dealer Operator and Its
Affiliates
Part III, Item 5 of proposed Form ATS-N would require certain
disclosures related to the trading activity of the broker-dealer
operator or its affiliates on the NMS Stock ATS. Specifically, Part
III, Item 5 of proposed Form ATS-N would require the NMS Stock ATS to
disclose whether the broker-dealer operator, or any of its affiliates,
enters orders or other trading interest on the NMS Stock ATS. If so,
the NMS Stock ATS would be required to: (1) Identify each affiliate and
business unit of the broker-dealer operator that may enter orders or
other trading interest on the NMS Stock ATS; (2) describe the
circumstances and capacity (e.g., proprietary, agency) in which each
identified affiliate and business unit enters orders or other trading
interest on the NMS Stock ATS; (3) describe the means by which each
identified affiliate and business unit enters orders or other trading
interest on the NMS Stock ATS (e.g., directly through a FIX connection
to the NMS Stock ATS, or indirectly, by way of the broker-dealer
operator's SOR (or similar functionality), algorithm, intermediate
application, or sales desk); and (4) describe any means by which a
subscriber can be excluded from interacting or trading with orders or
other trading interest of the broker-dealer operator or its affiliates
on the NMS Stock ATS.\405\
---------------------------------------------------------------------------

\405\ The Commission notes that a broker-dealer operator may
have valid business reasons for it or its affiliates to trade on the
NMS Stock ATS. The Commission is not proposing to limit the ability
for a broker-dealer operator to trade on any such NMS Stock ATS.
---------------------------------------------------------------------------

As noted above, Part III, Item 5(a) of proposed Form ATS-N would
require the NMS Stock ATS to identify each affiliate and business unit
(e.g., a sales desk or proprietary trading unit) and affiliate of the
broker-dealer operator that can enter orders or other trading interest
on the NMS Stock ATS. The Commission preliminarily believes that
disclosure of whether a broker-dealer operator of an NMS Stock ATS or
its affiliates may trade on that NMS Stock ATS would be important to
subscribers with respect to the potential conflicts of interest that
may arise from the unique position the broker-dealer operator occupies
in relation to the NMS Stock ATS. If the person that operates and
controls a trading center is also able to trade on that trading center,
there may be an incentive to design the operations of the trading
center to favor the trading activity of the operator of the trading
center or affiliates of the operator.\406\ The operator of a trading
center that also trades on the trading center it operates would likely
have informational advantages over others trading on the trading center
such as a better understanding of the manner in which the system
operates or who is trading on the trading center. In the most egregious
case, the operator of the trading center might use the confidential
trading information of other traders to advantage its own trading on
that trading center, which, in context of an ATS, would violate Rule
301(b)(10). Accordingly, the Commission believes that subscribers would
benefit from knowing whether and how a broker-dealer operator or its
affiliates trade on the NMS Stock ATS to which they may route orders or
become a subscriber. Such information would allow market participants
to evaluate the extent of the potential conflicts of interest posed by
the broker-dealer operator or its affiliates' participation on the NMS
Stock ATS and to inquire further about such trading activity if they
choose.
---------------------------------------------------------------------------

\406\ See supra note 370 and accompanying text.
---------------------------------------------------------------------------

Part III, Item 5(b) of proposed Form ATS-N would require an NMS
Stock ATS to disclose the circumstances and capacity in which the
broker-dealer operator's business units or affiliates may trade on the
NMS Stock ATS, such as whether they are trading on a proprietary basis
(i.e., for their own accounts) or agency basis or both. This disclosure
is meant to provide insight as to the nature of the trading of the
broker-dealer operator and/or its affiliates. The Commission
preliminarily believes that market participants would find this
information useful in evaluating NMS Stock ATSs because they may
perceive agency trading by the broker-dealer operator or its affiliates
as posing less of a conflict of interest as compared to proprietary
trading. For example, market participants may perceive a lesser
potential for a conflict of interest if the broker-dealer operator
discloses that the broker-dealer operator or its affiliates trade on
its own NMS Stock ATS only in an agency capacity with its customers'
orders as opposed to trading on the NMS Stock ATS in a principal
capacity on a proprietary basis--where the broker-dealer operator or
its affiliates may have increased incentives to use their informational
advantage in operating the NMS Stock ATS to advance their trading
opportunities.\407\ Alternatively, market participants could conclude
that the broker-dealer operator's agency trading on its own NMS Stock
ATS could nevertheless pose an unacceptable conflict of interest as the
broker-dealer operator may be able to advantage its customers' orders
to the disadvantage of subscribers to the NMS Stock ATS. The Commission
proposes to provide market participants with information regarding the
nature of the trading activity of the broker-dealer operator and its
affiliates on the NMS Stock ATS so that subscribers (and potential
subscribers) can evaluate potential conflicts of interest that may
arise from that trading activity.
---------------------------------------------------------------------------

\407\ See supra note 368.
---------------------------------------------------------------------------

Part III, Item 5(c) of proposed Form ATS-N would require an NMS
Stock ATS to describe the means by which the business units of the
broker-dealer operator and its affiliates enter orders or other trading
interest into the NMS Stock ATS. Item 5(d) would require a description
of any means by which a subscriber can be excluded from interacting or
trading with orders or other trading interest of the broker-dealer
operator or its affiliates. Some NMS Stock ATSs that currently transact
in NMS stocks may provide both direct and indirect means for
subscribers to enter orders or other trading interest to the ATS. Based
on its experience, the Commission understands that subscribers to some
NMS Stock ATSs may enter orders or other trading interest directly to
the ATS using, for example, a direct FIX connection,\408\ while other
subscribers may enter

[[Page 81051]]

orders or other trading interest indirectly to the ATS using, for
example, an algorithm, the broker-dealer operator's smart order
router,\409\ or the broker-dealer operator's sales desks. As such,
there are a variety of means by which business units of the broker-
dealer operator or its affiliates of the broker-dealer operator may
connect to, and enter orders on, an NMS Stock ATS. The Commission
preliminarily believes that market participants evaluating NMS Stock
ATSs may find this information relevant in assessing any potential
advantages that the broker-dealer operator or its affiliates may have
over other subscribers to the NMS Stock ATS. For example, an NMS Stock
ATS may permit orders or other trading interest of all of its
affiliates that trade on the NMS Stock ATS to enter through a means
that can be used only by the broker-dealer operator or its affiliates
and not by non-affiliated subscribers to the NMS Stock ATS (e.g.,
bypassing the broker-dealer operator's SOR). The Commission
preliminarily believes that market participants would want to know
these circumstances, as the difference in access or order entry could
result in certain advantages, such as the speed at which orders could
be entered or cancelled. Moreover, the Commission preliminarily
believes that based on how a broker-dealer operator's business units or
affiliates access and trade on an NMS Stock ATS--or on other
considerations--certain subscribers may not wish to interact with the
order flow of the broker-dealer operator or its affiliates.
Accordingly, the Commission preliminarily believes that it is important
for market participants to have the information to elect whether and
how they may avoid trading against orders or other trading interest of
the broker-dealer operator or its affiliates on an NMS Stock ATS to
achieve their investing or trading objectives.
---------------------------------------------------------------------------

\408\ To the extent that a subscriber to the NMS Stock ATS
directly sends an order to the NMS Stock ATS by way of FIX protocol,
the NMS Stock ATS should identify and describe any intermediate
functionality that the subscriber order may pass through on its way
to the NMS Stock ATS as part of the FIX process.
\409\ See infra Section VII.B.7 (discussing the use of smart
order routers by broker-dealer operators of NMS Stock ATSs).
---------------------------------------------------------------------------

Overall, the Commission preliminarily believes that the disclosures
required under Part III, Item 5 of proposed Form ATS-N would be useful
to many market participants. The Commission notes that market
participants may vary widely in their decision making process in
selecting a particular trading center to effect their trades or route
their orders, and therefore, the Commission preliminarily believes that
some market participants may not be concerned with the potential
conflicts of interest posed by the trading activity of the broker
dealer operator or its affiliates on the NMS Stock ATS. However, absent
disclosure of this trading activity of the broker-dealer operator or
its affiliates, subscribers and potential subscribers that take such
information into account when executing their trading or investment
strategies likely would neither be aware of such potential conflicts
nor able to assess whether the conflicts might impact those strategies.
Consequently, the Commission preliminary believes that it would be
useful to market participants for an NMS Stock ATS to be required to
disclose the information required in Part III, Item 5 of proposed Form
ATS-N.
Request for Comment
202. Do you believe the Commission should require the disclosure of
the information on Part III, Item 5 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
203. Do you believe Part III, Item 5 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to the trading activity of the
broker-dealer operator or its affiliates on the NMS Stock ATS? Why or
why not? Please support your arguments.
204. Do you believe that Part III, Item 5 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required relating to the broker-dealer operator and its affiliates
trading on the NMS Stock ATS? If not, how should Part III, Item 5 of
proposed Form ATS-N be revised to provide additional clarity? Please
explain.
205. Do you believe proposed disclosures in Part III, Item 5 of
proposed Form ATS-N should be applied to the trading activity on the
NMS Stock ATS of affiliates of the broker-dealer operator? Why or why
not? Should disclosures of affiliates trading on the NMS Stock ATS be
extended to more remote affiliates under a revised definition of
``affiliate''? \410\ Should disclosures apply to a more limited set of
affiliates? Why or why not? Please support your arguments.
---------------------------------------------------------------------------

\410\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

206. Do you believe that the Commission should enhance measures to
prevent potential conflicts of interest posed by the broker-dealer
operator or its affiliates trading on its own NMS Stock ATS, such as
prohibiting proprietary trading by the broker-dealer operator or its
affiliates on the NMS Stock ATS? If no, why? If yes, what measures
should the Commission consider? Please explain in detail.
207. What are the potential costs and benefits of disclosing the
information required by Part III, Item 5 of proposed Form ATS-N? Do you
believe the disclosures in Part III, Item 5 of proposed Form ATS-N
would have the potential to impact innovation or discourage broker-
dealer operators or their affiliates from trading on their own NMS
Stock ATS? Why or why not? Would the proposed disclosures in Part III,
Item 5 of proposed Form ATS-N require broker-dealer operators of NMS
Stock ATSs to reveal too much (or not enough) information about their
structure and operations? Why or why not? Please support your
arguments.
208. Do you believe there is other information that market
participants might find relevant or useful regarding the trading
activity on the NMS Stock ATS by the broker-dealer operator or its
affiliates? If so, describe such information and explain whether, and
if so why, such information should be required to be provided under
proposed Form ATS-N. Please support your arguments.
209. Do you believe there is any information regarding the trading
activity on the NMS Stock ATS by the broker-dealer operator or its
affiliates that the NMS Stock ATS should not be required to disclose on
Form ATS-N due to concerns regarding confidentiality, business reasons,
trade secrets, burden, or any other concerns? If so, what information
and why? Please support your arguments.
210. Should the Commission require separate disclosures for
different types of trading conducted by the broker-dealer operator on
the NMS Stock ATS, such as trading by the broker-dealer operator for
the purpose of correcting error trades executed on the ATS, as compared
to other types of proprietary trading? Why or why not? Please support
your arguments. If so, what types of proprietary trading should be
addressed separately and why? What disclosures should the Commission
require about these types of proprietary trading and why? Please
explain in detail.
211. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
5 of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part III, Item 5?

[[Page 81052]]

7. Broker-Dealer Operator Smart Order Routers (or Similar
Functionalities) and Algorithms
Part III, Item 6 of proposed Form ATS-N would require the NMS Stock
ATS to disclose whether the broker-dealer operator, or any of its
affiliates, use a SOR(s) (or similar functionality), an algorithm(s),
or both to send or receive subscriber orders or other trading interest
to or from the NMS Stock ATS, and if so, to: (1) Identify the SOR(s)
(or similar functionality) or algorithm(s) and identify the person(s)
that operates the SOR(s) (or similar functionality) or algorithm(s), if
other than the broker-dealer operator; \411\ and (2) describe the
interaction or coordination between the identified SOR(s) (or similar
functionality) or algorithm(s) and the NMS Stock ATS, including any
information or messages about orders or other trading interest (e.g.,
IOIs) that the SOR(s) (or similar functionality) or algorithm(s) send
or receive to or from the NMS Stock ATS and the circumstances under
which such information may be shared with any person.
---------------------------------------------------------------------------

\411\ See supra note 362.
---------------------------------------------------------------------------

Today, most broker-dealers that operate an NMS Stock ATS use some
form of SOR (or similar functionality) in connection with the NMS Stock
ATS. A SOR (or similar functionality) can generally be understood as an
automated system used to route orders or other trading interest among
trading centers, including proprietary non-ATS trading centers operated
by the broker-dealer operator, to carry out particular trading
instructions or strategies of a broker-dealer. Smart order routers (or
similar functionalities) have become an integral part of the business
of many multi-service broker-dealers, given the increase in the speed
of trading in today's equity markets and the large number of trading
centers, including national securities exchanges, ATSs, and non-ATS
trading centers, that have emerged since the adoption of Regulation
ATS. In addition to the SOR (or similar functionality), orders or other
trading interest may be entered on an NMS Stock ATS through the use of
a trading algorithm, which is a computer assisted trading tool that,
for instance, may be used by or on behalf of institutional investors to
execute orders that are typically too large to be executed all at once
without excessive price impact, and divide the orders into many small
orders that are fed into the marketplace over time.\412\
---------------------------------------------------------------------------

\412\ See Staff of the Division of Trading and Markets,
Commission, ``Equity Market Structure Literature Review, Part II:
High Frequency Trading,'' at 5 (March 18, 2014), https://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
---------------------------------------------------------------------------

Broker-dealer operators of NMS Stock ATSs or their affiliates may
use SORs (or similar functionality) or algorithms in a variety of
ways.\413\ For example, the broker-dealer operator may use the SOR (or
similar functionality) to route orders on behalf of its customers and
proprietary trading desks to different trading venues, or the broker-
dealer operator may use the SOR as the primary means of routing
subscriber orders or other trading interest to or from the NMS Stock
ATS. The Commission understands, based on experience, that for some
ATSs that currently transact in NMS stocks, the SOR (or similar
functionality) or algorithm of the broker-dealer operator or its
affiliates is the only means of access (i.e., all orders or other
trading interest entered on, or removed from, the ATS, must pass
through the SOR (or similar functionality) or algorithm). A broker-
dealer operator may also use a SOR (or similar functionality) or
algorithm to handle all order flow received by the broker-dealer
operator (or its affiliates), including both orders that a subscriber
has specifically directed to the NMS Stock ATS and orders that may not
be sent to the NMS Stock ATS, as well as the broker-dealer's own
proprietary orders and those of its affiliates. For many orders, the
SOR (or similar functionality) or algorithm determines whether to route
the order to the NMS Stock ATS, another NMS Stock ATS or non-ATS
trading center operated by the broker-dealer operator, another broker-
dealer, an unaffiliated NMS Stock ATS, or a national securities
exchange. The SOR (or similar functionality) may obtain knowledge of
subscriber orders or other trading interest that have been routed to
the NMS Stock ATS (and may now be resting on the NMS Stock ATS) and
subscriber orders that have been routed out of the NMS Stock ATS.
Similarly, the system operating an algorithm used by the broker-dealer
operator to enter subscriber orders based on the algorithm's trading
strategy may obtain information about subscriber orders sent to the NMS
Stock ATS. The broker-dealer operator (or its affiliates) programs and
operates the SOR (or similar functionality) and/or algorithm(s), unless
the broker-dealer operator contracts such functions to a third-party
vendor, in which case the broker-dealer operator or third-party vendor
may have access to information that passes through the SOR(s) (or
similar functionality), algorithm(s) or both.
---------------------------------------------------------------------------

\413\ The Commission notes that, similar to legacy NMS Stock
ATSs, broker-dealer operators are likely to vary in their
organizational structures. Accordingly, the Commission proposes to
include affiliates of the broker-dealer operator that may operate a
SOR(s) (or similar functionality) or algorithm(s) in Part III, Item
6 of proposed Form ATS-N to ensure that SORs (or similar
functionalities) or algorithms used in connection with the NMS Stock
ATSs are disclosed regardless of whether the SOR(s) (or similar
functionality) or algorithm(s) is operated by an affiliate of the
broker-dealer operator.
---------------------------------------------------------------------------

The Commission preliminarily believes that the high likelihood that
a SOR (or similar functionality) or algorithm could access subscribers'
confidential trading information necessitates disclosure of certain
information to subscribers about the use of a SOR (or similar
functionality) or algorithm by the broker-dealer operator or its
affiliates to route subscriber orders to or out of the NMS Stock ATS.
The Commission preliminarily believes that subscribers and the
Commission would benefit from increased disclosures about the use of a
SOR(s) (or similar functionality) or algorithm(s) by the broker-dealer
operator or its affiliates in connection with the NMS Stock ATS because
of the potential for information leakage. Existing Form ATS does not
specifically inquire about the use of a SOR (or similar functionality)
or algorithms in connection with an ATS and based on Commission
experience, the Commission is concerned that there is limited
information available to subscribers about the interaction between SORs
(or similar functionalities) or algorithms and affiliated ATSs that
trade NMS stocks, despite the importance of SORs (or similar
functionality) or algorithms to the functions and operations of such
ATSs. The Commission preliminarily believes that information provided
on Form ATS-N would allow market participants to better understand the
operation of an NMS Stock ATS and the circumstances that may give rise
to potential conflicts of interest and information leakage.
Part III, Item 6(a) of proposed Form ATS-N would require an NMS
Stock ATS to identify the SOR(s) (or similar functionality) or
algorithm(s) and identify the person(s) that operates the SOR (or
similar functionality) and algorithm(s). Part III, Item 6(a) of
proposed Form ATS-N is designed to provide subscribers with information
about who operates the SOR(s) (or similar functionality) or
algorithm(s) used in connection with the NMS Stock ATS, which would
thereby inform subscribers about who may have access to their
confidential trading information or control over the entry and removal
of orders or other trading interest to and

[[Page 81053]]

from the NMS Stock ATS. Information about the persons who operate a
SOR(s) (or similar functionality) or algorithm(s) used in connection
with the NMS Stock ATS and how the SOR(s) (or similar functionality) or
algorithm(s) operates would allow subscribers to assess potential
sources of information leakage and conflicts of interest that may arise
from the operation of the SOR(s) (or similar functionality) and/or
algorithm(s).
Part III, Item 6(b) of proposed Form ATS-N would require an NMS
Stock ATS to describe the interaction or coordination between the
identified SOR(s) (or similar functionality) or algorithm(s) and the
NMS Stock ATS, including any information or messages about orders or
other trading interest (e.g., IOIs) that the SOR(s) (or similar
functionality) or algorithm(s) send or receive to or from the NMS Stock
ATS and the circumstances under which such information may be shared
with any person. Because the SOR(s) (or similar functionality) or
algorithm(s) and NMS Stock ATS are typically operated by the same
broker-dealer operator (rather than a third-party vendor), the
Commission preliminarily believes subscribers to the NMS Stock ATS are
likely to find it important to understand what information about their
orders is obtained by a SOR(s) (or similar functionality) or
algorithm(s) and the circumstances under which that information may be
used by the broker-dealer operator of the NMS Stock ATS, its
affiliates, or other persons. The Commission is concerned that without
this information, subscribers that send orders to the NMS Stock ATS by
way of the broker-dealer operator's SOR (or similar functionality) or
algorithm may not be able to understand the conditions under which
information about their confidential trading information may be leaked.
The interaction or coordination of the SOR(s) (or similar
functionality) or algorithm(s) with the NMS Stock ATS likely varies
across NMS Stock ATSs. For instance, a SOR (or similar functionality)
or algorithm may check for potential contra-side interest in a
particular symbol on the NMS Stock ATS prior to sending the subscriber
order or other trading interest into the NMS Stock ATS. Such protocol
carried out by the SOR (or similar functionality) or algorithm may send
only information about the symbol and side (i.e., buy or sell) of the
subscriber's order or other trading interest, but not the size, price,
identity of the subscriber or other information. As another example, an
NMS Stock ATS that uses IOIs as part of its platform may use its SOR
(or similar functionality) or an algorithm to facilitate the sending of
IOIs to relevant persons regarding orders or other trading interest
resting on the NMS Stock ATS. The Commission preliminarily believes
that the operations and functions of the SOR(s) (or similar
functionality) or algorithm(s) in these examples would be relevant to
subscribers and helpful in understanding how the NMS Stock ATS
operates.
The Commission notes that an ATS may consist of various
functionalities or mechanisms that operate collectively as a Rule 3b-16
system to bring together the orders for securities of multiple buyers
and sellers using non-discretionary methods.\414\ Based on Commission
experience, most broker-dealer operators that use a SOR(s) (or similar
functionality) or algorithm operate the SOR(s) (or similar
functionality) or algorithm(s) separate and apart from their ATS.
However, to the extent that a SOR (or similar functionality) or
algorithm operates jointly with, or performs a function of, the NMS
Stock ATS to bring together the orders for securities of multiple
buyers and sellers using established nondiscretionary methods, the SOR
(or similar functionality) or algorithm may be considered part of the
NMS Stock ATS.\415\ For example, a SOR (or similar functionality) or
algorithm that is, based on the facts and circumstances, the exclusive
means for subscribers to access and enter orders or other trading
interest on NMS Stock ATS for execution would be regarded as part of
the operations of the NMS Stock ATS because the SOR (or similar
functionality) or algorithm would function as the mechanism for orders
or other trading interest to be brought together and interact in the
NMS Stock ATS. The Commission preliminarily believes that information
provided on proposed Form ATS-N about the use of a SOR (or similar
functionality) or algorithm under Part III, Item 6 of proposed Form
ATS-N would allow the Commission to better understand the operations
and scope of the NMS Stock ATS. That is, the proposed disclosures would
assist the Commission in determining if a SOR (or similar
functionality) or algorithm is facilitating the bringing together of
orders for securities of multiple buyers and sellers using established
nondiscretionary methods, and would consequently be part of the NMS
Stock ATS for the purposes of Regulation ATS.
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\414\ Under Rule 3b-16 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. 17 CFR 240.3b-16(a).
\415\ The Commission noted in adopting Regulation ATS that the
Commission ``will attribute the activities of a trading facility to
a system if that facility is offered by the system directly or
indirectly'' and ``if an organization arranges for separate entities
to provide different pieces of a trading system, which together meet
the definition contained in paragraph (a) of Rule 3b-16, the
organization responsible for arranging the collective efforts will
be deemed to have established a trading facility.'' See Regulation
ATS Adopting Release, supra note 7, at 70852. If the SOR(s) (or
similar functionality) or algorithm(s) were operated by an affiliate
of the NMS Stock ATS or an entity unaffiliated with the NMS Stock
ATS, the SOR(s) (or similar functionality) or algorithm(s) could
still be considered a part of the NMS Stock ATS depending on the
facts and circumstances.
---------------------------------------------------------------------------

Request for Comment
212. Do you believe the Commission should require the disclosure of
the information on Part III, Item 6 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
213. Do you believe Part III, Item 6 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding the use of a SOR or algorithm
by the broker-dealer operators, or any of its affiliates, to send or
receive subscriber orders or other trading interest to or from the NMS
Stock ATS? Why or why not? Please support your arguments.
214. Do you believe that Part III, Item 6 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required relating to the broker-dealer operator and its affiliates' use
of SORs (or similar functionality) and algorithms in connection with
the NMS Stock ATS? If not, how should Part III, Item 6 of proposed Form
ATS-N be revised to provide additional clarity? Please explain in
detail.
215. Do you believe it is appropriate for the Commission to require
disclosure about the use of SORs (or similar functionalities) and
algorithms by the broker-dealer operator, or its affiliates, to send or
receive orders or other trading interest to or from the NMS Stock ATS?
Why or why not? Please support your arguments. If so, what level of
detail should be disclosed about how SORs (or similar functionalities)
and algorithms determine whether to send or receive

[[Page 81054]]

orders or other trading interest to the NMS Stock ATS? Please be
specific.
216. What are the potential costs and benefits of disclosing the
information required by Part III, Item 6 of proposed Form ATS-N? Do you
believe the disclosures in Part III, Item 6 of proposed Form ATS-N
would have the potential to impact innovation? Why or why not? Would
the proposed disclosures in Part III, Item 6 of proposed Form ATS-N
require broker-dealer operators of NMS Stock ATSs to reveal too much
(or not enough) about their structure and operations? Why or why not?
Please support your arguments.
217. Do you believe the proposed disclosures in Part III, Item 6 of
proposed Form ATS-N related to the use of SORs (or similar
functionality) and algorithms should be applied to affiliates of the
broker-dealer operator? Why or why not? Please support your arguments.
218. Do you believe there is other information that market
participants might find relevant or useful regarding broker-dealer
operators or their affiliates' SORs (or similar functionalities) and
algorithms? If so, describe such information and explain whether, and
if so why, such information should be required to be provided under
proposed Form ATS-N. Please support your arguments.
219. Do you believe there is any information regarding broker-
dealer operators or their affiliates' SORs (or similar functionality)
and algorithms that the NMS Stock ATS should not be required to
disclose on proposed Form ATS-N due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
220. Do you believe that most subscribers to ATSs that transact in
NMS stock access the ATSs through the SOR (or similar functionality) or
algorithm of the broker-dealer operator (or its affiliates), or do they
connect directly to the ATS through some other means, or both? Please
explain in detail.
221. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
6 of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part III, Item 6?
8. Shared Employees of NMS Stock ATS
Part III, Item 7 of proposed Form ATS-N would require an NMS Stock
ATS to state whether any employee of the broker-dealer operator that
services the operations of the NMS Stock ATS also services any other
business unit(s) of the broker-dealer operator or any affiliate(s) of
the broker-dealer operator (``shared employee'') and, if so, to (1)
identify the business unit(s) and/or the affiliate(s) of the broker-
dealer operator to which the shared employee(s) provides services and
identify the position(s) or title(s) that the shared employee(s) holds
in the business unit(s) and/or affiliate(s) of the broker-dealer
operator; and (2) describe the roles and responsibilities of the shared
employee(s) at the NMS Stock ATS and the business unit(s) and/or
affiliate(s) of the broker-dealer operator.\416\
---------------------------------------------------------------------------

\416\ See Part III, Item 7 of proposed Form ATS-N.
---------------------------------------------------------------------------

Part III, Item 7 of proposed Form ATS-N is designed to provide
information to market participants and the Commission about
circumstances that might give rise to a potential conflict of interest
and potential information leakage involving shared employees of the
broker-dealer operator. Responses to Part III, Item 7 of proposed Form
ATS-N would require an NMS Stock ATS to describe the roles and
responsibilities of the shared employees with the NMS Stock ATS and the
other business units of the broker-dealer operator or affiliates.
Responses to Part III, Item 7 of proposed Form ATS-N would be required
to be sufficiently detailed to provide a comprehensive understanding of
the full range of the shared employee's responsibilities with the NMS
Stock ATS and each relevant entity, and include disclosure of
responsibilities that could enable the employee to view subscribers'
confidential trading information. The Commission preliminarily believes
that market participants would find information about the multiple
roles or functions of shared employees disclosed in Part III, Item 7 of
proposed Form ATS-N important in evaluating whether to route orders to
a particular ATS. For example, to identify and understand potential
sources of information leakage, market participants would likely want
to know if an employee of the broker-dealer operator that is
responsible for the operations of a system supporting the NMS Stock ATS
is also responsible for the proprietary trading activity of an
affiliate of the broker-dealer operator that trades on the NMS Stock
ATS. In this example, market participants might also be interested in
understanding conflicts of interest that may result from the shared
employee performing multiple roles, as the shared employee could have
an incentive to alter the operations of the NMS Stock ATS to benefit
the broker-dealer operator or an affiliate of the NMS Stock ATS.\417\
---------------------------------------------------------------------------

\417\ The Commission notes that a broker-dealer operator may
have valid business reasons for it or its affiliates having shared
employees, and the Commission is not proposing to limit the ability
for a broker-dealer operator to have such arrangements.
---------------------------------------------------------------------------

The Commission would preliminarily view any personnel that service
the trading functions of the NMS Stock ATS, such as those performing
information technology, programming, testing, or system design
functions as employees that ``service the operations of the NMS Stock
ATS.'' Other employees of the NMS Stock ATS that are otherwise
necessary for the trading functions of the NMS Stock ATS would also be
included in the disclosure requirement of Part III, Item 7 of proposed
Form ATS-N. Clerical employees or those performing solely
administrative duties such as the payroll functions for the employees
of the NMS Stock ATS would preliminarily not be included within the
proposed disclosure.
Request for Comment
222. Do you believe the Commission should require the disclosure of
the information on Part III, Item 7 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
223. Do you believe Part III, Item 7 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to ``shared employees''? Why or
why not? Please support your arguments.
224. Do you believe that Part III, Item 7 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required relating to shared employees of the broker-dealer operator? If
not, how should Part III, Item 7 of proposed Form ATS-N be revised to
provide additional clarity? Please explain.
225. Do you believe that it is sufficiently clear who would be
considered a ``shared employee'' under Part III, Item 7 of proposed
Form ATS-N? Why or why not? Is the scope of ``shared employees''
provided under Part III, Item 7 reasonable? Why or why not? Please
explain.
226. Do you believe there is any information contained in the
proposed disclosures in Part III, Item 7 of proposed Form ATS-N
regarding shared employees of the broker-dealer operator that the NMS
Stock ATS should not be required to disclose on proposed Form ATS-N due
to concerns regarding confidentiality, business reasons, trade

[[Page 81055]]

secrets, burden, or any other concerns? If so, what information and
why? Please support your arguments.
227. What are the potential costs and benefits of disclosing the
information required by Part III, Item 7 of proposed Form ATS-N? Do you
believe the disclosures in Part III, Item 7 of proposed Form ATS-N
would have the potential to impact innovation or the manner in which
NMS Stock ATSs and broker-dealer operators use their employees? Why or
why not? Would the proposed disclosures in Part III, Item 7 of proposed
Form ATS-N require broker-dealer operators of NMS Stock ATSs to reveal
too much (or not enough) information about their structure and
operations? Why or why not? Please support your arguments.
228. Do you believe there is other information that market
participants might find relevant or useful regarding shared employees
of the broker-dealer operator? If so, describe such information and
explain whether, and if so why, such information should be required to
be provided under proposed Form ATS-N. Please support your arguments.
229. Do you believe that the Commission should expand the proposed
disclosures in Part III, Item 7 of proposed Form ATS-N to other
employees, personnel, or independent contractors of the broker-dealer
operator? Why or why not? If so, which employees, personnel, or
independent contractors should be included and what information about
such persons should be solicited? Please explain.
230. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
7 of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part III, Item 7?
9. Service Providers to the NMS Stock ATS
Part III, Item 8 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether any operation, service, or function of the NMS
Stock ATS is performed by any person(s) other than the broker-dealer
operator of the NMS Stock ATS, and if so to: (1) Identify the person(s)
(in the case of a natural person, to identify only the position or
title) performing the operation, service, or function and note whether
this service provider(s) is an affiliate of the broker-dealer, if
applicable; (2) describe the operation, service, or function that the
identified person(s) provides and describe the role and
responsibilities of that person(s); and (3) state whether the
identified person(s), or any of its affiliates, may enter orders or
other trading interest on the NMS Stock ATS and, if so, describe the
circumstances and means by which such orders or other trading interest
are entered on the NMS Stock ATS.\418\
---------------------------------------------------------------------------

\418\ See Part III, Item 8 of proposed Form ATS-N.
---------------------------------------------------------------------------

The Commission notes that Part III, Item 8 of proposed Form ATS-N
expands on the disclosure requirements of Exhibit E on current Form
ATS, which requires ATSs to disclose the name of any entity other than
the ATS that will be involved in the operation of the ATS, including
the execution, trading, clearing and settling of transactions on behalf
of the ATS; and to provide a description of the role and
responsibilities of each entity.\419\ Part III, Item 8 of proposed Form
ATS-N would require more detailed information about service providers
to the NMS Stock ATS than is currently required by Form ATS, including
whether affiliates of service providers may trade on the NMS Stock
ATS.\420\
---------------------------------------------------------------------------

\419\ See Item 7 of Form ATS (describing the requirements for
Exhibit E to Form ATS).
\420\ The Commission notes that a broker-dealer operator may
have valid business reasons for it or its affiliates to have
functions of the NMS Stock ATS performed by person(s) other than the
broker-dealer operator of the NMS Stock ATS. The Commission is not
proposing to limit the ability for a broker-dealer operator to have
such arrangements.
---------------------------------------------------------------------------

Under Part III, Item 8(a) of proposed Form ATS-N, the NMS Stock-ATS
must identify any entity that performs any operation, service, or
function for the NMS Stock ATS.\421\ For example, an NMS Stock ATS may
engage a third-party service provider to provide market data for the
NMS Stock ATS to, among other things, calculate reference prices (such
as the NBBO). Responses to Part III, Item 8(a) of proposed Form ATS-N
would be required to include the name of the company that provides the
market data. Part III, Item 8(b) of proposed Form ATS-N would require
an NMS Stock ATS to provide, in detail, information about the
operations, service, or function of the NMS Stock ATS that is provided
by the identified third-party in Part III, Item 8(a) of proposed Form
ATS-N and its roles and responsibilities with respect to that
operation, service, or function. For example, a broker-dealer operator
may engage a third party to host and maintain the trading platform of
the NMS Stock ATS. Part III, Item 8(b) of proposed Form ATS-N would
require a description of those services and the specific role and
responsibilities of the company and its employees. Responses to Part
III, Item 8(b) of proposed Form ATS-N would be required to be
sufficiently detailed such that market participants and the Commission
could understand what functions are performed by a person other than an
employee of the broker-dealer operator and what those services include.
As guidance for completing this proposed disclosure item, the
Commission would view an NMS Stock ATS simply stating that a third-
party provides technology or hardware services to the NMS Stock ATS as
not sufficiently responsive to the required disclosure. Responses to
Part III, Item 8(b) of proposed Form ATS-N, in the example above, would
require a detailed description of information technology services,
including both hardware and software that may be provided, as well as
any programming, ongoing maintenance, monitoring, and other functions
the service provider would perform with respect to the NMS Stock ATS.
As additional guidance, responses to Item 8 would also be required to
include any service provider that provides, for example, such functions
as consulting relating to the trading systems or functionality, cyber
security, regulatory compliance, and record keeping services or
functions of the NMS Stock ATS. Additionally, an NMS Stock ATS would be
required to identify and describe the services of any service provider
engaged for the purposes of the clearance and settlement of trades for
the NMS Stock ATS.\422\
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\421\ The Commission is not proposing to require than an NMS
Stock ATS provide any personally identifiable information about any
natural person in Part III, Item 8(a) of proposed Form ATS-N. Part
III, Item 8(a) of proposed Form ATS-N is designed to solicit
sufficient information to identify the entity or person providing
the service, operation, or function to the NMS Stock ATS, such as
the position or title in the case of a natural person acting as a
service provider.
\422\ The Commission notes that the examples listed above are
not intended to be an exhaustive list of the types of services, and
the level of detail about those services, that would be required by
Part III, Item 8 of proposed Form ATS-N. The Commission
preliminarily believes that the appropriate disclosure would be
driven by the particular facts and circumstances of operational
structure of the NMS Stock ATS.
---------------------------------------------------------------------------

The Commission intends that the proposed disclosure requirements of
Items 8(a) and (b) of Part III of proposed Form ATS-N would apply to
any operation, service, or function performed by any person outside of
the NMS Stock ATS entity, including affiliates of the broker-dealer
operator.\423\ However, services provided

[[Page 81056]]

to the NMS Stock ATS by employees of the broker-dealer operator would
not need to be disclosed in Part III, Item 8 of proposed Form ATS-N.
The activities of such persons, to the extent they are shared
employees, would be disclosed pursuant to Part III, Item 7 of proposed
Form ATS-N.\424\ The Commission also notes that it does not intend that
the proposed disclosure requirements of Part III, Item 8 of proposed
Form ATS-N would extend to operations, services, or functions that are
administrative in nature and do not pose a significant risk of
information leakage of confidential trading information, such as
payroll functions servicing employees of the NMS Stock ATS or email
services provided by an outside provider, because the Commission
preliminarily believes that information about the services of such
third-party services providers and their employees would not be
relevant to market participants' evaluation of an NMS Stock ATS as a
trading venue and would not be necessary for the Commission's oversight
functions.
---------------------------------------------------------------------------

\423\ If, for example, the SOR of an affiliate of the broker-
dealer operator is used to route orders to and from the NMS Stock
ATS, the SOR would need to be disclosed in Part III, Item 8 of
proposed Form ATS-N and would likely also need to be disclosed in
Part III, Item 6 of proposed Form ATS-N, which relates to SORs used
by the broker-dealer operator or its affiliates.
\424\ See supra Section VII.B.8 (discussing proposed
requirements for disclosure pertaining to NMS Stock ATS employees
that are shared employees with other business units of the broker-
dealer operator or its affiliates).
---------------------------------------------------------------------------

Items 8(a) and (b) of Part III of proposed Form ATS-N are designed
to provide market participants and the Commission with information
about how the NMS Stock ATS operates, potential conflicts of interest,
and the potential for information leakage. In particular, the
Commission preliminarily believes that this information would inform
market participants, as well as the Commission, about what aspects of
the NMS Stock ATS's operations are performed by third-parties that may
or may not be under the control of the broker-dealer operator. For
example, an NMS Stock ATS whose trading system is operated or supported
by a third-party service provider may have business interests that are
aligned with those of the service provider. Additionally, depending on
the role and responsibilities of the third-party service provider,
market participants may want to evaluate the robustness of the NMS
Stock ATS's safeguards and procedures to protect confidential
subscriber information.
Lastly, Part III, Item 8(c) of proposed Form ATS-N would require an
NMS Stock ATS to state whether any person identified in Part III, Item
8(a) of proposed Form ATS-N or any of its affiliates may enter orders
or other trading interest on the NMS Stock ATS and if so, to describe
the circumstances and means by which such orders or other trading
interests are entered on the NMS Stock ATS. The purpose of these
disclosures is to provide market participants and the Commission with
information about the potential for conflicts of interest that may
result from a service provider, or its affiliates, trading on the NMS
Stock ATS and the potential for information leakage. For example, the
Commission preliminarily believes that a subscriber or potential
subscriber likely would want to know whether a person that is not an
employee of the broker-dealer operator, but is contracted to service
the trading platform that contains the NMS Stock ATS's book of orders,
could enter orders or other trading interest on the NMS Stock ATS.
Similarly, the Commission preliminarily believes that a subscriber or a
potential subscriber would also want to know whether an affiliate of
the service provider could enter orders or other trading interest on
the NMS Stock ATS as well and whether its means of access differ from
other subscribers. Under both of these scenarios, a potential conflict
of interest could result if the service provider has business interests
that compete with the trading interests of other subscribers to the NMS
Stock ATS.
Request for Comment
231. Do you believe the Commission should require the disclosure of
the information on Part III, Item 8 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
232. Do you believe Part III, Item 8 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding any operation, service, or
function of the NMS Stock ATS performed by any person other than the
broker-dealer operator? Why or why not? Please support your arguments.
233. Do you believe that Part III, Item 8 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required relating to service providers of the NMS Stock ATS? If not,
how should Part III, Item 8 of proposed Form ATS-N be revised to
provide additional clarity? Please explain.
234. What are the potential costs and benefits of disclosing the
information required by Part III, Item 8 of proposed Form ATS-N? Do you
believe the disclosures in Part III, Item 8 of proposed Form ATS-N
would have the potential to impact innovation or discourage
arrangements with other service providers? Why or why not? Would the
proposed disclosures in Part III, Item 8 of proposed Form ATS-N require
broker-dealer operators of NMS Stock ATSs to reveal too much (or not
enough) information about their structure and operations? Why or why
not? Please support your arguments.
235. Do you believe that any of the information in the proposed
disclosure requirements of Part III, Item 8 of proposed Form ATS-N
regarding service providers to the NMS Stock ATS should not be required
to be disclosed on proposed Form ATS-N due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
236. Do you believe the Commission should adopt a more limited or
expansive definition of ``affiliate'' for purposes of this disclosure
item? Why or why not? Please support your arguments.
237. Do you believe there is other information that market
participants might find relevant or useful regarding any operation,
service, or function of the NMS Stock ATS performed by any person other
than the broker-dealer operator? If so, describe such information and
explain whether, and if so why, such information should be required to
be provided under proposed Form ATS-N. Please support your arguments.
238. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
8 of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part III, Item 8?
10. Differences in Availability of Services, Functionality, or
Procedures
Part III, Item 9 of proposed Form ATS-N would require an NMS Stock
ATS to identify and describe any service, functionality, or procedure
of the NMS Stock ATS that is available or applies to the broker-dealer
operator or its affiliates, that is not available or does not apply to
a subscriber(s) to the NMS Stock ATS. The purpose of this disclosure is
to alert market participants to the existence of system, functionality,
or trading features that the broker-dealer operator or its affiliates
may have that

[[Page 81057]]

other subscribers do not.\425\ For example, an NMS Stock ATS may employ
different procedures governing how orders entered on the NMS Stock ATS
by the broker-dealer operator's business units or affiliates are
segmented than it does for other subscribers. The Commission
preliminarily believes that the disclosure of those differences in
procedures would allow market participants to evaluate whether such
differences might put them at a disadvantage when competing against the
broker-dealer operator or its affiliates for an execution on the NMS
Stock ATS and thus, better enable market participants to decide whether
submitting order flow to that NMS Stock ATS aligns with their trading
or investment objectives.
---------------------------------------------------------------------------

\425\ The Commission notes that it is similarly proposing to
require NMS Stock ATSs to disclose differences in the treatment of
subscribers on the NMS Stock ATS in a number of proposed disclosure
requirements. See, e.g., proposed Items 1(a) and 1(b) of Part IV of
proposed Form ATS-N.
---------------------------------------------------------------------------

The Commission notes that a significant difference between national
securities exchanges and NMS Stock ATSs is the extent to which each
trading center allows access to its services by its users. Section
6(b)(2) of the Exchange Act generally requires registered national
securities exchanges to allow any qualified and registered broker-
dealer to become a member of the exchange--a key element in assuring
fair access to national securities exchange services.\426\ In contrast,
the access requirements that apply to ATSs are much more limited.
Because NMS Stock ATSs are exempt from the definition of an
``exchange'' so long as they comply with Regulation ATS, and thus, are
not required to register as a national securities exchange pursuant to
Sections 5 and 6 of the Exchange Act, NMS Stock ATSs are not required
to provide fair access unless they reach a 5% trading volume threshold
in a stock, which almost all NMS Stock ATSs currently do not.\427\ As a
result, access to the services of NMS Stock ATSs is determined
primarily by private negotiation, and such access to services can
differ among persons that subscribe to the NMS Stock ATS.
---------------------------------------------------------------------------

\426\ 15 U.S.C. 78f(b)(2).
\427\ See 17 CFR 242.301(b)(5). See also supra notes 92-95 and
accompanying text (discussing the fair access requirements of
Regulation ATS).
---------------------------------------------------------------------------

While the Commission is not proposing to change the fair access
requirements applicable to NMS Stock ATSs in this proposal, the
Commission is proposing to require, among other things, disclosures on
Form ATS-N that identify and describe differences among subscribers (or
other persons) in the services, procedures or functionalities that an
NMS Stock ATS provides, as well as disclosures that identify and
describe any services, functionalities, or procedures of an NMS Stock
ATS that are available to the broker-dealer operator's affiliates, but
are not available to subscribers. The Commission preliminarily believes
that the disclosure of these differences would allow market
participants to evaluate whether such differences might put them at a
disadvantage when trading on a particular NMS Stock ATS and thus,
better enable market participants to decide whether submitting order
flow to that NMS Stock ATS aligns with their trading or investment
objectives.
The Commission notes that ATSs may treat subscribers differently
with respect to the services offered by the ATS unless prohibited by
applicable federal securities laws or the rules and regulations
thereunder. For example, an ATS with at least 5% of the average daily
volume for any covered security during four of the preceding six months
is required to comply with fair access requirements under Rule
301(b)(5) of Regulation ATS,\428\ which, among other things, requires
an ATS to establish written standards for granting access to trading on
its system and not unreasonably prohibiting or limiting any person with
respect to access to services offered by the ATS by applying the
written standards in an unfair or discriminatory manner. Thus, for
example, an ATS that discloses a service to one class of subscribers
(or makes the associated functionality available to only one class of
subscribers) could not, if it were subject to the fair access
requirements, discriminate in this manner unless it had fair and non-
discriminatory reasons for doing so. The Commission further notes that,
even if an ATS is not subject to the fair access requirements,
inaccurate or misleading disclosures about an ATS's operations could
result in violations of the antifraud provisions of the federal
securities laws.\429\
---------------------------------------------------------------------------

\428\ See id.
\429\ See, e.g., UBS Settlement at 14, ITG Settlement at 15,
Pipeline Settlement at 16, and Liquidnet Settlement at 14, supra
note 374 (all noting violations of Section 17(a)(2) of the
Securities Act, which prohibits, directly or indirectly, in the
offer or sale of securities, obtaining money or property by means of
any untrue statement of a material fact or any omission to state a
material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not
misleading.) 15 U.S.C. 77q(a)(2).
---------------------------------------------------------------------------

Request for Comment
239. Do you believe the Commission should require the disclosure of
the information on Part III, Item 9 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
240. Do you believe Part III, Item 9 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to any service, functionality,
or procedure of the NMS Stock ATS that is available or applies to the
broker-dealer operator or its affiliates, that is not available or does
not apply to a subscriber(s) to the NMS Stock ATS? Why or why not?
Please support your arguments.
241. Do you believe there is other information that market
participants might find relevant or useful regarding any service,
functionality, or procedure of the NMS Stock ATS that is available or
applies to the broker-dealer operator or its affiliates, that is not
available or does not apply to a subscriber(s) to the NMS Stock ATS? If
so, describe such information and explain whether, and if so why, such
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
242. Do you believe that Part III, Item 9 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required relating to the differences in services provided to the
broker-dealer operator or its affiliates trading on the NMS Stock ATS?
If not, how should Part III, Item 9 of proposed Form ATS-N be revised
to provide additional clarity? Please explain.
243. Do you believe that the proposed disclosures in Part III, Item
9 of proposed Form ATS-N that are intended to cover differences in
services, functionalities, or procedures should be applied to
affiliates of the broker-dealer operator? Why or why not? Conversely,
should such disclosures be extended to more remote affiliates under a
revised definition of ``affiliate''? \430\ Should disclosure apply to a
more limited set of affiliates? Why or why not? Please support your
arguments.
---------------------------------------------------------------------------

\430\ See, e.g., supra note 385 and accompanying text.
---------------------------------------------------------------------------

244. What are the potential costs and benefits of disclosing the
information required by Part III, Item 9 of proposed Form ATS-N? Do you
believe the disclosures in Part III, Item 9 of proposed Form ATS-N
would have the potential to impact innovation? Why or why not? Would
the proposed disclosures in Part III, Item 9 of proposed Form ATS-N
require broker-dealer operators of NMS Stock ATSs to

[[Page 81058]]

reveal too much (or not enough) information about their structure and
operations? Why or why not? Please support your arguments.
245. Do you believe there is any information regarding differences
in services, functionalities, or procedures of the NMS Stock ATS that
are available to the broker-dealer operator or its affiliates and not
other subscribers that should not be required disclosures on Form ATS-N
due to concerns regarding confidentiality, business reasons, trade
secrets, burden, or any other concerns? If so, what information and
why? Please support your arguments.
246. Do you believe that the Commission should propose amendments
to Rule 301(b)(5) of Regulation ATS to lower the trading volume
threshold in Regulation ATS that triggers the fair access requirement
from its current 5%? If so, what is the appropriate threshold? Please
support your arguments.
247. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
9 of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part III, Item 9?
11. Confidential Treatment of Trading Information
Part III, Item 10 of proposed Form ATS-N is based on the
requirements of Rule 301(b)(10) of Regulation ATS,\431\ and would
require an NMS Stock ATS to describe the written safeguards and written
procedures to protect the confidential trading information of
subscribers to the NMS Stock ATS. It would also require an NMS Stock
ATS to: (a) Describe the means by which a subscriber can consent or
withdraw consent to the disclosure of confidential trading information
to any persons (including the broker-dealer operator and any of its
affiliates); (b) identify the positions or titles of any persons that
have access to the confidential trading information, describe the
confidential trading information to which the persons have access, and
describe the circumstances under which the persons can access
confidential trading information; (c) describe the written standards
controlling employees of the NMS Stock ATS trading for the employees'
accounts; and (d) describe the written oversight procedures to ensure
that the safeguards and procedures described above are implemented and
followed.
---------------------------------------------------------------------------

\431\ 17 CFR 242.301(b)(10).
---------------------------------------------------------------------------

As previously noted,\432\ the Commission stated when adopting
Regulation ATS that Rule 301(b)(10) did not preclude a broker-dealer
that operated an ATS from engaging in other broker-dealer functions.
However, to prevent the misuse of private subscriber and customer
trading information for the benefit of other customers or activities of
the broker-dealer operator, the Commission required that ATSs have in
place safeguards and procedures to protect that confidential trading
information and to separate ATS functions from other broker-dealer
functions.\433\ In adopting Rule 301(b)(10), the Commission stated that
the rule was meant to ensure that information, such as the identity of
subscribers and their orders, be available only to those employees of
the alternative trading system who operate the system or are
responsible for its compliance with applicable rules.\434\ Thus, a
broker-dealer operator may not convert confidential trading information
of ATS subscribers for use by the non-ATS business units operated by
the broker-dealer.
---------------------------------------------------------------------------

\432\ See infra Sections IX and X (discussing the requirements
of Rule 301(b)(10) and proposed amendments to require that
safeguards and procedures be written and preserved).
\433\ See Regulation ATS Adopting Release, supra note 7, at
70879.
\434\ Id.
---------------------------------------------------------------------------

The protection of subscribers' confidential trading information
remains a bedrock component of the regulation of ATSs, including those
that trade NMS stocks, and is essential to ensuring the integrity of
ATSs as execution venues. To the extent that subscribers cannot be
assured that their confidential trading information will be protected
by an ATS, many of the advantages or purposes for which a subscriber
may choose to send its orders to an ATS (e.g., trade anonymously and/or
to mitigate the impact of trading large positions) \435\ are
eliminated. Moreover, if subscribers' confidential trading information
is shared without subscribers' consent, that information may be used by
the recipient of the information to gain a competitive advantage over
the subscriber. In cases where the confidential trading information of
a subscriber is impermissibly shared with the personnel of the broker-
dealer operator or any of its affiliates (i.e., persons who are not
responsible for the operation of the ATS or compliance with applicable
rules), such an abuse is compounded by the conflicting interests of the
broker-dealer operator. That is, in such a case, the broker-dealer
operator has invited subscribers to trade on its ATS and may have
abused that relationship to provide itself or its affiliates with a
direct competitive advantage over that subscriber. The Commission
preliminarily believes that disclosure is necessary in this area so
market participants can independently evaluate the robustness of the
safeguards and procedures that are employed by the NMS Stock ATS to
protect subscriber confidential trading information and decide for
themselves whether they wish to do business with a particular NMS Stock
ATS.
---------------------------------------------------------------------------

\435\ See id. (stating that many of the ATSs popular at the time
Regulation ATS was adopted were anonymous and that many ECNs at that
time were popular because they permitted wide dissemination of
orders but provided anonymity).
---------------------------------------------------------------------------

Part III, Item 10(a) of proposed Form ATS-N would require the NMS
Stock ATS to describe the means by which a subscriber can consent or
withdraw consent to the disclosure of confidential trading information
to any persons (including the broker-dealer operator and any of its
affiliates). Disclosing the means by which a subscriber can consent or
withdraw consent from the sharing of such information would allow
subscribers and potential subscribers to understand what information
about their orders or other trading interest will be kept confidential
and how they can specify the means by which they choose to share
confidential information. As the Commission noted in the adoption of
Regulation ATS, subscribers should be able to give consent if they so
choose to share their confidential trading information.\436\ ATSs that
transact in NMS stocks vary in terms of what types of orders,
indications of interests, or other forms of trading interest are
confidential on their systems and what specific information about such
trading interest may be shared. For example, an ATS might provide that
no IOIs submitted by subscribers will be considered confidential, but
may provide subscribers with the option to restrict the information in
the IOI message to just the symbol and side (i.e., buy or sell). In
this example, responses to Item 10(a) would require an NMS Stock ATS to
describe the means by which a subscriber or potential subscriber could
control some of the information contained in the IOI message by
providing consent or withdrawing such consent for the sharing of its
confidential trading information.\437\
---------------------------------------------------------------------------

\436\ See Regulation ATS Adopting Release, supra note 7, at
70879.
\437\ The Commission notes that there may be some NMS Stock ATSs
that might not offer any means by which a subscriber could consent
to the dissemination of its confidential trading information. An NMS
Stock ATS would be required to disclose this fact pursuant to Item
9(a).

---------------------------------------------------------------------------

[[Page 81059]]

Part III, Item 10(b) of proposed Form ATS-N, which would require
that ATSs identify any person that has access to confidential trading
information, the type of information, and the circumstances under which
they may access such information, is meant to provide transparency into
the potential sources from which confidential trading information might
be compromised. As noted above, Regulation ATS requires that access to
confidential subscriber information be available only to those
employees of the ATS that operate the system or are responsible for the
ATS's compliance with applicable rules.\438\ The Commission
preliminarily believes that requiring ATSs to disclose the list by
title or position of all personnel that can access the confidential
trading information of subscribers would buttress the existing
obligations on ATSs to restrict access only to permitted personnel
(i.e., those responsible for its operation or compliance).
---------------------------------------------------------------------------

\438\ See Regulation ATS Adopting Release, supra note 7, at
70879; 17 CFR 242.301(b)(10)(i)(A).
---------------------------------------------------------------------------

Part III, Item 10(b) of proposed Form ATS-N would also require the
NMS Stock ATS to describe the confidential trading information that may
be accessed by permitted persons. For example, employees that operate
the NMS Stock ATS may be able to see the size, side, and symbol of an
order but not the identity of the subscriber that submitted the order.
The Commission preliminarily believes that subscribers and potential
subscribers to the NMS Stock ATS likely would find it useful to know
the range of confidential trading information that a person may have
access to. Item 10(b) would also require the disclosure of the
circumstances under which confidential trading information may be
accessed by permitted persons. This disclosure requirement is designed
to encompass the reasons for which confidential subscriber information
might be accessed. For example, an NMS Stock ATS may only permit its
designated employees access to confidential subscriber information when
it is necessary to break certain trades or to perform system
maintenance or repairs. Disclosures in Item 10(b) generally should
describe whether the information is available in real-time (i.e., as
trading is occurring on the platform) or whether the information
relates to historical activity by one or more subscribers.\439\
---------------------------------------------------------------------------

\439\ For example, an NMS Stock ATS that permits access to the
confidential trading information of subscribers for breaking trades
generally should specify, if true, that access to that information
would only be of previous activity on the NMS Stock ATS for the
purpose of breaking a trade.
---------------------------------------------------------------------------

Part III, Items 10(c) and (d) of proposed Form ATS-N closely track
the existing requirements of Regulation ATS encompassed in Rule
301(b)(10)(i)(B) and (b)(10)(ii) respectively. The Commission
preliminarily believes that market participants and the Commission
would benefit from a description of the NMS Stock ATS's standards in
ensuring that employees of the NMS Stock ATS cannot trade for their own
account using confidential trading information and the procedures
adopted by the NMS Stock ATS to ensure its safeguards and procedures
are followed. The Commission notes that, pursuant to existing Rule
301(b)(10), the Commission requires ATSs to have in place such
standards, policies, and procedures. As discussed in greater detail
below, the Commission is proposing to amend Regulation ATS to provide
that these standards, policies, and procedures be written.\440\ By
requiring that these standards, policies, and procedures be written and
that a description of them be publicly disclosed in Part III, Item 10
of proposed Form ATS-N, NMS Stock ATSs may be encouraged to carefully
consider the adequacy of their means of protecting the confidential
trading information of subscribers, which may result in more robust
protections of such information. Market participants would be able to
evaluate the relative robustness of such standards, policies, and
procedures based on the disclosures provided in Part III, Item 10 of
proposed Form ATS-N, which would in turn allow them to better evaluate
the NMS Stock ATS to which they might route orders or become a
subscriber.
---------------------------------------------------------------------------

\440\ See infra Section IX.
---------------------------------------------------------------------------

Request for Comment
248. Do you believe the Commission should require the disclosure of
the information on Part III, Item 10 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
249. Do you believe Part III, Item 10 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to the written safeguards and
written procedures to protect the confidential trading information of
subscribers to the NMS Stock ATS? Why or why not? Please support your
arguments.
250. Do you believe that Part III, Item 10 of proposed Form ATS-N
is sufficiently clear with respect to the disclosures that would be
required relating to the NMS Stock ATS's obligations under Rule
301(b)(10) of Regulation ATS, including a description of the safeguards
and procedures of the NMS Stock ATS to protect the confidential trading
information of subscribers? If not, how should Part III, Item 10 of
proposed Form ATS-N be revised to provide additional clarity? Please
explain.
251. Do you believe that any of information in the proposed
disclosure requirements of Part III, Item 10 of proposed Form ATS-N,
including a description of the NMS Stock ATS's safeguards and
procedures to protect the confidential trading information of
subscribers, should not be required to be disclosed on proposed Form
ATS-N due to concerns regarding confidentiality, business reasons,
trade secrets, burden, or any other concerns? If so, what information
and why? Please support your arguments.
252. Do you believe that the proposed disclosures in Part III, Item
10(a) of proposed Form ATS-N requiring an NMS Stock ATS to describe the
means by which a subscriber can consent or withdraw consent to the
disclosure of confidential trading information should be disclosed? Do
ATSs that currently transact in NMS stock inform subscribers as to what
trading information is considered confidential and/or provide a means
for subscribers to give or withdraw consent to the disclosure of such
trading information? Please explain.
253. Do you believe that the proposed disclosures in Part III, Item
10(b) of proposed Form ATS-N requiring an NMS Stock ATS to identify the
positions or titles of any persons that have access to the confidential
trading information of subscribers, what information they may obtain,
and the circumstances under which such persons may obtain that
information should be disclosed? Why or why not? Please support your
arguments.
254. Do you believe there is other information that market
participants might find relevant or useful regarding NMS Stock ATSs
obligations under Rule 301(b)(10) and the protection of the
confidential trading information of subscribers that has not been
proposed in Part III, Item 10 of proposed Form ATS-N? If so, describe
such information and explain whether, and if so why, such information
should be required to be provided under proposed Form ATS-N. Please
support your arguments.
255. What are the potential costs and benefits of disclosing the
information required by Part III, Item 10 of proposed Form ATS-N? Would
the proposed

[[Page 81060]]

disclosures in Part III, Item 10 of proposed Form ATS-N require broker-
dealer operators of NMS Stock ATSs to reveal too much (or not enough)
information about their structure and operations? Why or why not?
Please support your arguments.
256. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part III, Item
10 of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part III, Item 10?

VIII. Part IV of Proposed Form ATS-N: The Manner of Operations of the
NMS Stock ATS

Given the dispersal of trading volume in NMS stocks among an
increasing number of trading centers,\441\ the decision of where to
route orders to obtain best execution for market participants is
critically important. Today, NMS Stock ATSs account for a significant
source of liquidity for NMS stocks and compete with, and operate
functionally similar to, registered national securities exchanges.\442\
Notwithstanding the importance of NMS Stock ATSs as a source of
liquidity in NMS stocks and the increasing operational complexity of
NMS Stock ATSs, market participants have limited information about how
these markets operate. The Commission is concerned that this lack of
operational transparency impedes market participants from adequately
discerning how orders interact, match, and execute on NMS Stock ATSs,
and may hinder market participants' ability to obtain, or monitor for,
best execution for their orders. The current disclosures on Form ATS
are confidential, and even in cases where an ATS voluntarily discloses
its Form ATS publicly, ATSs have often been reluctant to provide more
than summary disclosures about their operations. As a result, neither
the Commission nor market participants currently receive a full picture
of the operations of NMS Stock ATSs. The Commission preliminarily
believes that the information that would be disclosed on proposed Form
ATS-N, and in particular Part IV of the Form, would significantly
improve the opportunity for market participants and the Commission to
understand the operations of NMS Stock ATSs.
---------------------------------------------------------------------------

\441\ See supra Section III.A (discussing the various trading
venues for NMS stocks and the significance of NMS Stock ATSs as a
significant source of liquidity).
\442\ See id.
---------------------------------------------------------------------------

Part IV of proposed Form ATS-N would require that the NMS Stock ATS
include as Exhibit 4 information about the operations of an NMS Stock
ATS. Specifically, Part IV of proposed Form ATS-N would require
detailed information about the operations of NMS Stock ATSs, including
the following, which are discussed in more detail below: Subscribers;
hours of operations; order types; connectivity and order entry;
segmentation of order flow; display of orders and trading interest;
trading services; procedures governing suspension of trading and
trading during system disruptions and malfunctions; opening, reopening,
closing and after-hours trading procedures; outbound routing from the
NMS Stock ATS; use of market data by the NMS Stock ATS; fees; trade
reporting, clearance and settlement procedures; order display and
execution access; and fair access standards. The proposed disclosure
requirements are designed to assist market participants in assessing an
NMS Stock ATS as a trading venue. The Commission preliminarily believes
that the information that would be required to be disclosed on proposed
Form ATS-N would allow market participants to compare and evaluate NMS
Stock ATSs, as well as compare NMS Stock ATSs with national securities
exchanges, as the type and level of information required by Part IV of
proposed Form ATS-N would be generally similar to the information
disclosed by national securities exchanges about their operations. For
example, the rules of national securities exchanges, which are publicly
available,\443\ include membership eligibility requirements, hours of
operations, the operation of order types, the structure of the market
(e.g., auction market, limit order matching book), priority, and
opening and closing procedures, among other things. In addition,
information provided on proposed Form ATS-N should assist the
Commission, and the SRO for the broker-dealer operator, in exercising
oversight over the broker-dealer operator.\444\
---------------------------------------------------------------------------

\443\ See supra note 303.
\444\ The SRO for an ATS has responsibility for overseeing the
activities of the broker-dealer operator, which includes the
activities of the NMS Stock ATS and surveilling the trading that
occurs on the NMS Stock ATS. See Regulation ATS Adopting Release,
supra note 7, at 70863.
---------------------------------------------------------------------------

A. Subscribers

Part IV, Item 1 of proposed Form ATS-N would require an NMS Stock
ATS to disclose information regarding any eligibility requirements to
access the NMS Stock ATS, terms and conditions of use, types of
subscribers, arrangements with liquidity providers, and any procedures
or standards to limit or deny access to the NMS Stock ATS.\445\
---------------------------------------------------------------------------

\445\ The Commission notes that Exhibit A of current Form ATS
requires an ATS to describe its classes of subscribers (for example,
broker-dealer, institution, or retail) and any differences in access
to the services offered by the ATS to different groups or classes of
subscribers. Part IV, Section 1 of proposed Form ATS-N would require
similar information, but the proposed requirements of Form ATS-N are
designed to solicit more detailed information than that currently
solicited by Form ATS.
---------------------------------------------------------------------------

Part IV, Item 1(a) of proposed Form ATS-N would require an NMS
Stock ATS to describe any eligibility requirements to gain access to
the services of the NMS Stock ATS. If the eligibility requirements are
not the same for all subscribers and persons, an NMS Stock ATS would be
required to describe any differences. This item is designed to provide
potential subscribers with information about any conditions they would
need to satisfy prior to accessing the NMS Stock ATS. Based on
Commission experience, the eligibility process and requirements to
access an NMS Stock ATS vary, and the requirements may differ depending
on whether a potential subscriber is a customer of the broker-dealer
operator of the NMS Stock ATS. For instance, some NMS Stock ATSs
require that a potential subscriber be a broker-dealer to enter orders
on the NMS Stock ATS, while other NMS Stock ATSs do not. Some NMS Stock
ATSs may require potential subscribers to submit financial information
as a pre-requisite to subscribing to, or maintaining their subscriber
status on, the NMS Stock ATS.\446\ The Commission preliminarily
believes that market participants would find it useful to understand an
NMS Stock ATS's eligibility requirements so they may determine whether
they may qualify for access to an NMS Stock ATS.\447\ The Commission
preliminarily believes that making such information publicly available
would provide efficiencies, as a market participant could source
information about, and compare and contrast, the eligibility processes
and requirements to access different NMS Stock ATSs. The Commission
also preliminary believes that it would be better able to monitor

[[Page 81061]]

the extent to which NMS Stock ATSs are available to market participants
and obtain a thorough understanding of NMS Stock ATS's eligibility
processes and requirements.
---------------------------------------------------------------------------

\446\ See Regulation ATS Adopting Release, supra note 7, at
70859 (stating that the limitation on ATSs governing the conduct of
subscribers does not preclude an ATS from requiring financial
information from subscribers).
\447\ See Liquidnet letter #1, supra note 166 and accompanying
text (stating disclosures should include the admission criteria for
each ATS).
---------------------------------------------------------------------------

Request for Comment
257. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 1(a) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
258. Do you believe Part IV, Item 1(a) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to eligibility requirements to
gain access to the services of the NMS Stock ATS? Why or why not?
Please support your arguments.
259. Is it sufficiently clear what information would be required by
Part IV, Item 1(a) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
260. Do you believe there is other information that market
participants might find relevant or useful regarding the eligibility
process or requirements to gain access to the services of the NMS Stock
ATS? If so, describe such information and explain whether, and if so
why, such information should be required to be provided under proposed
Form ATS-N. Please support your arguments.
261. Do you believe there is any information that would be required
by Part IV, Item 1(a) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
262. Do you believe that subscribers and potential subscribers
would benefit from knowing the eligibility requirements of the NMS
Stock ATS? Why or why not? Please support your arguments.
263. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 1(a) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 1(a) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
264. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
1(a) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 1(a)?
Part IV, Item 1(b) of proposed Form ATS-N would require an NMS
Stock ATS to describe the terms and conditions of any contractual
agreements for granting access to the NMS Stock ATS for the purpose of
effecting transactions in securities or for submitting, disseminating,
or displaying orders on the NMS Stock ATS, and to state whether these
contractual agreements are written. Furthermore, if the terms and
conditions of any contractual agreements are not the same for all
subscribers and persons, the NMS Stock ATS would be required to
describe any differences. Based on Commission experience, these
contractual agreements may or may not be in writing, and the terms and
conditions therein can vary among subscribers to the NMS Stock ATSs.
The Commission preliminarily believes that it would be important
for all subscribers to have access to all relevant information
regarding the terms and conditions for accessing the trading services
of the NMS Stock ATS, which today may not always be available to all
subscribers. This item would allow subscribers to understand their
rights and obligations in connection with their use of the NMS Stock
ATS, and allow subscribers and potential subscribers to assess whether
other market participants may have access arrangements more favorable
than their own. This information is designed to help market
participants when evaluating which trading centers they could or would
like to access, and on which terms they could seek executions on those
trading centers. The Commission preliminarily believes that having such
information publicly available would provide efficiencies as market
participants could more easily source information about the terms and
conditions under which they could trade across NMS Stock ATSs, as well
as compare those terms and conditions to those of national securities
exchanges. The Commission understands that some NMS Stock ATSs
communicate the terms and conditions to access the NMS Stock ATS orally
to subscribers, often as part of an onboarding process, and do not
provide written contractual agreements. The Commission preliminarily
believes that market participants would benefit from knowing whether a
written contractual agreement exists that sets forth the terms and
conditions for accessing and trading on the NMS Stock ATS. Furthermore,
the Commission preliminarily believes that the disclosures that would
be required under Item 1(b) would better inform potential subscribers
about whether additional inquiry is necessary to fully understand the
terms and conditions for trading on the NMS Stock ATS.
Request for Comment
265. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 1(b) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
266. Do you believe Part IV, Item 1(b) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to the terms and conditions of
any contractual agreements for granting access to the NMS Stock ATS?
Why or why not? Please support your arguments.
267. Is it sufficiently clear what information would be required by
Part IV, Item 1(b) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
268. Do you believe there is other information that market
participants might find relevant or useful regarding the terms and
conditions of any contractual agreements by which access is granted to
the services of the NMS Stock ATS? If so, describe such information and
explain whether, and if so why, such information should be required to
be provided under proposed Form ATS-N. Please support your arguments.
269. Do you believe there is any information that would be required
by Part IV, Item 1(b) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
270. Do you believe that NMS Stock ATSs commonly have written
contractual agreements for granting access to the NMS Stock ATS? Why or
why not, and what is the basis for such belief? If not, how is access
granted? How are the terms and conditions of trading on the NMS Stock
ATS communicated to subscribers? Is there commonly an onboarding
process for new subscribers? What does such onboarding process entail?
Please explain in detail.
271. Do you believe there are agreements between subscribers and an
NMS Stock ATS that are not written? If so, what is the basis for your
belief,

[[Page 81062]]

what do those non-written agreements encompass, and how are they
communicated to subscribers? Are any materials other than contracts
provided to subscribers that set forth terms and conditions for
granting access to the NMS Stock ATS? Please explain in detail.
272. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 1(b) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 1(b) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
273. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
1(b) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 1(b)?
Part IV, Item 1(c) of proposed Form ATS-N would require an NMS
Stock ATS to describe the types of subscribers and other persons that
use the services of the NMS Stock ATS (e.g., institutional and retail
investors, broker-dealers, proprietary trading firms). The NMS Stock
ATS would also be required to state whether it accepts non-broker-
dealers as subscribers to the NMS Stock ATS and describe any criteria
for distinguishing among types of subscribers, classes of subscribers,
or other persons.
This item would provide information about the types of subscribers
to the NMS Stock ATS, or other persons that can enter orders onto the
NMS Stock ATS, so that market participants and the Commission would be
better informed about the type of order flow that may be present on the
NMS Stock ATS. Moreover, this item would, in conjunction with the other
disclosure requirements of proposed Form ATS-N regarding differences in
access to services or functionality of the NMS Stock ATS, inform market
participants of any privileges or restrictions that attach to different
categories of subscribers so that subscribers could evaluate which
privileges or restrictions might apply to them or the counterparties
against which they would be trading.\448\ For example, an NMS Stock ATS
may only allow certain types of subscribers, including institutional
investors, retail investors, broker-dealers, or proprietary trading
firms, to enter a certain type of order on the NMS Stock ATS.
Additionally, NMS Stock ATSs may assign different priorities to orders
based on the types of subscribers that entered the orders on the NMS
Stock ATS, such as orders originating from retail brokerage accounts or
proprietary traders. Furthermore, the Commission understands that
subscribers may wish to preclude or limit the interaction of their
orders with the orders of certain other subscribers for several
reasons, such as to help reduce information leakage or the possibility
of trading with counterparties that they perceive to be undesirable.
Accordingly, the Commission preliminarily believes that subscribers
would find it useful to know the types of subscribers or other persons
transacting on the NMS Stock ATS, and with that knowledge, they would
be in a better position to evaluate the order flow on the NMS Stock ATS
and determine whether they may wish to send their orders to the NMS
Stock ATS for execution.\449\ The Commission also preliminarily
believes that increased transparency regarding the types of
subscribers--and distinctions an NMS Stock ATS makes among subscribers
or other persons when trying to access the ATS--would advance the
Commission's objective of protecting investors by giving them better
information with which to protect their own interests.
---------------------------------------------------------------------------

\448\ But see supra notes 92-95 and 427-429 and accompanying
text (discussing the fair access requirements of Regulation ATS).
\449\ See Lime Brokerage letter, supra note 192 and accompanying
text (stating the Commission should require ``transparency around .
. . membership of dark pools'').
---------------------------------------------------------------------------

Request for Comment
274. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 1(c) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
275. Do you believe Part IV, Item 1(c) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to the types of subscribers and
other persons that use the services of the NMS Stock ATS? Why or why
not? Please support your arguments.
276. Is it sufficiently clear what information would be required by
Part IV, Item 1(c) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
277. Do you believe there is other information that market
participants might find relevant or useful regarding distinctions made
by the NMS Stock ATS among subscribers? If so, describe such
information and explain whether, and if so why, such information should
be required to be provided under proposed Form ATS-N. Please support
your arguments.
278. Do you believe there is any information that would be required
by Part IV, Item 1(c) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
279. Do you believe that the information that would be required by
Part IV, Item 1(c) of proposed Form ATS-N would aid subscribers in
evaluating the order flow on the NMS Stock ATS and determining whether
they wish to send their orders there for execution? Why or why not?
Please support your arguments.
280. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 1(c) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 1(c) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
281. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
1(c) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 1(c)?
Part IV, Item 1(d) of proposed Form ATS-N would require an NMS
Stock ATS to describe any formal or informal arrangement the NMS Stock
ATS has with a subscriber(s) or person(s) to provide liquidity to the
NMS Stock ATS (e.g., undertaking to buy or sell continuously, or to
meet specified thresholds of trading or quoting activity). Item 1(d)
would further require an NMS Stock ATS to describe the terms and
conditions of each arrangement and identify any liquidity providers
that are affiliates of the broker-dealer operator.
An NMS Stock ATS may want to ensure that there is sufficient
liquidity in a particular NMS stock to incentivize subscribers to send
order flow in that NMS stock to the NMS Stock ATS; market participants
may believe they are more likely to get an execution because of such
liquidity. The Commission understands that some ATSs that trade

[[Page 81063]]

NMS stocks may engage certain subscribers to provide liquidity to the
NMS Stock ATS and perform similar functions to that of a market maker
on a national securities exchange.\450\ These liquidity providers may
quote in a particular NMS stock on the NMS Stock ATS during trading
hours and may receive a benefit for performing this function, such as
discounts on fees, rebates, or the opportunity to execute with a
particular type of segmented order flow.\451\ The obligations required
of liquidity providers and the benefits they are provided vary across
NMS Stock ATSs. Accordingly, the Commission proposes to require NMS
Stock ATSs to describe the terms of any formal or informal arrangement
with a liquidity provider, which could entail such obligations and
benefits as well as a description of the process by which a subscriber
could become a liquidity provider on the NMS Stock ATS. The Commission
preliminarily believes that information about liquidity providers would
be useful to subscribers and market participants who, for example, may
want their orders to only interact with agency orders (and not with
those of a liquidity provider), or, conversely, may themselves want to
become a liquidity provider on the NMS Stock ATS.
---------------------------------------------------------------------------

\450\ See, e.g., The NASDAQ Stock Market LLC, Rule 4613, Market
Maker Obligations. Market-makers on a national securities exchange
typically undertake, among other things, two-sided quote obligations
where the market maker holds itself out as willing to buy and sell a
particular security or securities for its own account on a
continuous basis during trading hours. The obligations required of
market makers may vary across national securities exchanges.
\451\ Often, market makers on national securities exchanges are
provided benefits for providing liquidity to the exchange, such as
fee discounts, rebates, or volume incentive programs that may not be
available to non-market makers. See, e.g., The NASDAQ Stock Market
LLC, Rule 7014, Market Quality Incentive Programs (describing the
``Qualified Market Maker Program'' and ``Lead Market Maker
Program''). The attendant benefits provided to market makers may
vary across national securities exchanges.
---------------------------------------------------------------------------

Part IV, Item 1(d) of proposed Form ATS-N would also require an NMS
Stock ATS to identify any liquidity providers that are affiliates of
the broker-dealer operator. The Commission preliminarily believes that
market participants would find it useful to know whether the broker-
dealer operator itself, or its affiliates, have an arrangement to
provide liquidity to the NMS Stock ATS. The Commission preliminarily
believes that such information could reveal potential conflicts of
interest, if, for example, an NMS Stock ATS were to only permit
affiliates to act as liquidity providers and provided significant
benefits for performing that function.
Request for Comment
282. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 1(d) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
283. Do you believe Part IV, Item 1(d) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to any formal or informal
arrangement the NMS Stock ATS has with a subscriber(s) or person(s) to
provide liquidity to the NMS Stock ATS? Why or why not? Please support
your arguments.
284. Is it sufficiently clear what information would be required by
Part IV, Item 1(d) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
285. Do you believe there is other information that market
participants might find relevant or useful regarding arrangements with
subscribers or other persons to provide liquidity to the NMS Stock ATS?
If so, describe such information and explain whether, and if so why,
such information should be required to be provided under proposed Form
ATS-N. Please support your arguments.
286. Do you believe there is any information that would be required
by Part IV, Item 1(d) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
287. Do you believe that the information that would be required by
Part IV, Item 1(d) of proposed Form ATS-N would aid subscribers in
evaluating the order flow on the NMS Stock ATS and determining whether
they wish to send their orders there for execution? Why or why not?
Please support your arguments.
288. Do you believe that the proposed requirement in Part IV, Item
1(d) of proposed Form ATS-N that the NMS Stock ATS identify any
liquidity providers that are affiliates of the broker-dealer operator
would aid subscribers in evaluating potential conflicts of interest of
the broker-dealer operator, the order flow on the NMS Stock ATS, and
determining whether they wish to send their orders there for execution?
Why or why not? Please support your arguments.
289. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 1(d) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 1(d) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
290. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
1(d) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 1(d)?
Part IV, Item 1(e) of proposed Form ATS-N would require an NMS
Stock ATS to describe the circumstances by which access to the NMS
Stock ATS for a subscriber or other person may be limited or denied,
and describe any procedures or standards that are used to determine
such action. If these circumstances, procedures, or standards are not
applicable to all subscribers and persons, the NMS Stock ATS would be
required to describe any differences. As an ATS, an NMS Stock ATS
cannot exercise SRO powers and may not discipline subscribers other
than by excluding them from trading.\452\ The Commission understands
that ATSs that trade NMS stocks have rules governing subscribers'
participation on the ATS, and that if a subscriber fails to comply with
these rules, the ATS may limit or deny access to the NMS Stock
ATS.\453\ These limitations can result in some subscribers having
different levels of functionality or more favorable terms of access
than others. The Commission preliminarily believes that it is important
for subscribers to have advance notice of the circumstances under which
their access to NMS Stock ATSs would be limited or denied, and the
procedures or standards that would be used to govern such actions. The
Commission preliminarily believes that understanding such information
would provide efficiencies as a market participant could source
information about potential limits to accessing an

[[Page 81064]]

NMS Stock ATS, even if that market participant otherwise meets the
eligibility criteria for subscribing to the NMS Stock ATS, and it would
allow them to evaluate whether any limitations may result in receiving
less favorable access from the NMS Stock ATS. The increased
transparency regarding these procedures also may advance the
Commission's objective of protecting investors by helping the
Commission to understand when NMS Stock ATSs deny or limit access to
market participants.
---------------------------------------------------------------------------

\452\ See supra note 286 and accompanying text.
\453\ Form ATS-R, Exhibit C requires an ATS subject to the fair
access obligations under Rule 301(b)(5) of Regulation ATS to list
all persons granted, denied, or limited access to the ATS during the
period covered by the ATS-R report, designating for each person (a)
whether they were granted, denied, or limited access; (b) the date
the alternative trading system took such action; (c) the effective
date of such action; and (d) the nature of any denial on limitation
of access. See Form ATS-R.
---------------------------------------------------------------------------

Request for Comment
291. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 1(e) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
292. Do you believe Part IV, Item 1(e) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to the circumstances by which
access to the NMS Stock ATS for a subscriber or other person may be
limited or denied? Please explain.
293. Is it sufficiently clear what information would be required by
Part IV, Item 1(e) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
294. Do you believe there is other information that market
participants might find relevant or useful regarding the process by
which access to an NMS Stock ATS for a subscriber may be limited or
denied? If so, describe such information and explain whether, and if so
why, such information should be required to be provided under proposed
Form ATS-N. Please support your arguments.
295. Do you believe there is any information that would be required
by Part IV, Item 1(e) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
296. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 1(e) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 1(e) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
297. Do you believe there are circumstances under which NMS Stock
ATSs currently limit the functionality available to subscribers due to
an action or inaction on the part of a subscriber? If so, what is the
basis for your belief, what are those circumstances, and what
functionality is typically limited? Is it common for an NMS Stock ATS
to deny access to subscribers as opposed to limiting access? Why or why
not, and under what circumstances? Please be specific.
298. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
1(e) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Items 1(e)?

B. Hours of Operations

Part IV, Item 2(a) of proposed Form ATS-N would require an NMS
Stock ATS to provide the days and hours of operation of the NMS Stock
ATS, including the times when orders or other trading interest are
entered on the NMS Stock ATS and the time when pre-opening or after-
hours trading occur. Also, if the times when orders or other trading
interest are entered on the NMS Stock are not the same for all
subscribers and persons, Part IV, Item 2(b) would require the NMS Stock
ATS to describe any differences.
The Commission preliminarily believes that it is important for
subscribers and the Commission to have information regarding when NMS
Stock ATSs are operating and when orders can be entered on those
trading centers, including when an NMS Stock ATS will accept orders
outside of standard operating hours. The Commission notes that national
securities exchanges' rulebooks, which are publicly available, include
such information.\454\ Making such information publicly available for
NMS Stock ATSs would enable market participants to more easily compare
when trading interest may be entered on NMS stock trading centers. This
information also would allow the Commission to better understand the
operations of NMS Stock ATSs.
---------------------------------------------------------------------------

\454\ See, e.g., BATS Exchange Rules 1.5(c) (setting forth hours
for the exchange's After Hours Trading Session), 1.5(r) (setting
forth hours for the exchange's Pre-Opening Session), 1.5(w) (setting
forth the hours for the exchange's Regular Trading Hours), and 11.1
(setting forth the exchange's hours of trading and trading days, and
when certain order types may be entered).
---------------------------------------------------------------------------

Request for Comment
299. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 2 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
300. Do you believe Part IV, Item 2 of proposed Form ATS-N captures
the information that is most relevant to understanding the operations
of the NMS Stock ATS related to the days and hours of operation of the
NMS Stock ATS? Why or why not? Please support your arguments.
301. Do you believe there is other information that market
participants might find relevant or useful regarding the hours of
operation of an NMS Stock ATS? If so, describe such information and
explain whether, and if so why, such information should be required to
be provided under proposed Form ATS-N. Please support your arguments.
302. Do you believe that Part IV, Item 2 of proposed Form ATS-N is
sufficiently clear with respect to the disclosures that would be
required? If not, how should Part IV, Item 2 of proposed Form ATS-N be
revised to provide additional clarity? Please explain in detail.
303. Do you believe there is any information that would be required
by Part IV, Item 2 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? If so,
what information and why? Please support your arguments.
304. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 2 of proposed Form ATS-N? Would
the proposed disclosures in Part IV, Item 2 of proposed Form ATS-N
require an NMS Stock ATS to reveal too much (or not enough) information
about its structure and operations? Why or why not? Please support your
arguments.
305. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item 2
of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part IV, Item 2?

C. Types of Orders

Part IV, Item 3(a) of proposed Form ATS-N would require an NMS
Stock ATS to describe any types of orders that are entered on the NMS
Stock ATS, their characteristics, operations, and how they are handled
on the NMS Stock ATS, including: (i) Priority for each order type; (ii)
conditions for each order

[[Page 81065]]

type; (iii) order types designed not to remove liquidity (e.g., post-
only orders); (iv) order types that adjust their price as changes to
the order book occur (e.g., price sliding orders or pegged orders) or
have a discretionary range; (v) the time-in-force instructions that can
be used or not used with each order type; (vi) the availability of
order types across all forms of connectivity to the NMS Stock ATS and
differences, if any, between the availability of an order type across
those forms of connectivity; (vii) whether an order type is eligible
for routing to other trading centers; and (viii) the circumstances
under which order types may be combined with a time-in-force or another
order type, modified, replaced, canceled, rejected, or removed from the
NMS Stock ATS.\455\ If the availability of order types and their terms
and conditions are not the same for all subscribers and persons, Part
IV, Item 3(b) would require the NMS Stock ATS to describe any
differences. In addition, Part IV, Item 3(c) of Form ATS-N would
require an NMS Stock ATS to describe any requirements and handling
procedures for minimum order sizes, odd-lot orders, or mixed-lot
orders. The NMS Stock ATS must also describe any differences if the
requirements and handling procedures for minimum order sizes, odd-lot
orders, or mixed-lot orders are not the same for all subscribers and
persons.\456\
---------------------------------------------------------------------------

\455\ Items 3(a)(i), (ii), (iii), (iv) and (vii) of proposed
Form ATS-N provide further requirements of what needs to be included
in responding to these items. See discussion under each item infra.
\456\ The Commission notes that a broker-dealer operator may
have valid business reasons for offering various order types to
subscribers and the Commission is not proposing to limit the ability
for a broker-dealer operator to have such arrangements.
---------------------------------------------------------------------------

As discussed above, NMS Stock ATSs offer a wide range of order
types and modifiers and offer different minimum order size
requirements.\457\ Order types, in particular, are a primary means by
which users of an NMS Stock ATS communicate their instructions for
handling their orders to the NMS Stock ATS. Moreover, order types can
be complex and operate in various ways, and the Commission is therefore
proposing to request that NMS Stock ATSs provide the level of detail
set forth in subsections (i) through (viii) of Item 3(a). The
Commission believes that all market participants should have sufficient
information about all aspects of the operations of order types
available on an NMS Stock ATS to understand how to use order types to
achieve their investing or trading objectives, as well as to understand
how order types used by other market participants could affect their
trading interest. Item 3(a) would require a complete and detailed
description of the order types available on the NMS Stock ATS, their
characteristics, operations, and how they are handled to provide
transparency to market participants and the Commission. Subsection (i)
of Item 3(a) would require that the NMS Stock ATS describe the priority
rules for each order type. The description would be required to include
the order type's priority on the NMS Stock ATS upon order entry as well
as any subsequent change to priority (if applicable). Also, the NMS
Stock ATS would need to describe whether an order type can receive a
new time stamp (such as, for example, in the case of order types that
adjust price), and such order type's priority vis-[agrave]-vis other
orders on the book due to changes in the NBBO or other reference price.
In addition, this subsection would also require a description of any
instance in which the order type could lose execution priority to a
later arriving order at the same price.
---------------------------------------------------------------------------

\457\ See supra Section III.B.
---------------------------------------------------------------------------

Subsection (ii) of Item 3(a) would require that the NMS Stock ATS
describe any conditions for each order type. Such conditions would
include: any price conditions, including how the order type is ranked
and how price conditions affect the rank and price at which it can be
executed; conditions on the display or non-display of an order; or
conditions on the execution or routing of orders.
Subsection (iii) of Item 3(a) would require that the NMS Stock ATS
describe order types designed not to remove liquidity (e.g., post-only
orders). The NMS Stock ATS would need to describe what occurs when such
order is marketable against trading interest on the NMS Stock ATS when
received.
Subsection (iv) of Item 3(a) would require that the NMS Stock ATS
describe order types that adjust their price as changes to the order
book occur (e.g., price-sliding orders or pegged orders) or have a
discretionary range. As part of a response, this description would be
required to include an order's rank and price upon order entry and
whether such prices or rank may change based on the NBBO or other
market conditions when using such an order type. In addition, the
description would have to include when the order type is executable and
at what price the execution would occur, and also whether the price at
which the order type can be executed ever changes. Also, if the order
type can operate in different ways, the NMS Stock ATS would need to
explain the default operation of the order type.
Subsection (v) of Item 3(a) would require the NMS Stock ATS to
describe the time-in-force instructions that can be used or not used
with each order type.
Subsection (vi) of Item 3(a) would require a description of the
availability of order types across all forms of connectivity to the NMS
Stock ATS and differences, if any, between the availability of order
types across those forms of connectivity. For example, if an NMS Stock
ATS offers certain order types to persons who connect through the
broker-dealer operator, such as through use of a SOR (or similar
functionality) or algorithm, as opposed to persons who connect directly
through a FIX connection, that difference in availability would need to
be described in response to this subsection.
Subsection (vii) of Item 3(a) would require a description of
whether the order type is eligible for routing to other trading
centers. The response required by this item would be required to
include, if it is routable, whether an order type can be used with any
routing services offered.
Subsection (viii) of Item 3(a) would require the NMS Stock ATS to
describe the circumstances under which order types submitted to the NMS
Stock ATS may be combined with a time-in-force or another order type,
modified, replaced, canceled, rejected, or removed from the NMS Stock
ATS. If an NMS Stock ATS allows a subscriber to combine separate order
types, or combine an order type with a time-in-force restriction, both
of those instances would be responsive to subsection (viii) of Item
3(a).
Part IV, Item 3(b) of proposed Form ATS-N would require the NMS
Stock ATS to describe any differences if the availability of its orders
types and their terms and conditions are not the same for all
subscribers and persons.
Part IV, Item 3(c) of proposed Form ATS-N would require an NMS
Stock ATS to describe any requirements and handling procedures for
minimum order sizes, odd-lot orders, or mixed-lot orders. If the
requirements and handling procedures for minimum order sizes, odd-lot
orders, or mixed-lot orders are not the same for all subscribers and
persons, the NMS Stock ATS would also be required to describe any
differences. These would include, for example, any order size
requirements that may differ based on factors such as the type of
subscriber or person that uses the services of the NMS Stock ATS, or
the type of order (e.g., if only certain subscribers or persons are
eligible to use that order type).

[[Page 81066]]

The Commission preliminarily believes that a detailed description
of the characteristics of the order types of an NMS Stock ATS would
assist subscribers in better understanding how their orders would
function and interact with other orders on the NMS Stock ATS.\458\ It
also would allow market participants to see what order types could be
used by other market participants, which could affect the probability,
timing, and quality of their own executions. Moreover, the Commission
preliminarily believes that requiring comprehensive disclosure of an
NMS Stock ATS's order types on proposed Form ATS-N would allow market
participants to compare order types across NMS Stock ATSs and national
securities exchanges. As a result, a market participant would be better
able to assess the availability of order types and whether their
characteristics would accomplish the market participant's investing or
trading objectives.
---------------------------------------------------------------------------

\458\ See Consumer Federation of America Letter, supra note 188
and accompanying text (stating the Commission should require all
ATSs to disclose certain information about the order types offered
on the ATS); Liquidnet letter #1, supra note 171 and accompanying
text (stating institutional brokers, including institutional ATSs,
should disclose the order types offered).
---------------------------------------------------------------------------

The Commission also preliminarily believes that the disclosures
about the characteristics and functions of order types would allow the
Commission to better oversee NMS Stock ATSs, and alert the Commission
as to whether the function of a particular order type may violate the
federal securities laws or the rules or regulations thereunder, such as
the requirement under Rule 611 of Regulation NMS that a trading center
have policies and procedures reasonably designed to prevent trade-
throughs of protected quotations in NMS stocks.\459\ The Commission
preliminarily believes that the disclosures that would be required by
Item 3(a) would help the Commission discover a potential violation of
the federal securities laws and rules or regulations thereunder in a
more expeditious manner than if the disclosures were not required. The
disclosures required by Item 3(a) would also facilitate the
Commission's comparison of how the characteristics of order types were
described to subscribers and how they operate in practice as part of
any examination of the NMS Stock ATS.
---------------------------------------------------------------------------

\459\ See 17 CFR 242.611.
---------------------------------------------------------------------------

The Commission preliminarily believes this information would also
advance the Commission's interest in the protection of investors by
allowing subscribers to clearly see the types of orders available to
them, as well as potential counterparties, and any differences between
the order types, available among participants on the NMS Stock ATS.
As noted above, Part IV, Item 3(b) would require the NMS Stock ATS
to describe any differences if the availability of its order types and
their terms and conditions are not the same for all subscribers and
persons. The Commission preliminarily believes that this information
would be important for a market participant to better assess whether
other participants on the NMS Stock ATS may receive advantageous or
disadvantageous treatment as a result of the ATS's various order types
and how that treatment may affect that market participant's trading
interest. Information about any disparate treatment of investors also
would be important for the Commission as it monitors developments in
the national market system.
Part IV, Item 3(c) of proposed Form ATS-N would require an NMS
Stock ATS to describe any requirements and handling procedures for
minimum order sizes, odd-lot orders, or mixed-lot orders. The NMS Stock
ATS would also be required to explain any differences if the
requirements and handling procedures for minimum order sizes, odd-lot
orders, or mixed-lot orders are not the same for all subscribers and
persons. The information that would be required by Item 3(c) is
designed to facilitate the entry of orders by subscribers by providing
information on minimum order sizes, odd-lot orders, and mixed-lot
orders. An explanation of how an NMS Stock ATS's requirements and
conditions for minimum order sizes, odd-lot orders, and mixed-lot
orders differ among subscribers and persons would also provide a market
participant with information regarding how its trading interest would
be handled vis-[agrave]-vis other market participants. The information
that would be required by Item 3(c) would also be useful to the
Commission's monitoring of developments in market structure.
Request for Comment
306. Do you believe the Commission should require the disclosure of
the information on Part IV, Items 3(a) through 3(c) of Form ATS-N? Why
or why not? If so, what level of detail should be disclosed? Please be
specific.
307. Do you believe Part IV, Items 3(a) through 3(c) of proposed
Form ATS-N captures the information that is most relevant to
understanding the operations of the NMS Stock ATS related to the types
of orders that are entered to the NMS Stock ATS, their characteristics,
operations, and how they are handled on the NMS Stock ATS? Please
explain.
308. Is it sufficiently clear what information would be required by
Part IV, Items 3(a) through 3(c) of proposed Form ATS-N? Should the
items be refined in any way? If so, how? Please be specific.
309. Do you believe the proposed requirement to disclose the
information that would be required by Part IV, Item 3(a) of proposed
Form ATS-N could impact innovation on NMS Stock ATSs? Why or why not?
Please support your arguments.
310. Do you believe there is other information that market
participants might find relevant or useful regarding the types of
orders that are entered to the NMS Stock ATS, their characteristics,
operations, and how they are handled on the NMS Stock ATS? If so,
describe such information and explain whether, and if so why, such
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
311. Do you believe there is any information that would be required
by Part IV, Items 3(a) through 3(c) of proposed Form ATS-N that an NMS
Stock ATS should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
312. Do you believe there are any other aspects of order types that
an NMS Stock ATS should be required to disclose in a subpart to Part
IV, Item 3(a) of proposed Form ATS-N that have not been identified? If
so, what? Do you believe there are other order types about which the
Commission should ask specifically? If so, what order types? Please
explain in detail.
313. Should the Commission require greater specificity regarding
the operation of order types? If so, why and how? If not, why not?
Please support your arguments.
314. Do you believe that information relating to available order
types would help market participants in determining the best trading
venue for their orders? Why or why not? Please support your arguments.
315. Do you believe that Items 3(a) through 3(c) of Part IV of
proposed Form ATS-N would advance the Commission's interest in the
protection of investors by allowing market participants to consider the
types of orders available to them, as well as potential counterparties,
and any differences between the order types, modifiers, and size
requirements

[[Page 81067]]

available among participants on the NMS Stock ATS? Why or why not?
Please support your arguments.
316. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Items
3(a) through 3(c) of proposed Form ATS-N other than through disclosure
on proposed Form ATS-N? If so, how else could this information be
obtained and would such alternative means be preferable to the proposed
disclosures in Part IV, Items 3(a) through 3(c)?
317. What are the potential costs and benefits of disclosing the
information required by Part IV, Items 3(a) through 3(c) of proposed
Form ATS-N? Would the proposed disclosures in Part IV, Items 3(a)
through 3(c) of proposed Form ATS-N require an NMS Stock ATS to reveal
too much (or not enough) information about its structure and
operations? Why or why not? Please support your arguments.
318. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N
should require a description of priority for each order type? Why or
why not? Please support your answer.
319. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N
should require a description of any conditions for each order type? Why
or why not? Please support your answer.
320. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N
should require a description of order types designed not to remove
liquidity? Why or why not? Please support your answer.
321. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N
should require a description of order types that adjust their price as
changes to the order book occur or have a discretionary range? Why or
why not? Please support your answer.
322. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N
should require a description of the time-in-force instructions for each
order type? Why or why not? Please support your answer.
323. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N
should require a description of the availability of order types across
all forms of connectivity to the NMS Stock ATS? Why or why not? Please
support your answer.
324. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N
should require a description of whether order types are eligible for
routing to other trading centers? Why or why not? Please support your
answer.
325. Do you believe that Part IV, Item 3(a) of proposed Form ATS-N
should require a description of the circumstances under which order
types may be combined with a time-in-force or another order type,
modified, replaced, canceled, rejected, or removed from the NMS Stock
ATS? Why or why not? Please support your answer.
Part IV, Item 3(d) of proposed Form ATS-N would require an NMS
Stock ATS to describe any messages sent to or received by the NMS Stock
ATS indicating trading interest (e.g., IOIs, actionable IOIs, or
conditional orders), including information contained in the message,
the means under which messages are transmitted, the circumstances in
which messages are transmitted (e.g., automatically by the NMS Stock
ATS or upon the subscriber's request), and the circumstances by which
they may result in an execution on the NMS Stock ATS. If the terms and
conditions regarding these messages, indications of interest, and
conditional orders are not the same for all subscribers and persons,
the NMS Stock ATS would be required describe any differences.
This item is designed to provide specific information about the use
of IOIs, actionable IOIs, conditional orders, and similar
functionalities on the NMS Stock ATS. Based on the Commission's
experience, IOIs are used by NMS Stock ATSs to convey trading interest
available on those trading centers. Some NMS Stock ATSs also transmit
``actionable'' IOIs to selected market participants for the purpose of
attracting contra-side order flow to the ATS. In general, an actionable
IOI is an IOI containing enough information to effectively alert the
recipient about the details of the NMS Stock ATS's trading interest in
a security. While an actionable IOI may not explicitly specify the
price and/or size of the trading interest, the practical context in
which it is submitted alerts the recipient about the side (buy or
sell), size (minimum of a round lot of trading interest), and price (at
or better than the NBBO, depending on the side of the order).
Conditional orders are also messages indicating a trading interest
on a trading venue, and conditional orders generally function in a
similar manner to IOIs. A conditional order may contain the same
attributes as other order types when a subscriber enters it onto the
trading venue (e.g., side, price, and size), but NMS Stock ATSs will
generally not transmit those details to other subscribers or market
participants. Rather, the NMS Stock ATS will tentatively match the
conditional order with contra side interest and then alert the
subscriber that entered the conditional order of the potential match.
That subscriber may then either accept or decline the execution (i.e.,
``firm up'' the conditional order). Based on Commission experience, NMS
Stock ATSs typically only permit conditional orders to execute against
other conditional orders, but some ATSs allow conditional orders to
interact with other order types.
The Commission preliminarily believes that understanding the manner
in which NMS Stock ATSs use IOIs, actionable IOIs, conditional orders,
and similar functionalities could be useful to market participants
because it could impact the potential execution of a subscriber's
trading interest. Also, because an actionable IOI conveys substantial
information, the potential for information leakage could be a concern
to NMS Stock ATS subscribers using IOIs, particularly when they are
seeking to execute large-sized orders. In the Commission's experience,
NMS Stock ATSs generally send IOIs and other conditional orders only to
certain market participants. Accordingly, the disclosures that would be
required by Item 3(d) are designed to help market participants better
evaluate whether messages indicating trading interest (including IOIs,
actionable IOIs, and conditional orders) are equally available to them
as compared to other market participants and would be appropriate tools
to accomplish their investing or trading objectives.
Request for Comment
326. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 3(d) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
327. Do you believe Part IV, Item 3(d) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to any messages sent to or
received by the NMS Stock ATS indicating trading interest? Please
explain.
328. Is it sufficiently clear what information would be required by
Part IV, Item 3(d) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
329. Do you believe there is other information that market
participants might find relevant or useful regarding messages
indicating trading interest (e.g., IOIs, actionable IOIs, or
conditional orders)? If so, describe such information and explain
whether, and if so why, such information should be required to be
provided under proposed Form ATS-N. Please support your arguments.
330. Do you believe there are other types of messages that
communicate

[[Page 81068]]

trading interest that the Commission should specifically cite as
examples in Part IV, Item 3(d) of proposed Form ATS-N? If so, what are
those message types? Please provide a detailed explanation of each
additional type of message and support your arguments as to each.
331. Do you believe there is any information that would be required
by Part IV, Item 3(d) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? If so, what information and why? Please support your
arguments.
332. Do you believe that there is potential concern for information
leakage from the use of IOIs, particularly actionable IOIs on NMS Stock
ATSs? If so, would disclosure about their operation on proposed Form
ATS-N be an appropriate manner in which to mitigate any concern? If
not, why not? Please support your arguments.
333. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 3(d) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 3(d) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
334. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
3(d) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 3(d)?

D. Connectivity, Order Entry, and Co-Location

Part IV Item 4(a) of proposed Form ATS-N would require the NMS
Stock ATS to describe the means by which subscribers or other persons
connect to the NMS Stock ATS and enter orders or other trading interest
on the NMS Stock ATS (e.g., directly, through a Financial Information
eXchange (``FIX'') connection to the ATS, or indirectly, through the
broker-dealer operator's SOR, or any intermediate functionality,
algorithm, or sales desk). This item also would require an NMS Stock
ATS to describe any differences if the terms and conditions for
connecting and entering orders or other trading interest on the NMS
Stock ATS are not the same for all subscribers and persons.
Based on Commission experience reviewing Forms ATS, subscribers
send orders or other trading interest to the NMS Stock ATS both
directly and indirectly. A direct method of sending orders or other
trading interest to an ATS that trades NMS stocks, for example, may
include the use of the FIX Protocol. The FIX Protocol allows
subscribers to enter orders or other trading interest into the ATS
without an intermediary. To the extent that a subscriber connects to
the NMS Stock ATS by way of a FIX connection and an order sent by that
subscriber passes through an intermediate application or functionality
on its way to the NMS Stock ATS, the NMS Stock ATS should identify the
application or functionality and provide a description of its
purpose.\460\ One example of an indirect method of sending orders or
other trading interest to an NMS Stock ATS is sending orders or other
trading interest to the broker-dealer operator, which may then use its
SOR (or similar functionality) or algorithm to send such orders or
other trading interest to the NMS Stock ATS.
---------------------------------------------------------------------------

\460\ The Commission notes that, in this example, given that the
intermediate application or functionality has access to a
subscriber's order information, the NMS Stock ATS should take
appropriate measures to protect the confidentiality of such
information pursuant to Rule 301(b)(10) of Regulation ATS.
---------------------------------------------------------------------------

The disclosures regarding the direct or indirect means of order
entry could be important to subscribers because they would provide
information about the possible methods to reach the NMS Stock ATS and
applicable system requirements necessary to send orders or other
trading interest to the NMS Stock ATS. This information would also
alert subscribers to the NMS Stock ATS as to whether trading interest
can be entered on the NMS Stock ATS through the broker-dealer operator,
which would allow subscribers to assess any potential advantages that
orders sent through the broker-dealer operator may have with respect to
other subscribers on the NMS Stock ATS.\461\ The Commission would find
the information required by this item useful to understanding how
trading interest moves from persons to possible trading centers and in
evaluating any potential conflicts of interest presented between the
broker-dealer operator and the NMS Stock ATS in how orders are entered
onto the NMS Stock ATS.
---------------------------------------------------------------------------

\461\ But see supra notes 92-95 and 427-429 and accompanying
text (discussing the fair access requirements of Regulation ATS).
---------------------------------------------------------------------------

The disclosure of the information required for order entry on the
NMS Stock ATS, such as limit price, size, and/or side of the market,
would inform all subscribers to the NMS Stock ATS about how to transmit
orders or other trading interest to the NMS Stock ATS. The Commission
preliminarily believes that understanding this information may expedite
the order entry process of subscribers. The Commission, as part of its
monitoring of developments in market structure, also could use this
disclosure to better understand what information allows for the
interaction of trading interest.
The Commission preliminarily believes that requiring NMS Stock ATSs
to disclose any differences if the terms and conditions for connecting
and entering orders or other trading interest on the NMS Stock ATS are
not the same for all subscribers and persons would allow market
participants to source the various order entry procedures offered by
NMS Stock ATSs as part of evaluating an NMS Stock ATS as a potential
destination for them to route their orders for execution.
Request for Comment
335. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 4(a) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
336. Do you believe Part IV, Item 4(a) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to the means by which
subscribers or other persons connect to the NMS Stock ATS and enter
orders or other trading interest on the NMS Stock ATS? Please explain.
337. Is it sufficiently clear what information would be required by
Part IV, Item 4(a) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
338. What are the direct and indirect means through which
subscribers and other persons can send orders or other trading interest
to the NMS Stock ATS? Do you believe there any means for which the
Commission should specifically request information in Part IV, Item
4(a) of proposed Form ATS-N? If so, please explain how those means to
send orders or other trading interest are used by subscribers and other
persons.
339. Do you believe there are any methods of sending orders or
other trading interest to NMS Stock ATSs that are more advantageous
than others? If so, please explain how such methods provide advantages
to subscribers or other persons who use them. Should those advantages,
if any, be specifically disclosed?

[[Page 81069]]

340. Do you believe there is other information that market
participants might find relevant or useful regarding the means by which
subscribers can send orders or other trading interest to the NMS Stock
ATS? If so, describe such information and explain whether, and if so
why, such information should be required to be provided under proposed
Form ATS-N. Please support your arguments.
341. Do you believe there is any information that would be required
by Part IV, Item 4(a) of Proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? Why or why not? Please support your arguments.
342. Do you believe that the information that would be required by
Part IV, Item 4(a) of proposed Form ATS-N could be important to market
participants in assessing any potential advantages that orders sent
through the broker-dealer operator may have over other market
participants on the NMS Stock ATS? Why or why not? Please support your
arguments.
343. Do you believe that the information that would be required by
Part IV, Item 4(a) of proposed Form ATS-N would be important to market
participants when deciding whether to trade on an NMS Stock ATS and
would assist them in devising appropriate trading strategies to help
accomplish their investing or trading objectives? Why or why not?
Please support your arguments.
344. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 4(a) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 4(a) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
345. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
4(a) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 4(a)?
Part IV Item 4(b) of proposed Form ATS-N would require that the NMS
Stock ATS describe any co-location services or any other means by which
any subscriber or other persons may enhance the speed by which to send
or receive orders, trading interest, or messages to or from the NMS
Stock ATS and the terms and conditions of co-location services. If the
terms and conditions of the co-location services are not the same for
all subscribers and persons, Part IV, Item 4(b) would require the NMS
Stock ATS to describe any differences. Co-location is the placement of
a user's systems in close physical proximity to the trading and
execution system of a trading venue to reduce latency and enhance
speed. The description of co-location services that could enhance the
speed of orders and messages and the terms and conditions thereof would
allow subscribers to evaluate these services and determine whether they
would like to subscribe to such services if available. Moreover,
subscribers and potential subscribers would know that others can use a
co-location service even if they determine not to use it themselves,
which would assist them in devising appropriate trading strategies if
they choose to participate.\462\ For instance, a subscriber could
choose certain types of orders or trading strategies with the knowledge
that other subscribers have enhanced speeds for submitting trading
interest through the use of the NMS Stock ATS's connectivity or co-
location services.
---------------------------------------------------------------------------

\462\ See SIFMA letter #1, supra note 194 and accompanying text
(stating its belief that ``added disclosure about co-location and
other market access arrangements would be beneficial to market
participants''); Morgan Stanley letter, supra note 197 and
accompanying text (stating that it received questions from customers
specific to dark pools related to the co-location of servers).
---------------------------------------------------------------------------

The proposed requirement that the NMS Stock ATS describe any
differences in the terms and conditions of an NMS Stock ATS's co-
location services among subscribers or other persons also could help
inform the trading strategies chosen by subscribers. Information on
such connectivity and co-location options would further the
Commission's understanding of the dynamics of the markets and overall
market structure for NMS stocks. In addition, this information would
allow the Commission to evaluate whether the NMS Stock ATS is
unreasonably prohibiting or limiting any person with respect to the
access to services offered by the NMS Stock ATS in contravention of
Rule 301(b)(5) of Regulation ATS for those NMS Stock ATSs that have
surpassed the applicable trading volume thresholds.
Request for Comment
346. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 4(b) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
347. Do you believe Part IV, Item 4(b) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to co-location services or any
other means by which any subscriber or other persons may enhance the
speed by which to send or receive orders, trading interest, or messages
to or from the NMS Stock ATS? Please explain.
348. Is it sufficiently clear what information would be required by
Part IV, Item 4(b) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
349. Do you believe there is other information that market
participants might find relevant or useful regarding co-location
services by which a subscriber may enhance the speed that it may submit
orders or send and receive messages? If so, describe such information
and explain whether, and if so why, such information should be required
to be provided under proposed Form ATS-N. Please support your
arguments.
350. Do you believe there is any information that would be required
by Part IV, Item 4(b) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? Why or why not? Please support your arguments.
351. Do believe that the information that would be required by Part
IV, Item 4(b) of proposed Form ATS-N would be useful to market
participants when deciding whether to trade on an NMS Stock ATS and
would assist them in devising appropriate trading strategies to help
accomplish their investing or trading objectives? Why or why not?
Please support your arguments.
352. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
4(b) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 4(b)?
353. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 4(b) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 4(b) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.

[[Page 81070]]

E. Segmentation of Order Flow and Notice About Segmentation

Part IV, Item 5(a) of proposed Form ATS-N would require an NMS
Stock ATS to describe any segmentation of orders or other trading
interest on the NMS Stock ATS (e.g., classification by type of
participant, source, nature of trading activity). Part IV, Item 5(a)
would also require the NMS Stock ATS to describe the segmented
categories, the criteria used to segment these categories, and
procedures for determining, evaluating, and changing segmented
categories. If the segmented categories, the criteria used to segment
these categories, and any procedures for determining, evaluating or
changing segmented categories are not the same for all subscribers and
persons, this item would require an NMS Stock ATS to describe any
differences.
Based on Commission experience, some NMS Stock ATSs segment order
flow entered on the NMS Stock ATS according to various categories and
allow subscribers to select the type of persons or order flow they want
to trade or not trade against. An NMS Stock ATS may segment trading
interest by type of participant (e.g., buy-side or sell-side firms,
proprietary trading firms, agency-only firms, firms above or below
certain assets under management thresholds). For example, buy-side or
institutional order flow may seek to only trade against other buy-side
or institutional order flow, or may seek to avoid trading against
proprietary trading firms or so-called high frequency trading firms.
When segmenting by source, an NMS Stock ATS may look to the underlying
source of the trading interest in the case of trading interest that is
intermediated, such as the trading interest of retail customers. Some
NMS Stock ATSs segment by the nature of the trading activity, which
could include segmenting by patterns of behavior, time horizons of
traders, or the passivity or aggressiveness of trading strategies. NMS
Stock ATSs might elect to use some combination of these criteria or
other criteria altogether.
This item would require that an NMS Stock ATS disclose the
segmented categories, the criteria used to segment these categories,
and procedures for determining, evaluating, and changing segmented
categories. This would include, for example, any modification or
overriding of an existing segmented category and a description of how
existing subscribers in the segmented category would be handled and
notified. This item would provide market participants with an
understanding of the categories of order flow or types of market
participants with which they may interact and allow them to both assess
the consistency of a segmented group and determine whether the manner
in which the trading interest is segmented comports with its views of
how certain trading interest should be categorized. Disclosure of the
procedures and criteria used to segment categories would allow a market
participant to determine whether its view of what constitutes certain
trading interest it wants to seek or avoid is classified in the same
way by the NMS Stock ATS. For example, a subscriber may find it useful
to understand the metrics or criteria an NMS Stock ATS uses to
categorize high frequency trading firms so that it can compare the
criteria used by the NMS Stock ATS with its view of what constitutes a
high frequency trading firm, and thus be able to successfully trade
against or avoid such trading interest. Similarly, information
regarding the procedures applicable to trading among segmented
categories would allow market participants to evaluate whether they can
successfully trade against or avoid the segments of trading interest
they desire.
In addition, disclosure of any differences in the segmentation
among participants would allow subscribers to more clearly note if
certain persons are, for instance, not subject to segmentation in the
same way as other persons, or not subject to segmentation at all and
able to trade against all order flow. All participants would have
access to the same information as to how the NMS Stock ATS segments
order flow, and whether the segmentation criteria are applied by the
NMS Stock ATS uniformly.\463\ These disclosures would help the
Commission understand the categories and manner in which persons and
order flow (or both) are segmented across NMS Stock ATSs and could aid
the Commission in its oversight of the markets including, for example,
its evaluation of whether segmentation could facilitate or hinder
market participants from achieving their investing or trading
objectives. The Commission is not proposing to prohibit NMS Stock ATSs
from segmenting their order flow; \464\ the Commission is instead
proposing only that an NMS Stock ATS disclose to market participants
and the Commission how they segment their order flow.
---------------------------------------------------------------------------

\463\ See Blackrock letter, supra note 186 and accompanying text
(stating mandatory ATS disclosure should include greater detail on
how the platform matches orders between client segments); Consumer
Federation of America letter, supra note 187 and accompanying text
(stating that Form ATS should require ATSs to provide ``critical
details about . . . segmentation'' because ``the information will
allow market participants . . . to assess whether an ATS's terms of
access and service are such that it makes sense to trade on that
venue'').
\464\ However, an ATS that crossed the fair access threshold and
wished to segment its order flow could do so only in accordance with
the fair access provisions of existing Rule 301(b)(5) of Regulation
ATS.
---------------------------------------------------------------------------

Request for Comment
354. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 5(a) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
355. Do you believe Part IV, Item 5(a) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to segmentation of orders or
other trading interest on the NMS Stock ATS? Please explain.
356. Is it sufficiently clear what information would be required by
Part IV, Item 5(a) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
357. Do you believe there is other information that market
participants might find relevant or useful regarding segmentation of
order flow on the NMS Stock ATS? If so, describe such information and
explain whether, and if so why, such information should be required to
be provided under proposed Form ATS-N. Please support your arguments.
358. Do you believe there is any information that would be required
by Part IV, Item 5(a) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? Why or why not? Please support your arguments.
359. Do you believe there are any forms or types of order
segmentation that would not be captured by Part IV, Item 5(a) of
proposed Form ATS-N or should be addressed separately? If so, please
provide a detailed explanation of how orders are segmented under such
functionalities on NMS Stock ATSs.
360. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 5(a) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 5(a) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
361. Do you believe there are other ways to obtain the same
information as

[[Page 81071]]

would be required from NMS Stock ATSs by Part IV, Item 5(a) of proposed
Form ATS-N other than through disclosure on proposed Form ATS-N? If so,
how else could this information be obtained and would such alternative
means be preferable to the proposed disclosures in Part IV, Item 5(a)?
Part IV, Item 5(b) of proposed Form ATS-N would require the NMS
Stock ATS to state whether the NMS Stock ATS informs subscribers or
persons about the segmentation category that a subscriber or a person
is assigned and to describe any notice provided to subscribers or
persons about the segmentation category that they are assigned and the
segmentation identified in Part IV, Item 5(a), including the content of
any notice and the means by which any notice is communicated. Also, an
NMS Stock ATS would be required to describe any differences if the
notice is not the same for all subscribers and persons. As discussed
above, an NMS Stock ATS can elect to segment its order flow entered on
the NMS Stock ATS according to various categories and allow subscribers
and other persons to select the type of persons or order flow they want
to trade or not trade against. Based on the experience of the
Commission and its staff, ATSs provide subscribers with limited
information about how they segment order flow and do not always inform
subscribers about the categories into which they are segmented. A
market participant that is unaware of its segmented category may not
know about the order flow it is trading against, and therefore, the
Commission preliminarily believes that market participants trading on
an NMS Stock ATS would want to know about their assigned segmented
categories and understand how those categories were determined.\465\
The category into which a subscriber is placed also informs its
decision of where to trade because it could affect the contra-side
trading interest available to them to trade against. Item 5(b) is
therefore designed to inform market participants about the potential
information that the NMS Stock ATS may provide to inform them about
such segmentation, particularly with respect to whether the NMS Stock
ATS informs subscribers about how it assigns a participant to a
segmented category, as well as any differences in the notice provided
to subscribers. The Commission preliminarily believes that market
participants would find it useful to understand how they will be
alerted about segmentation on an NMS Stock ATS before deciding whether
or not to subscribe to the NMS Stock ATS.
---------------------------------------------------------------------------

\465\ See supra notes 171, 186, 198, 199 and accompanying text.
---------------------------------------------------------------------------

Request for Comment
362. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 5(b) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
363. Do you believe Part IV, Item 5(b) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to informing subscribers or
persons about the segmentation category that a subscriber or a person
is assigned? Please explain.
364. Is it sufficiently clear what information would be required by
Part IV, Item 5(b) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
365. Do you believe there is any information that would be required
by Part IV, Item 5(b) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? Why or why not? Please support your arguments.
366. Do you believe there is any specific information that the
Commission should require NMS Stock ATSs to disclose to each subscriber
with regard to how it segments each subscriber's orders? If so, explain
what information and why. Please support your arguments.
367. Do you believe transparency with respect to how an NMS Stock
ATS notifies subscribers regarding how those subscribers' trading
interests are segmented is useful to market participants when deciding
whether to trade on the NMS Stock ATS and would assist them in devising
appropriate trading strategies to help accomplish their investing or
trading objectives? If not, why? Please support your arguments.
368. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 5(b) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 5(b) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
369. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
5(b) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 5(b)?
Part IV, Item 5(c) of proposed Form ATS-N would require an NMS
Stock ATS to describe any means and the circumstances by which a
subscriber, the broker-dealer operator, or any of its affiliates may
designate an order or trading interest submitted to the NMS Stock ATS
to interact or not to interact with specific orders, trading interest,
or persons on the NMS Stock ATS (e.g., designating an order or trading
interest to be executed against a specific subscriber) and how such
designations affect order priority and interaction. Part IV, Item 5(c)
would require the NMS Stock ATS to describe any means by which
subscribers can seek or avoid certain executions against certain
orders, persons, or trading interest. In response to this item, an NMS
Stock ATS would be required to disclose, for example, any circumstances
by which an NMS Stock ATS allows persons to designate an order
submitted to the NMS Stock ATS to interact with specific orders resting
on the NMS Stock ATS. The NMS Stock ATS would need to describe this
process and how such order preferencing works with other rules
governing order priority and interaction. The response to this item
also would also be required to include a description of any means by
which a subscriber could avoid executing against any order, person, or
trading interest. For instance, an NMS Stock ATS would need to describe
any mechanisms by which a person could avoid executing against its own
orders or orders of its affiliates on the NMS Stock ATS.
The Commission preliminarily believes that it is important for
market participants to understand whether--and how--they may designate
their orders or other trading interest to avoid interacting with
specific orders, trading interest, or persons on an NMS Stock ATS. The
Commission preliminarily believes that this understanding would help
market participants better evaluate the NMS Stock ATS as a potential
trading venue. For instance, if a market participant seeks to avoid
interacting with an order type that is commonly employed as part of
certain trading strategies, the Commission preliminarily believes that
the disclosures required under Item 5(c) would better enable that
market participant to determine whether submitting order flow to a
particular NMS Stock ATS would allow it to carry out its own trading
strategy. Similarly, if a market participant would find it desirable to
be able to designate an order submitted to the NMS Stock ATS to
interact with specific orders resting

[[Page 81072]]

on an NMS Stock ATS's order book, the Commission preliminarily believes
that the information required by Item 5(c) would inform that market
participant whether--and how--it can do so on a particular NMS Stock
ATS, thereby assisting that market participant when it evaluates that
NMS Stock ATS as a potential trading venue.
Request for Comment
370. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 5(c) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
371. Do you believe Part IV, Item 5(c) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to the means and the
circumstances by which a subscriber, the broker-dealer operator, or any
of its affiliates may designate an order or trading interest submitted
to the NMS Stock ATS to interact or not to interact with specific
orders, trading interest, or persons on the NMS Stock ATS? Please
explain.
372. Do you believe there is other information that market
participants might find relevant or useful regarding the means and the
circumstances by which a subscriber, the broker-dealer operator, or any
of its affiliates may designate an order or trading interest submitted
to the NMS Stock ATS to interact or not to interact with specific
orders, trading interest, or persons on the NMS Stock ATS? If so,
describe such information and explain whether, and if so why, such
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
373. Is it sufficiently clear what information would be required by
Part IV, Item 5(c) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
374. Do you believe there is any information that would be required
by Part IV, Item 5(c) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? Why or why not? Please support your arguments.
375. Should the requirement to describe the means by which persons,
orders, or trading interest may be sought or avoided on an NMS Stock
ATS be refined in any way? Please be specific.
376. Does the process for seeking or avoiding specific orders,
persons, or trading interest raise any other market structure issues or
concerns that the Commission should consider? Please be specific.
377. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 5(c) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 5(c) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
378. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
5(c) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 5(c)?

F. Display of Order and Trading Interest

Part IV, Item 6(a) of proposed Form ATS-N would require that an NMS
Stock ATS describe any means and circumstances by which orders or other
trading interest on the NMS Stock ATS are displayed or made known
outside the NMS Stock ATS and the information about the orders and
trading interest that are displayed. Also, if the display of orders or
other trading interest is not the same for all subscribers and persons,
the NMS Stock ATS would be required to describe any differences. Part
IV, Item 6(b) of proposed Form ATS-N would also require the NMS Stock
ATS to identify the subscriber(s) or person(s) (in the case of a
natural person, to identify only the position or title) to whom the
orders and trading interest are displayed or otherwise made known.
As discussed more fully above,\466\ most NMS Stock ATSs do not
publicly display quotation data and are commonly referred to as ``dark
pools.'' The Commission preliminarily believes that market participants
generally are very sensitive to precisely how and when their trading
interest is displayed or otherwise made known outside the NMS Stock
ATS. The Commission is concerned that market participants currently may
not know the extent to which their trading interest sent to ATSs is
displayed outside those ATSs. Accordingly, for any NMS Stock ATSs that
display some or all of the trading interest on their systems, Part IV,
Item 6 of proposed Form ATS-N would require the NMS Stock ATS to
identify the subscriber(s) or person(s) to whom orders or other trading
interest information is displayed or otherwise made known, the means
and circumstances by which orders or other trading interest are
displayed or made known, and the contents of that information. Because
NMS Stock ATSs that are also ECNs may differ in how and where orders or
other trading interest are displayed, the Commission preliminarily
believes this item would clarify for market participants and the
Commission exactly how such display may occur. In addition, an NMS
Stock ATS would need to disclose arrangements, whether formal or
informal (oral or written) to the extent they exist, with third parties
to display the NMS Stock ATS's trading interest outside of the NMS
Stock ATS, such as IOIs from the NMS Stock ATS's subscribers being
displayed on vendor systems, or arrangements with third parties to
transmit IOIs between subscribers.
---------------------------------------------------------------------------

\466\ See supra note 123 and accompanying text.
---------------------------------------------------------------------------

The Commission preliminarily believes that when an NMS Stock ATS
sends electronic messages outside of the NMS Stock ATS that expose the
presence of orders or other trading interest on the NMS Stock ATS, it
is displaying or making known orders or other trading interest on the
NMS Stock ATS. For instance, an NMS Stock ATS may send to subscribers
or other persons a direct data feed from the NMS Stock ATS that
contains real-time information about current quotes, orders or other
trading interest on the NMS Stock ATS. Accordingly, it would be
responsive to this item for the NMS Stock ATS to disclose the
circumstances under which the NMS Stock ATS would send these messages,
the persons that received them, and the information contained in the
messages, including the symbol or any other information relating to
trading interest on the NMS Stock ATS. The NMS Stock ATS would need to
disclose the information required by this item, including the exact
content of the information, such as symbol, price, size, attribution,
or any other information made known. The Commission preliminarily
believes that disclosures in response to this item are important
because the information disclosed would provide market participants
with advance notice of the potential display of their orders or other
trading interest outside of the NMS Stock ATS.\467\ The Commission
preliminarily believes that market

[[Page 81073]]

participants, whose trading strategies are sensitive to how and to whom
their orders and trading interest are displayed, would use the
information disclosed under Item 6 to evaluate whether routing orders
to a particular NMS Stock ATS would be consistent with their respective
strategies.
---------------------------------------------------------------------------

\467\ See Morgan Stanley letter, supra note 197 and accompanying
text (stating customers questioned it about whether its dark pool is
truly dark); Bloomberg Tradebook letter, supra note 190 and
accompanying text (recommending that the Commission ask ATSs to
complete a questionnaire that would include questions relating to
the sharing of orders or order information with affiliates or other
trading venues by the ATS).
---------------------------------------------------------------------------

Request for Comment
379. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 6 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific
380. Do you believe Part IV, Item 6 of proposed Form ATS-N captures
the information that is most relevant to understanding the operations
of the NMS Stock ATS related to the means and circumstances by which
orders or other trading interest on the NMS Stock ATS are displayed or
made known outside the NMS Stock ATS and the information about the
orders and trading interest that are displayed? Please explain.
381. What are the means through which NMS Stock ATSs currently
display or make known trading interest? Do you believe any of these
means raise any concerns? If so, why? Please support your arguments. Do
you believe that Part IV, Item 6 of proposed Form ATS-N would mitigate
any of those concerns through the disclosure of responsive information?
Why or why not? Please support your arguments.
382. Is it sufficiently clear what information would be required by
Part IV, Item 6 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific.
383. Do you believe there is other information that market
participants might find relevant or useful regarding orders or other
trading interest on the NMS Stock ATS that are displayed or otherwise
made known outside the NMS Stock ATS? If so, describe such information
and explain whether, and if so why, such information should be required
to be provided under proposed Form ATS-N. Please support your
arguments.
384. Do you believe there is any information that would be required
by Part IV, Item 6 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
385. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 6 of proposed Form ATS-N? Would
the proposed disclosures in Part IV, Item 6 of proposed Form ATS-N
require an NMS Stock ATS to reveal too much (or not enough) information
about its structure and operations? Why or why not? Please support your
arguments.
386. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item 6
of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part IV, Item 6?

G. Trading Services

Part IV, Item 7(a) of proposed Form ATS-N would require an NMS
Stock ATS to describe the means or facilities used by the NMS Stock ATS
to bring together the orders of multiple buyers and sellers, including
the structure of the market (e.g., crossing system, auction market,
limit order matching book). If the use of these means or facilities are
not the same for all subscribers and persons, the NMS Stock ATS would
also be required to describe any differences.
This item is primarily designed to inform market participants and
the Commission about an NMS Stock ATS's market and the facilities and
mechanisms that it uses to match counterparties. Part IV, Item 7(a) of
proposed Form ATS-N would require a description, with specificity, of
the facilities and mechanisms into which subscribers enter orders and
how orders entered into these facilities and mechanisms would interact.
The Commission has previously explained that a trading center brings
together orders when orders entered into the system for a given
security have the opportunity to interact with other orders entered
into the system for the same security.\468\ For instance, a trading
center brings together orders if it displays, or otherwise represents,
trading interests entered on the system, such as a consolidated quote
screen, to system users.\469\ Furthermore, a trading center also brings
together orders if it receives subscribers' orders centrally for future
processing and execution, such as part of a limit order matching book
that allows subscribers to display buy and sell orders in particular
securities and to obtain execution against matching orders
contemporaneously entered or stored in the system.\470\ Additionally,
as explained above, to qualify for the Rule 3a1-1(a)(2) exemption from
the statutory definition of ``exchange,'' an ATS must bring together
the orders of multiple buyers and sellers.\471\
---------------------------------------------------------------------------

\468\ See Regulation ATS Adopting Release, supra note 7, at
70849.
\469\ See id.
\470\ See id.
\471\ See id. The Commission emphasized in the Regulation ATS
Adopting Release that the mere interpositioning of a designated
counterparty as riskless principal for settlement purposes after the
purchasing and selling counterparties to a trade have been matched
would not, by itself, mean that the system does not have multiple
buyers and sellers. See id. Additionally, systems in which there is
only a single seller, such as systems that permit issuers to sell
their own securities to investors, would not be included within Rule
3b-16. See id.
---------------------------------------------------------------------------

Based on Commission experience, ATSs that trade NMS stocks use
various types of trading mechanisms. For example, many ATSs bring
together multiple buyers and sellers using limit order matching
systems. Other ATSs use crossing mechanisms that allow participants to
enter unpriced orders to buy and sell securities, with the ATS's system
crossing orders at specified times at a price derived from another
market.\472\ Some ATSs use an auction mechanism that matches multiple
buyers and sellers by first pausing execution in a certain security for
a set amount of time, during which the ATS's system seeks out and/or
concentrates liquidity for the auction; after the trading pause, orders
will execute at either a single auction price or according to the
priority rules for the auction's execution. Furthermore, some ATSs use
a blotter scraping functionality, which may inform the ATS's system
about the orders placed on a participant's order management system, but
not yet entered into the ATS; the ATS or broker-dealer operator
oftentimes can automatically generate those orders and enter them into
the ATS on behalf of the subscriber, in accordance with the relevant
terms and conditions, when certain contra-side trading interest exists
in the ATS.
---------------------------------------------------------------------------

\472\ See Regulation ATS Adopting Release, supra note 7, at
70849 n.37.
---------------------------------------------------------------------------

The Commission preliminarily believes that the disclosures required
under Part IV, Item 7(a) would be useful to market participants when
evaluating whether or not to route orders to a particular NMS Stock
ATS. At times, market participants may route orders to a trading venue
with certain characteristics to accomplish a particular trading
strategy. For instance, a market participant aiming to execute a block
transaction may seek out a trading platform that operates a block
crossing network with specialized size discovery mechanisms and
controls for information leakage. At the same time, a different market
participant may seek to use an NMS Stock ATS's auction

[[Page 81074]]

function if that market participant believes the auction process would
provide the best opportunity for price discovery or price improvement.
Accordingly, the Commission preliminarily believes that disclosure of
the information that would be required under Item 7(a) of proposed Form
ATS-N would better enable market participants to evaluate an NMS Stock
ATS as a potential destination for them to route their orders. In
addition, this information also would assist the Commission to fully
evaluate the facilities and mechanisms that consist of the NMS Stock
ATS and whether an NMS Stock ATS meets the requirements of Rule 3b-16
that it is bringing together the orders for securities of multiple
buyers and sellers.\473\
---------------------------------------------------------------------------

\473\ See 17 CFR 240.3b-16(a)(1).
---------------------------------------------------------------------------

Request for Comment
387. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 7(a) of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
388. Do you believe Part IV, Item 7(a) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to the means or facilities used
by the NMS Stock ATS to bring together the orders of multiple buyers
and sellers, including the structure of the market? Please explain.
389. Is it sufficiently clear what information would be required by
Part IV, Item 7(a) of proposed Form ATS-N? Should the item be refined
in any way? If so, how? Please be specific.
390. Do you believe there is other information that market
participants might find relevant or useful regarding the means or
facilities used by the NMS Stock ATS to bring together the orders of
multiple buyers and sellers? If so, describe such information and
explain whether, and if so why, such information should be required to
be provided under proposed Form ATS-N. Please support your arguments.
391. Do you believe there is any information that would be required
by Part IV, Item 7(a) of proposed Form ATS-N that an NMS Stock ATS
should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? Why or why not? Please support your arguments.
392. Are there particular means or facilities for bringing together
the orders of multiple buyers and sellers on which the Commission
should request information specifically that is not included as a
component under Part IV, item 7(a) of proposed Form ATS-N?
393. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 7(a) of proposed Form ATS-N?
Would the proposed disclosures in Part IV, Item 7(a) of proposed Form
ATS-N require an NMS Stock ATS to reveal too much (or not enough)
information about its structure and operations? Why or why not? Please
support your arguments.
394. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
7(a) of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 7(a)?
Part IV, Item 7(b) of Form ATS-N would require an NMS Stock ATS to
describe the established, non-discretionary methods that dictate the
terms of trading among multiple buyers and sellers on the facilities of
the NMS Stock ATS, including rules and procedures governing the
priority, pricing methodologies, allocation, matching, and execution of
orders and other trading interest. If these rules and procedures are
not the same for all subscribers and persons, the NMS Stock ATS would
be required to describe any differences.
Part IV, Item 7(b) of proposed Form ATS-N is primarily designed to
inform market participants about how orders interact on an NMS Stock
ATS upon being entered into the system. Item 7(b) would require a
description, with specificity, of all rules and procedures relevant to
order interaction and execution, such as those addressing order
priority, pricing methodologies, allocation, matching, and execution of
orders and other trading interest. The Commission previously explained
in the Regulation ATS Adopting Release that use of established, non-
discretionary methods could include operation of a trading facility or
the setting of rules governing the trading of subscribers.\474\ For
example, the Commission considers the use of an algorithm by an
electronic trading system, which sets trading procedures and
priorities, to be a trading facility that uses established, non-
discretionary methods.\475\ Similarly, the Commission has previously
stated that rules imposing execution priorities, such as time and price
priority rules, would be ``established, non-discretionary methods.''
\476\
---------------------------------------------------------------------------

\474\ See Regulation ATS Adopting Release, supra note 7, at
70851-52.
\475\ See id. at 70851.
\476\ See id. at 70852.
---------------------------------------------------------------------------

Based on Commission experience, NMS Stocks ATSs employ various
terms and conditions under which orders interact and match. As noted
above, some NMS Stock ATSs may offer price-time priority to determine
how to match orders (potentially with various exceptions), while other
NMS Stock ATSs may offer midpoint-only matching with time
priority.\477\ Some NMS Stock ATSs might also take into account other
factors to determine priority. For example, an NMS Stock ATS may assign
either a lower or higher priority to an order entered by a subscriber
in a certain class (e.g., orders of proprietary traders or retail
investors) or routed from a particular source (e.g., orders routed by
the broker-dealer operator's SOR (or similar functionality) or
algorithm) when compared to an equally priced order entered by a
different subscriber or via a different source. Furthermore, in the
Commission's experience, an NMS Stock ATS might elect to apply
different priority rules for matching conditional orders than it does
for matching other order types.
---------------------------------------------------------------------------

\477\ See supra Section III.B.
---------------------------------------------------------------------------

Part IV, Item 7(c) of proposed Form ATS-N would require an NMS
Stock ATS to describe any trading procedures related to price
protection mechanisms, short sales, locked-crossed markets, the
handling of execution errors, time-stamping of orders and executions,
or price improvement functionality. If the trading procedures are not
the same for all subscribers and persons, the NMS Stock ATS would also
be required to describe any differences. Some ATSs that trade NMS
stocks apply various methods to determine an execution price based on
the circumstances of the match. For example, an ATS may price an
execution of a midpoint pegged order with a limit or market order at
the midpoint of the NBBO. An ATS executing a match of two limit orders,
or a limit and market order, might price the execution at or within the
NBBO, with the possibility of offering the limit order(s) price
improvement. On the other hand, an ATS that operates a block crossing
network, with specialized size discovery mechanisms, might calculate a
volume-weighted average price after the final size of the execution has
been determined.
In the Commission's experience, NMS Stock ATSs have also adopted
other trading procedures governing the execution of orders, which the
NMS Stock ATS would be required to explain under Part IV, Item 7(c) of
proposed

[[Page 81075]]

Form ATS-N. For instance, an NMS Stock ATS might elect to use price
protections to re-price orders or prevent their execution under certain
circumstances, such as Limit Up Limit Down price bands pursuant to the
National Market System Plan to Address Extraordinary Market Volatility
(``LULD Plan'').\478\ An NMS Stock ATS might also permit short sales to
be executed on its system and would thus be required to configure its
system to comply with federal securities laws related to short sales,
including Regulation SHO.\479\ Additionally, an NMS Stock ATS could
have rules and procedures governing and/or precluding the execution of
orders in a locked or crossed market. If an NMS Stock ATS has any
procedures governing the handling of execution errors, such as the use
of an error account by the NMS Stock ATS, it would be required to
explain those procedures in Item 7(c).
---------------------------------------------------------------------------

\478\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (``LULD Approval
Order''). The registered national securities exchanges and FINRA
filed the LULD Plan to create a market-wide limit up-limit down
mechanism to address extraordinary market volatility in NMS Stocks.
See id. at 33500. The Plan sets forth procedures that provide for
market-wide limit up-limit down requirements that would be designed
to prevent trades in individual NMS Stocks from occurring outside of
the specified price bands. See id.
\479\ 17 CFR 242.200 through 242.204.
---------------------------------------------------------------------------

Furthermore, under Part IV, Item 7(c) of proposed Form ATS-N, an
NMS Stock ATS would also be required to describe any protocols for
time-stamping orders and executions to ensure compliance with the
Exchange Act and the rules and regulations thereunder and any execution
procedures related to price improvement. For example, if an NMS Stock
ATS has procedures to reprice orders under its price protection
mechanisms, to reprice short sale orders to ensure compliance with
Regulation SHO, or to reprice orders due to price-sliding order types
(such as certain pegged order types), it would be required to explain
when it creates new timestamps for such re-priced orders.\480\ In
addition, any functionality or mechanism available on the NMS Stock ATS
that allows for price improvement would also need to be described in
response to this item.
---------------------------------------------------------------------------

\480\ Additionally, if subscriber orders are routed from the NMS
Stock ATS and are not filled, or filled only in part on the NMS
Stock ATS, the Commission preliminarily believes that the NMS Stock
ATS should describe how such orders are time stamped for priority
purposes.
---------------------------------------------------------------------------

The Commission preliminarily believes that information about how an
NMS Stock ATS prices and matches orders is useful to market
participants' and the Commission's understanding of that trading
center's operation. The Commission preliminarily believes that the
information required under Part IV, Items 7(b) and 7(c) of proposed
Form ATS-N would allow market participants to evaluate the terms and
conditions under which their orders will interact and execute on an NMS
Stock ATS, and would thus provide them with a better opportunity to
determine whether that NMS Stock ATS is the appropriate trading
destination for their orders. For example, a market participant whose
order would be given a higher priority on an NMS Stock ATS based on its
subscriber class may choose to first route its order to that venue,
whereas a market participant seeking to enter a conditional order may
choose to route an order based on an NMS Stock ATS's specific priority
rules governing conditional orders. Likewise, market participants
likely would want to know whether an NMS Stock ATS applies price
protection mechanisms, or other standards, that could re-price an order
or prevent it from executing under certain conditions. In addition, the
Commission preliminarily believes that the information provided in
response to Items 7(a), 7(b), and 7(c) would allow the Commission to
more easily evaluate whether the entity that filed the proposed Form
ATS-N meets the criteria of Rule 3b-16 and the definition of an NMS
Stock ATS.
Request for Comment
395. Do you believe the Commission should require the disclosure of
the information on Part IV, Items 7(b) and 7(c) of Form ATS-N? Why or
why not? If so, what level of detail should be disclosed? Please be
specific.
396. Do you believe Part IV, Item 7(b) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS related to the established, non-
discretionary methods that dictate the terms of trading among multiple
buyers and sellers on the facilities of the NMS Stock ATS, including
rules and procedures governing the priority, pricing methodologies,
allocation, matching, and execution of orders and other trading
interest? Please explain.
397. Do you believe Part IV, Item 7(c) of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding the trading procedures
related to price protection mechanisms, short sales, locked-crossed
markets, the handling of execution errors, time-stamping of orders and
executions, or price improvement functionality? Please explain.
398. Is it sufficiently clear what information would be required by
Part IV, Items 7(b) and 7(c) of proposed Form ATS-N? Should these items
be refined in any way? If so, how? Please be specific.
399. Do you believe there is other information that market
participants might find relevant or useful regarding the established
non-discretionary methods that dictate the terms of trading among
multiple buyers and sellers on the market or facilities of an NMS Stock
ATS? If so, describe such information and explain whether, and if so
why, such information should be required to be provided under proposed
Form ATS-N. Please support your arguments.
400. Do you believe there is other information that market
participants might find relevant or useful regarding trading procedures
related to price protection mechanisms, short sales, locked-crossed
markets, the handling of execution errors, time-stamping of orders and
executions, or price improvement functionality on an NMS Stock ATS? If
so, describe such information and explain whether, and if so why, such
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
401. Do you believe there is any information that would be required
by Part IV, Items 7(b) and 7(c) of proposed Form ATS-N that an NMS
Stock ATS should not be required to disclose due to concerns regarding
confidentiality, business reasons, trade secrets, burden, or any other
concerns? Why or why not? Please support your arguments.
402. Are there any aspects of the non-discretionary methods that
dictate the terms of trading among buyers and sellers on which the
Commission should specifically require information that is not included
as a component under Part IV, Item 7(b) of proposed Form ATS-N?
403. What are the potential costs and benefits of disclosing the
information required by Part IV, Items 7(b) and 7(c) of proposed Form
ATS-N? Would the proposed disclosures in Part IV, Items 7(b) and 7(c)
of proposed Form ATS-N require an NMS Stock ATS to reveal too much (or
not enough) information about its structure and operations? Why or why
not? Please support your arguments.
404. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Items
7(b) and 7(c) of proposed Form ATS-N other than through disclosure on
proposed Form

[[Page 81076]]

ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part IV, Items 7(b) and 7(c)?

H. Suspension of Trading, System Disruption or Malfunction

Part IV, Item 8 of proposed Form ATS-N would require an NMS Stock
ATS to describe any procedures governing trading in the event the NMS
Stock ATS suspends trading or experiences a system disruption or
malfunction. In addition, if the procedures governing trading during a
suspension or system disruption or malfunction are not the same for all
subscribers and persons, the NMS Stock ATS would be required to
describe any differences. This item is designed to inform market
participants of whether, among other things, an NMS Stock ATS will
continue to accept orders after suspension or system malfunction or
disruption occurs, whether the NMS Stock ATS routes, holds, or
continues to execute orders resting in the system prior to the
disruption, and the type of notice the NMS Stock ATS provides to
subscribers and other market participants during a suspension or system
disruption or malfunction. Examples of system disruptions would
include, but are not limited to, internal software problems that
prevent the NMS Stock ATS's system from opening or continuing
trading,\481\ a significant increase in volume that exceeds the ability
of the trading system of the NMS Stock ATS to process incoming
orders,\482\ and the failure of the ability of the trading system of
the NMS Stock ATS to receive NBBO or other external pricing information
that is used in the system's pricing methodology.
---------------------------------------------------------------------------

\481\ See SCI Adopting Release, supra note 17 at 72254-55 n.28.
\482\ See id. at 72255 n.29.
---------------------------------------------------------------------------

The Commission preliminarily believes that information regarding an
NMS Stock ATS's procedures on how orders may be handled during a
suspension of trading or system disruption or malfunction would be
useful to market participants because such an event might preclude the
NMS Stock ATS from accepting and/or executing time sensitive orders and
could impact the price the subscriber receives. The information about
how an NMS Stock ATS would handle orders under such circumstances would
better inform a subscriber's trading decisions at the time of such an
event and thus help that subscriber accomplish its investing or trading
objectives.
Information regarding the procedures for how an NMS Stock ATS would
handle orders during a suspension of trading or system disruption or
malfunction would also help the Commission better monitor the
securities markets. The Commission has recently noted that given the
speed and interconnected nature of the U.S. securities markets, a
seemingly minor systems problem at a single entity can quickly create
losses and liability for market participants, and spread rapidly across
the national market system, potentially creating widespread damage and
harm to market participants and investors.\483\ Accordingly, it is
important to fully understand what, if any, trading procedures an NMS
Stock ATS would follow during a suspension of trading or system
disruption or malfunction. The Commission preliminarily believes that
the disclosures that would be required by Item 8 would help the
Commission discover a potential violation of the federal securities
laws and rules or regulations thereunder in a more expeditious manner
than if the disclosures were not required. The Commission notes that it
is not proposing to require NMS Stock ATSs to adopt specific procedures
governing trading during a system disruption or malfunction as it did
under Regulation SCI for certain significant-volume ATSs that trade NMS
stocks or non-NMS stocks.\484\ Rather, under Part IV, Item 8 of
proposed Form ATS-N, the Commission is only requiring an NMS Stock ATS
to disclose what procedures, if any, it follows during a suspension of
trading or system disruption or malfunction on the NMS Stock ATS.
Accordingly, the disclosure requirements under Item 8, similar to other
items on proposed Form ATS-N, are intended to inform market
participants of an NMS Stock ATS's procedures rather than impose any
new procedural requirements on NMS Stock ATSs.
---------------------------------------------------------------------------

\483\ See id. at 72253.
\484\ See supra notes 102-103 and accompanying text.
---------------------------------------------------------------------------

Request for Comment
405. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 8 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
406. Do you believe Part IV, Item 8 of proposed Form ATS-N captures
the information that is most relevant to understanding the operations
of the NMS Stock ATS regarding any procedures governing trading in the
event the NMS Stock ATS suspends trading or experiences a system
disruption or malfunction? Please explain.
407. Is it sufficiently clear what information would be required by
Part IV, Item 8 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific.
408. Do you believe there is other information that market
participants might find relevant or useful regarding procedures
governing trading in the event an NMS Stock ATS suspends trading or
experiences a system disruption or malfunction? If so, describe such
information and explain whether, and if so why, such information should
be required to be provided under proposed Form ATS-N. Please support
your arguments.
409. Do you believe there is any information that would be required
by Part IV, Item 8 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
410. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 8 of proposed Form ATS-N? Would
the proposed disclosures in Part IV, Item 8 of proposed Form ATS-N
require an NMS Stock ATS to reveal too much (or not enough) information
about its structure and operations? Why or why not? Please support your
arguments.
411. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item 8
of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part IV, Item 8?

I. Opening, Reopening, and Closing Processes, and After Hours
Procedures

Part IV, Item 9 of proposed Form ATS-N would require an NMS Stock
ATS to describe its opening, reopening, and closing processes, if any,
and any after-hours trading procedures. Part IV, Item 9(a) of proposed
Form ATS-N would require an NMS Stock ATS to describe any opening and
reopening processes, including how orders or other trading interest are
matched and executed prior to the start of regular trading hours or
following a stoppage of trading in a security during regular trading
hours and how unexecuted orders or other trading interest are

[[Page 81077]]

handled at the time the NMS Stock ATS begins regular trading at the
start of regular trading hours or following a stoppage of trading in a
security during regular trading hours. An NMS Stock ATS would also be
required to describe any differences between pre-opening executions,
executions following a stoppage of trading in a security during regular
trading hours, and executions during regular trading hours. Part IV,
Item 9(b) of proposed Form ATS-N would require a description of any
closing process, including how unexecuted orders or other trading
interest are handled at the close of regular trading. An NMS Stock ATS
would also be required to describe any differences between the closing
executions and executions during regular trading hours. Part IV, Item
9(c) of proposed Form ATS-N would require a description of any after-
hours trading procedures, including how orders and trading interest are
matched and executed during after-hours trading. An NMS Stock ATS would
also be required to describe any differences between the after-hours
executions and executions during regular trading hours.
Part IV, Item 9 of proposed Form ATS-N is designed to inform market
participants about whether an NMS Stock ATS uses any special procedures
to match orders outside of regular trading hours and/or processes to
set a single opening, reopening, or closing price to, for example,
maximize liquidity and accurately reflect market conditions at the
opening, reopening, or close of trading. The Commission notes that it
is standard practice for national securities exchanges to conduct
opening, reopening, and closing auctions, or similar procedures, to
start and conclude the trading day, or reopen trading in a security
during the trading day.\485\ Furthermore, to facilitate their opening
and closing processes, exchanges often permit members to enter orders
specially designated to execute on the opening or closing.\486\ The
disclosures under this item would allow for comparisons between NMS
Stock ATSs and exchanges.
---------------------------------------------------------------------------

\485\ See, e.g., New York Stock Exchange Rule 123D (setting
forth the duties of NYSE Designated Market Maker when opening and
reopening trading in a stock); New York Stock Exchange Rule 123C
(setting forth the exchange's closing procedures); The Nasdaq Stock
Market LLC Rule 4752 (setting forth rules for the Nasdaq Opening
Cross); The Nasdaq Stock Market LLC Rule 4753 (setting forth rules
for the Nasdaq Halt Cross); The Nasdaq Stock Market LLC Rule 4754
(setting forth rules for the Nasdaq Closing Cross); BATS Exchange
Rules 11.23 and 11.24 (setting forth the exchange's procedures for
openings, closings and auctions following a trading halt).
\486\ See, e.g., New York Stock Exchange Rule 13 (defining
Market-on-Open. Market-on-Close, Limit-on-Open, and Limit-on-Close,
and Closing Offset order types); The Nasdaq Stock Market LLC Rule
4752 (a) (defining Market on Open, Limit on Open, Opening Imbalance
Only, and Market Hours order types); The Nasdaq Stock Market LLC
Rule 4754(a) (defining Market on Close, Limit on Close, and
Imbalance Only order types); BATS Exchange Rule 11.23(a) (defining
Eligible Auction, Market-on-Open, Limit-on-Open, Late-Limit-on-Open,
Market-on-Close, Limit-on-Close, and Late Limit-on-Close order
types).
---------------------------------------------------------------------------

Market participants would likely want to know about any special
opening, reopening, or closing processes, and after-hours trading
procedures, employed by an NMS Stock ATS. In particular, the Commission
preliminarily believes that market participants would want to know
which, if any, order types participate in an NMS Stock ATS's opening,
reopening, and/or closing processes, and after-hours trading. The
Commission preliminarily believes that such information would help
market participants assess whether participating in an NMS Stock ATS's
opening, reopening, or closing processes, or after-hours trading on the
NMS Stock ATS, would help accomplish their investing or trading
objectives and thus, cause them to route orders to the NMS Stock ATS.
The disclosures required under Part IV, Item 9 of proposed Form
ATS-N are also designed to help the Commission to better oversee NMS
Stock ATSs and alert the Commission about any potential regulatory
issues arising from an NMS Stock ATS's opening, reopening, or closing
processes, or after-hours trading procedures. For example, under Rule
611(b)(3) of Regulation NMS,\487\ single-priced opening and closing
transactions are excepted from the Order Protection Rule under Rule
611(a) of Regulation NMS.\488\ The Commission preliminarily believes
the disclosures required under Part IV, Item 9 of proposed Form ATS-N
would help the Commission analyze whether the opening, reopening, and/
or closing processes of an NMS Stock ATS, and after-hours trading
procedures, are consistent with the Exchange Act and the rules and
regulations thereunder.
---------------------------------------------------------------------------

\487\ See 17 CFR 242.611(b)(3).
\488\ See 17 CFR 242.611(a).
---------------------------------------------------------------------------

Request for Comment
412. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 9 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
413. Do you believe Part IV, Item 9 of proposed Form ATS-N captures
the information that is most relevant to understanding the operations
of the NMS Stock ATS regarding its opening, reopening, or closing
processes, if any, and any after-hours trading procedures? Please
explain.
414. Do you believe there is other information that market
participants might find relevant or useful regarding the opening or
reopening processes, closing process, or after-hours trading procedures
on the NMS Stock ATS? If so, describe such information and explain
whether, and if so why, such information should be required to be
provided under proposed Form ATS-N. Please support your arguments.
415. Is it sufficiently clear what information would be required by
Part IV, Item 9 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific.
416. Do you believe there is any information that would be required
by Part IV, Item 9 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
417. Do you believe the information that would be required by Part
IV, Item 9 of proposed Form ATS-N would be useful to market
participants when deciding whether to trade on the NMS Stock ATS and
would assist them in devising appropriate trading strategies to help
accomplish their investing or trading objectives? Why or why not?
Please support your arguments.
418. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 9 of proposed Form ATS-N? Would
the proposed disclosures in Part IV, Item 9 of proposed Form ATS-N
require an NMS Stock ATS to reveal too much (or not enough) information
about its structure and operations? Why or why not? Please support your
arguments.
419. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item 9
of proposed Form ATS-N other than through disclosure on proposed Form
ATS-N? If so, how else could this information be obtained and would
such alternative means be preferable to the proposed disclosures in
Part IV, Item 9?

J. Outbound Routing

Part IV, Item 10(a) of Proposed Form ATS-N would require an NMS
Stock ATS to describe the circumstances under which orders or other
trading interest are routed from the NMS Stock ATS to another trading
center, including whether outbound routing occurs at the

[[Page 81078]]

affirmative instruction of the subscriber or at the discretion of the
broker-dealer operator, and the means by which routing is performed
(e.g., a third party or order management system or a SOR (or similar
functionality) or algorithm of the broker-dealer operator or any of its
affiliates). If the means by which orders or other trading interest are
routed from the NMS Stock ATS are not the same for all subscribers and
persons, the NMS Stock ATS would be required to describe any
differences under Part IV, Item 10(b) of proposed Form ATS-N.
Based on Commission experience, some NMS Stock ATSs, by way of
their broker-dealer operator, provide outbound routing services whereby
a subscriber's order or trading interest could be routed to another
trading center.\489\ Orders and trading interest could be routed to
other trading centers under a variety of circumstances. For instance, a
subscriber could instruct the NMS Stock ATS to route its orders to
another trading center if it is not immediately executed on the NMS
Stock ATS upon entry. Also, a subscriber could enter an order on the
NMS Stock ATS that rests as an open order on the NMS Stock ATS and is
concurrently routed to another trading center for potential execution.
If the order is executed at the away trading center, the NMS Stock ATS
would cancel the order resting as an open order on the NMS Stock ATS.
If the order is executed on the NMS Stock ATS, the order that was
routed to the away market would be canceled.
---------------------------------------------------------------------------

\489\ ``Trading center'' under Regulation NMS is defined as ``a
national securities exchange or national securities association that
operates an SRO trading facility, an alternative trading system, 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).
---------------------------------------------------------------------------

The descriptions in response to Part IV, Item 10 of proposed Form
ATS-N would be required to include who determines routing destinations,
whether the subscriber, the broker-dealer operator, or both. This
information is meant to illuminate when subscribers would have control
over potential routing destinations and when the broker-dealer operator
would have discretion to route away. The Commission preliminarily
believes that subscribers would find it useful to be aware of any
instance in which the broker-dealer operator has discretion to route
trading interest so that a subscriber could better protect its
interests and monitor any such routing. Item 10 of proposed Form ATS-N
would also require a description of the means by which the routing is
performed. Examples of the means of outbound routing could include a
third-party router, an order management system or SOR (or similar
functionality) or algorithm of the broker-dealer operator or any of its
affiliates, or any other functionality used to outbound route trading
interest.
The Commission preliminarily believes that it is important for
subscribers and potential subscribers to know at whose discretion any
outbound routing occurs and who would be performing the routing. The
Commission preliminarily believes that such disclosures concerning
outbound routing would provide subscribers and potential subscribers
with the ability to gauge how their orders would be handled if they are
not executed on the NMS Stock ATS. Subscribers and potential
subscribers might, for example, have concerns about the leakage of
confidential trading information when their orders are routed to other
trading centers. Part IV, Item 10 of proposed Form ATS-N is designed to
provide subscribers and potential subscribers with relevant information
to evaluate the potential for leakage of their confidential trading
information. In addition, subscribers and potential subscribers could
have concerns about the treatment of their confidential trading
information should their orders be routed by a third party or the SOR
(or similar functionality) or algorithm of the broker-dealer operator.
Overall, the Commission preliminarily believes that information about
routing would likely be useful to market participants when deciding
whether to subscribe or otherwise submit orders to an NMS Stock ATS
that might be eligible for routing.
The Commission also preliminarily believes that the disclosures
required by Part IV, Item 10 of proposed Form ATS-N would aid it in
evaluating whether an NMS Stock ATS is in compliance with Rule
301(b)(10) of Regulation ATS.\490\ The Commission could use the
disclosures required under Item 10 of proposed Form ATS-N to evaluate
whether there are any risks to the confidentiality of trading
information on an NMS Stock ATS due to the outbound routing
functionality being used. These disclosures would provide the
Commission with insight into what trading information may be visible to
the entity performing the NMS Stock ATS's outbound routing functions,
such as a third party or the broker-dealer operator's SOR (or similar
functionality) or algorithm.
---------------------------------------------------------------------------

\490\ See 17 CFR 242.301(b)(10).
---------------------------------------------------------------------------

Request for Comment
420. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 10 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
421. Do you believe Part IV, Item 10 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding the circumstances under which
orders or other trading interest are routed from the NMS Stock ATS to
another trading center? Please explain.
422. Is it sufficiently clear what information would be required by
Part IV, Item 10 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific.
423. What mechanisms are available for NMS Stock ATSs to perform
outbound routing? Do you believe there is any additional information
that the Commission should require NMS Stock ATSs to disclose with
regard to outbound routing? If so, explain what information and why.
Please support your arguments.
424. Do you believe there is any information that would be required
by Part IV, Item 10 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
425. Do you believe that the disclosures required under Part IV,
Item 10 of proposed Form ATS-N would provide market participants with
relevant information to evaluate the potential for leakage of their
confidential trading information? Why or why not? Please be specific.
426. Do you believe transparency in how an NMS Stock ATS routes
orders to other trading centers is useful to market participants when
deciding whether to trade on the NMS Stock ATS and would assist them in
devising appropriate trading strategies to help accomplish their
investing or trading objectives? Why or why not?
427. Do you believe there is other information that market
participants might find relevant or useful regarding the circumstances
under which orders or other trading interest are routed from the NMS
Stock ATS to another trading center? If so, describe such information
and explain whether, and if so why, such information should be required
to be provided under proposed Form ATS-N. Please support your
arguments.
428. What are the potential costs and benefits of disclosing the
information

[[Page 81079]]

required by Part IV, Item 10 of proposed Form ATS-N? Would the proposed
disclosures in Part IV, Item 10 of proposed Form ATS-N require an NMS
Stock ATS to reveal too much (or not enough) information about its
structure and operations? Why or why not? Please support your
arguments.
429. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
10 of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 10?

K. Market Data

Part IV, Item 11 of proposed Form ATS-N would require an NMS Stock
ATS to disclose its sources and use of market data. Part IV, Item 11(a)
of proposed Form ATS-N would require a description of the market data
used by the NMS Stock ATS and the source of that market data (e.g.,
market data feeds disseminated by the consolidated data processor
(``SIP'') and market data feeds disseminated directly by an exchange or
other trading center or third-party vendor of market data). Part IV,
Item 11(b) of proposed Form ATS-N would require the NMS Stock ATS to
describe the specific purpose for which the market data is used by the
NMS Stock ATS, including how market data is used to determine the NBBO,
protected quotes, pricing of orders and executions, and routing
destinations. For instance, an NMS Stock ATS can elect to use market
data feeds for purposes of complying with the trade through rule of
Rule 611 of Regulation NMS \491\ and for pricing executions on the NMS
Stock ATS that are derived from prices on other trading centers, such
as an execution at the mid-point of the NBBO. An NMS Stock ATS also
might use data feeds to determine the prices available at other trading
centers for purposes of routing orders or other trading interest.
---------------------------------------------------------------------------

\491\ See 17 CFR 242.611(a).
---------------------------------------------------------------------------

The Commission preliminarily believes that market participants
would likely find it useful to know the source and specific purpose for
which market data is used by an NMS Stock ATS. For instance, the market
data received by an NMS Stock ATS might affect the price at which
orders are executed on the NMS Stock ATS.\492\ In addition, because of
the latency differences between the SIP and the direct data feeds of
the exchanges,\493\ the source of an NMS Stock ATS's market data could
impact the price received by a market participant, depending on the
ATS's source of the market data. Accordingly, the Commission
preliminarily believes that Part IV, Item 11 of proposed Form ATS-N
would provide market participants with information to assist them in
developing optimal trading strategies to account for any potential
latency differences between market data feeds. Furthermore, the
Commission preliminarily believes that these disclosures would assist
subscribers to understand the procedures employed by the NMS Stock ATS
for complying with Regulation NMS, including an understanding about how
their orders might be routed by the NMS Stock ATS. The Commission also
preliminarily believes that the disclosures required under Item 11
could help the Commission in understanding how market data is used for
purposes of monitoring developments in market structure.
---------------------------------------------------------------------------

\492\ See supra Section VIII.G (explaining how NMS Stock ATSs
might use the NBBO to set execution prices). See also Morgan Stanley
letter, supra note 197, (stating it received customer questions
specific to the use of direct market data feeds by the dark pool's
servers and algorithmic strategies).
\493\ See 2010 Equity Market Structure Release, supra note 124,
at 3611 (``Given the extra step required for SROs to transmit market
data to plan processors, and for plan processors to consolidate the
information and distribute it the public, the information in the
individual data feeds of exchanges and ECNs generally reaches market
participants faster than the same information in the consolidated
data feeds.'').
---------------------------------------------------------------------------

Request for Comment
430. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 11 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
431. Do you believe Part IV, Item 11 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding the sources and use of market
data? Please explain.
432. Is it sufficiently clear what information would be required by
Part IV, Item 11 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific.
433. Do you believe there is other information that market
participants might find relevant or useful regarding the sources and
use of market data? If so, describe such information and explain
whether, and if so why, such information should be required to be
provided under proposed Form ATS-N. Please support your arguments.
434. Do you believe there is any information that would be required
by Part IV, Item 11 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
435. Are there any other applications for which NMS Stock ATSs use
market data that the Commission should specifically identify and/or
discuss under Part IV, Item 11 of Proposed Form ATS-N?
436. Do you believe that transparency regarding what market data an
NMS Stock ATS uses and how the NMS Stock ATS uses that market data is
useful to market participants when deciding whether to trade on the NMS
Stock ATS and would assist them in devising appropriate trading
strategies to help accomplish their investing or trading objectives?
Why or why not?
437. Do you believe that the disclosures required under Part IV,
Item 11 of Proposed Form ATS-N would assist the Commission to
understand the procedures employed by an NMS Stock ATS for complying
with Regulation NMS and to understand how orders are priced, handled,
and routed by the NMS Stock ATS? Why or why not?
438. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
11 of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 11?
439. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 11 of proposed Form ATS-N? Would
the proposed disclosures in Part IV, Item 11 of proposed Form ATS-N
require an NMS Stock ATS to reveal too much (or not enough) information
about its structure and operations? Why or why not? Please support your
arguments.

L. Fees

Part IV, Item 12 of proposed Form ATS-N would require the NMS Stock
ATS to disclose and describe its fee and rebate structure. Part IV,
Item 12(a) of proposed Form ATS-N would require an NMS Stock ATS to
describe any fees, rebates, or other charges of the NMS Stock ATS
(e.g., connectivity fees, subscription fees, execution fees, volume
discounts) and provide the range (e.g., high and low) of such fees,
rebates, or other charges. If the fees, rebates, or other charges of
the NMS Stock ATS are not the same for all subscribers and persons, the
NMS Stock

[[Page 81080]]

ATS would be required to describe any differences under Part IV, Item
12(b) of proposed Form ATS-N.
The Commission preliminarily believes that by requiring a
description of an NMS Stock ATS's fees, rebates, and other charges,
market participants would be able to review and evaluate the fee
structure of each NMS Stock ATS. If an NMS Stock ATS has a recognized
fee structure, such as a maker-taker pricing model,\494\ that
information would be required to be disclosed under Part IV, Item 12 of
proposed Form ATS-N. The Commission preliminarily believes these
disclosures would allow market participants to analyze the fee
structures across NMS Stock ATSs in an expedited manner and decide
which ATS offers them the best pricing according to the characteristics
of their order flow, the type of participant they are (if relevant), or
any other aspects of an ATS's fee structure that serves to provide
incentivizes or disincentives for specific market participants or
trading behaviors. For instance, an institutional subscriber that
commonly adds non-marketable, resting orders that offer liquidity may
choose to subscribe to an ATS that rewards liquidity-providing orders
with rebates. The types of fees charged for services also could
influence whether a market participant subscribes to, or the extent to
which it participates on, an NMS Stock ATS. For instance, an NMS Stock
ATS with relatively higher connectivity fees and relatively lower
execution fees may not be as attractive to a market participant that
only intends to send the NMS Stock ATS a small amount of trading
interest.
---------------------------------------------------------------------------

\494\ Under the maker-taker pricing model, non-marketable,
resting orders that offer (make) liquidity at a particular price
receive a liquidity rebate if they are executed, while incoming
orders that execute against (take) the liquidity of resting orders
are charged an access fee. See 2010 Equity Market Structure Release,
supra note 124, at 3598-3599.
---------------------------------------------------------------------------

The Commission also is proposing to require that NMS Stock ATSs
describe any differences in their fees, rebates, or other charges among
differing types of subscribers or other persons. The Commission
preliminarily believes that this information would further illuminate
the types of subscribers and/or trading interest that the NMS Stock ATS
may be trying to attract.\495\ This information would allow market
participants to observe whether an NMS Stock ATS is offering more
preferential treatment to other market participants and, therefore, aid
market participants in deciding where to route their trading interest
accordingly.\496\
---------------------------------------------------------------------------

\495\ See Bloomberg Tradebook letter, supra note 190 and
accompanying text (recommending that the Commission ask ATSs to
complete a questionnaire including questions relating to any special
fees or rebates which lead to a preference of one order over
another).
\496\ But see supra notes 92-95 and 427-429 and accompanying
text (discussing the fair access requirements of Regulation ATS).
---------------------------------------------------------------------------

Part IV, Item 12 of proposed Form ATS-N also would require that the
NMS Stock ATS provide the range (e.g., high and low) of such fees,
rebates, or other charges. For these disclosures, the types of fees
should be categorized in the same manner as the NMS Stock ATS divides
fees internally or on its fee schedule. For example, if an NMS Stock
ATS provides rebates for liquidity added onto the ATS, then the range
for such rebates would be required by this item. If these rebates are
further divided into differing rebate amounts depending on order types
used, then the range of such rebates for each order type would also
need to be disclosed on proposed Form ATS-N.
Item 12, however, does not require NMS Stock ATSs to disclose a
complete schedule of their fees. In some cases, the fee schedules
employed by NMS Stock ATSs are highly bespoke, and it may not be
practical or desirable to require an NMS Stock ATS to disclose the fee
schedule applicable to each subscriber to the NMS Stock ATS. The
Commission, therefore, is proposing that the NMS Stock ATS disclose
only the range of fees for each service. These disclosures are designed
to give market participants an awareness of the fees charged by the NMS
Stock ATS and allow market participants to understand and compare fees
across NMS Stock ATSs, which could reduce the search costs of market
participants in deciding where to send their orders and trading
interest. The Commission preliminarily believes that the disclosures
required by Part IV, Item 12 of proposed Form ATS-N would also assist
the Commission in better understanding the fee structures of NMS Stock
ATSs and trends in the market as part of the Commission's overall
review of market structure.
Request for Comment
440. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 12 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
441. Do you believe Part IV, Item 12 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding its fee and rebate structure?
Please explain.
442. Is it sufficiently clear what information would be required by
Part IV, Item 12 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific.
443. Do you believe the Commission should require NMS Stock ATSs to
publicly disclose their fees, charges, and rebates on proposed Form
ATS-N? Why or why not?
444. Do you believe the Commission should require NMS Stock ATSs to
disclose their complete fee schedules? Are there other ways that NMS
Stock ATSs earn revenue about which the Commission should require
disclosure?
445. Do you believe there is other information that market
participants might find relevant or useful regarding fees, rebates and
other charges? If so, describe such information and explain whether,
and if so why, such information should be required to be provided under
proposed Form ATS-N. Please support your arguments.
446. Do you believe there is any information that would be required
by Part IV, Item 12 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
447. Do you believe that the information required by Part IV, Item
12 of proposed Form ATS-N would assist market participants and the
Commission in comparing fees across NMS Stock ATSs? Why or why not?
Please support your arguments.
448. Do you believe that the information required by Part IV, Item
12 of proposed Form ATS-N would allow the Commission to gather further
information and analyze trends in the market, including how the
prevalence of different fee structures may impact different categories
of market participants? Would this information assist the Commission in
evaluating the potential incentives and disincentives created by
different fee structures in the market for NMS stocks? Why or why not?
Please support your arguments.
449. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 12 of proposed Form ATS-N? Would
the proposed disclosures in Part IV, Item 12 of proposed Form ATS-N
require an NMS Stock ATS to reveal too much (or not enough) information
about its structure and operations? Why or why not? Please support your
arguments.
450. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
12 of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If

[[Page 81081]]

so, how else could this information be obtained and would such
alternative means be preferable to the proposed disclosures in Part IV,
Item 12?

M. Trade Reporting, Clearance and Settlement

Part IV, Item 13 would require an NMS Stock ATS to describe its
arrangements or procedures for trade reporting, clearance, and
settlement of transactions. Part IV, Item 13(a) of proposed Form ATS-N
would require an NMS Stock ATS to describe any arrangements or
procedures for reporting transactions on the NMS Stock ATS and if the
trade reporting procedures are not the same for all subscribers and
persons, the NMS Stock ATS would be required to describe any
differences. Part IV, Item 13(b) of proposed Form ATS-N would require
an NMS Stock ATS to describe any arrangements or procedures undertaken
by the NMS Stock ATS to facilitate the clearance and settlement of
transactions on the NMS Stock ATS. If the clearance and settlement
procedures are not the same for all subscribers and persons, the NMS
Stock ATS would be required to describe any differences. The Commission
notes that Item 13 of proposed Form ATS-N would solicit similar
information that is solicited pursuant to Exhibit F, subsection (d) of
Form ATS, which currently requires ATSs to provide their procedures
governing execution, reporting, clearance, and settlement of
transactions effected through the ATS.\497\
---------------------------------------------------------------------------

\497\ In contrast to current Form ATS, Form ATS-N further would
require that an NMS Stock ATS describe any differences in the manner
in which its trade reporting, clearance, and settlement procedures
are applied among subscribers and other persons. Also, Exhibit F,
subsection (d) of Form ATS requires ATSs to provide the procedures
governing execution in the same section as reporting and clearance
and settlement procedures, whereas Form ATS-N would require
information on execution procedures under a separate item, Part IV,
Item 7.
---------------------------------------------------------------------------

Trade reporting furthers the transparent, efficient, and fair
operation of the securities markets.\498\ For example, among other
requirements, a broker-dealer operator of an NMS Stock ATS that is a
member of FINRA has trade reporting obligations to FINRA under FINRA
Rule 4552 and FINRA Rule 6730. The Commission preliminarily believes
the proposed disclosure of the trade reporting procedures of an NMS
Stock ATS under Part IV, Item 13(a) of proposed Form ATS-N would also
allow the Commission and the NMS Stock ATS's SRO to more easily review
the compliance of the NMS Stock ATS with its applicable trade reporting
obligations. The Commission also preliminarily believes market
participants may also find the disclosure of these procedures useful to
understanding how their trade information is reported.
---------------------------------------------------------------------------

\498\ See Regulation ATS Adopting Release, supra note 7, at
70887 (stating the market-wide transaction and quotation reporting
plans operated by the registered national securities exchanges are
responsible for the transparent, efficient, and fair operations of
the securities markets).
---------------------------------------------------------------------------

Part IV, Item 13(b) of proposed Form ATS-N would require that an
NMS Stock ATS describe any arrangements or procedures undertaken by the
NMS Stock ATS to facilitate the clearance and settlement of
transactions on the NMS Stock ATS. The Commission has previously stated
that the integrity of the trading markets depends on the prompt and
accurate clearance and settlement of securities transactions.\499\ For
example, the description of procedures required by Item 13(b) of
proposed Form ATS-N could include the process through which an NMS
Stock ATS clears a trade (e.g., whether the NMS Stock ATS becomes a
counterparty to a transaction, interposing itself between two
counterparties to a transaction, or whether the NMS Stock ATS submits
trades to a registered clearing agency for clearing) and any
requirements an NMS Stock ATS places on its subscribers, or other
persons whose orders are routed to an NMS Stock ATS, to have clearance
and settlement systems and/or arrangements with a clearing firm. The
Commission preliminarily believes market participants would likely find
the disclosures required by Item 13(b) to be useful in understanding
the measures undertaken by an NMS Stock ATS to facilitate clearance and
settlement of subscriber orders on the NMS Stock ATS and allow them to
more easily compare the clearance arrangements required across NMS
Stock ATSs as part of deciding where to route their trading interest.
The Commission preliminarily believes that the disclosures required by
Part IV, Item 13 of proposed Form ATS-N may assist the Commission in
better understanding the trade reporting, clearance and settlement
procedures of NMS Stock ATSs and trends in the market as part of the
Commission's overall review of market structure.
---------------------------------------------------------------------------

\499\ See id. at 70897.
---------------------------------------------------------------------------

Request for Comment
451. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 13 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
452. Do you believe Part IV, Item 13 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding its arrangements or
procedures for trade reporting, clearance, and settlement of
transactions? Please explain.
453. Do you believe there is other information that market
participants might find relevant or useful regarding procedures for
trade reporting, clearance, and settlement of transactions on the NMS
Stock ATSs? If so, describe such information and explain whether, and
if so why, such information should be required to be provided under
proposed Form ATS-N. Please support your arguments.
454. Is it sufficiently clear what information would be required by
Part IV, Item 13 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific
455. Do you believe there is any information that would be required
by Part IV, Item 13 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
456. Do you believe that the information required by Part IV, Item
13 of proposed Form ATS-N will assist market participants in the manner
described above? Why or why not? Please support your arguments.
457. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 13 of proposed Form ATS-N? Would
the proposed disclosures in Part IV, Item 13 of proposed Form ATS-N
require an NMS Stock ATS to reveal too much (or not enough) information
about its structure and operations? Why or why not? Please support your
arguments.
458. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
13 of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 13?

N. Order Display and Execution Access

[[Page 81082]]

volume in that NMS stock as reported by an effective transaction
reporting plan for four of the preceding six calendar months: (a) The
ticker symbol for each such NMS stock displayed for each of the last 6
calendar months; (b) the manner in which the NMS Stock ATS displays
such orders on a national securities exchange or through a national
securities association; and (c) how the NMS Stock ATS provides access
to such orders displayed in the national market system equivalent to
the access to other orders displayed on that exchange or
association.\500\
---------------------------------------------------------------------------

\500\ In response to Part IV, Item 14 of proposed Form ATS-N, an
NMS Stock ATS filing a Form ATS-N would indicate ``not applicable''
if the NMS Stock ATS had not triggered the volume thresholds under
Rule 301(b)(3)(i) of Regulation ATS before commencing operations
pursuant to an effective Form ATS-N. If an NMS Stock ATS triggers
the Rule 301(b)(3)(i) thresholds after commencing operations
pursuant to an effective Form ATS-N, the Commission generally would
consider this to be a material change to the operations of the NMS
Stock ATS (assuming it is not already complying with the display and
access requirements of Rule 301(b)(3)), and the NMS Stock ATS would
be required to file a Form ATS-N Amendment pursuant to proposed Rule
304(a)(2)(i)(A). In the case where an NMS Stock ATS has voluntarily
chosen to comply with the display and access requirements of Rule
301(b)(3)(ii) and (iii) before crossing the relevant thresholds, the
NMS Stock ATS would nevertheless have to file a Form ATS-N Amendment
upon surpassing the thresholds within 30 days after the end of the
calendar quarter pursuant to proposed Rule 304(a)(2)(i)(B).
---------------------------------------------------------------------------

The information elicited in Part IV, Item 14 relates to an NMS
Stock ATS's obligations under current Rule 301(b)(3) of Regulation ATS,
which applies if an ATS displays a subscriber order in an NMS stock to
any person other than ATS employees, and during at least 4 of the
preceding 6 calendar months, executed 5% or more of the average daily
trading volume in that NMS Stock as reported by an effective
transaction reporting plan. Rule 301(b)(3)(ii) and (iii) requires
qualifying ATSs to report their highest bid and lowest offer for the
relevant NMS stock for inclusion in the quotation data made available
by the national securities exchange or national securities association
to which it reports and provide equivalent access to effect a
transaction with other orders displayed on the exchange or by the
association.\501\ Under the current regulatory regime for ATSs, there
is no mechanism under which an ATS must notify the Commission, its SRO,
or market participants after it has triggered those requirements.\502\
---------------------------------------------------------------------------

\501\ See 17 CFR 242.301(b)(3)(ii) and (iii).
\502\ In contrast, an ATS that triggers the ``fair access''
requirements under Rule 301(b)(5), see supra notes 92-95 and 426-429
and accompanying text, is required to attach Exhibit C to Form ATS-
R, which is filed with the Commission, but not publicly available.
Exhibit C of Form ATS-R requires an ATS that triggered the fair
access requirements to: (1) Provide a list of all persons granted,
denied, or limited access to the ATS during the period covered by
the ATS-R and (2) designate for each person (a) whether they were
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 on limitation of access. See supra note 453.
---------------------------------------------------------------------------

The information required by Part IV, Item 14 of proposed Form ATS-N
is designed to elicit information about how the NMS Stock ATS complies
with the requirements of Rule 301(b)(3) of Regulation ATS when
applicable. The Commission preliminarily believes that the disclosure
of the information required by Item 14 of proposed Form ATS-N would
facilitate the Commission's oversight of NMS Stock ATSs and their
compliance with Rule 301(b)(3) and help the Commission discover a
potential violation of the federal securities laws and rules or
regulations thereunder in a more expeditious manner than if the
disclosures were not required. In part, because the thresholds required
for display and access are counted for each NMS stock individually, an
NMS Stock ATS would be required to disclose the ticker symbol for the
relevant NMS stock to aid the Commission in evaluating its compliance.
The Commission also preliminarily believes that these disclosures would
help ensure that market participants and the Commission are aware when
an NMS Stock ATS has become a significant source of liquidity in an NMS
stock. Further, the Commission preliminarily believes that market
participants would find the information disclosed in this item useful
to understand how they can access applicable quotations.
Request for Comment
459. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 14 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
460. Do you believe Part IV, Item 14 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding the NMS Stock ATS's
obligations under current Rule 301(b)(3) of Regulation ATS? Please
explain.
461. Do you believe there is other information that market
participants might find relevant or useful regarding the NMS Stock
ATS's obligations under current Rule 301(b)(3) of Regulation ATS? If
so, describe such information and explain whether, and if so why, such
information should be required to be provided under proposed Form ATS-
N. Please support your arguments.
462. Is it sufficiently clear what information would be required by
Part IV, Item 14 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific.
463. Do you believe there is any information that would be required
by Part IV, Item 14 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
464. Do you believe that the information required by Part IV, Item
14 of proposed Form ATS-N will assist market participants in accessing
applicable quotations and ensuring they receive equivalent access on
the NMS Stock ATS? Why or why not? Please support your arguments.
465. Do you believe that the imposition of the requirements of Rule
301(b)(3) on an NMS Stock ATS crossing the relevant volume thresholds
of Rule 301(b)(3)(i) and meeting the display requirement of the rule,
should constitute a material change in the operations of the NMS Stock
ATS such that it should be reported to the Commission in advance? Why
or why not?
466. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 14 of proposed Form ATS-N? Would
the proposed disclosures in Part IV, Item 14 of proposed Form ATS-N
require an NMS Stock ATS to reveal too much (or not enough) information
about its structure and operations? Why or why not? Please support your
arguments.
467. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
14 of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 14?

[[Page 81083]]

In 2009, the Commission published a proposal to address certain
practices with respect to undisplayed liquidity, which is trading
interest that is available for execution at a trading center, but is
not included in the consolidated quotation data that is widely
disseminated to the public.\503\ Among other things, the Commission
proposed amending Rule 301(b)(3) of Regulation ATS to lower the trading
volume threshold that triggers public display obligations for ATSs from
5% or more of the aggregate average daily share volume for an NMS stock
as reported by an effective transaction reporting plan to 0.25% or more
of the aggregate average daily share volume for an NMS stock as
reported by an effective transaction reporting plan.\504\ The
Commission also proposed to change the definition of ``bid'' or
``offer'' in Regulation NMS to clarify that the public quoting
requirements apply to actionable indications of interest privately
transmitted by dark pools to selected market participants.\505\
---------------------------------------------------------------------------

\503\ See generally Regulation of Non-Public Trading Interest,
supra note 123.
\504\ See id. at 61216.
\505\ See id.
---------------------------------------------------------------------------

Request for Comment
468. Do you believe that the Commission should lower the 5% trading
volume threshold in Rule 301(b)(3) of Regulation ATS that triggers the
public display requirement for ATSs? Why or why not? If so, what is the
appropriate threshold level? Please support your arguments.
469. Do you believe that the Commission should define actionable
indications of interest in the definition of ``bid'' and ``offer'' in
Regulation NMS? Why or why not? Please support your arguments.

O. Fair Access

Part IV, Item 15 of proposed Form ATS-N would require an NMS Stock
ATS to provide the following information if the NMS Stock ATS executes
5% or more of the average daily trading volume in an NMS stock as
reported by an effective transaction reporting plan for four of the
preceding six calendar months: (a) The ticker symbol for each NMS stock
for each of the last 6 calendar months; and (b) a description of the
written standards for granting access to trading on the NMS Stock
ATS.\506\ As explained above,\507\ Rule 301(b)(5)(ii)(A) of Regulation
ATS requires an ATS to establish written standards for granting access
to trading on its system when it crosses the fair access thresholds of
Rule 301(b)(5)(i) and does not meet the exception set forth in Rule
301(b)(5)(iii). If an ATS crosses the fair access thresholds, Rule
301(b)(5)(ii)(B) requires the ATS to ``not unreasonably prohibit or
limit any person in respect to access to services offered by such
alternative trading system by applying the [written] standards . . . in
an unfair or discriminatory manner.'' \508\
---------------------------------------------------------------------------

\506\ In response to Part IV, Item 15 of proposed Form ATS-N, an
NMS Stock ATS filing a Form ATS-N would indicate ``not applicable''
if the NMS Stock ATS had not triggered the volume thresholds under
Rule 301(b)(5)(i) of Regulation ATS before commencing operations
pursuant to an effective Form ATS-N. If an NMS Stock ATS triggers
the Rule 301(b)(5)(i) thresholds after commencing operations
pursuant to an effective Form ATS-N, the Commission would generally
consider this to be a material change to the operations of the NMS
Stock ATS (assuming it is not already complying with the fair access
requirements of Rule 301(b)(5)), and the NMS Stock ATS would be
required to file a Form ATS-N Amendment pursuant to proposed Rule
304(a)(2)(i)(A). In the case where an NMS Stock ATS has voluntarily
chosen to comply with the fair access requirements of Rule
301(b)(5)(ii) before crossing the relevant thresholds, the NMS Stock
ATS would nevertheless have to file a Form ATS-N Amendment upon
surpassing the thresholds within 30 days after the end of the
calendar quarter pursuant to Rule proposed 304(a)(2)(i)(B).
\507\ See supra notes 92-95 and accompanying text.
\508\ See 17 CFR 242.301(b)(5)(ii)(B).
---------------------------------------------------------------------------

The Commission preliminarily believes that the disclosure of the
information requested by Part IV, Item 15 of proposed Form ATS-N would
facilitate the Commission's oversight of NMS Stock ATSs and their
compliance with Rule 301(b)(5). Because the volume thresholds required
for fair access are counted for each NMS stock individually, an NMS
Stock ATS would be required to disclose the ticker symbol for the
relevant NMS stock to aid the Commission in evaluating the NMS Stock
ATS's compliance. The Commission also preliminarily believes that it is
important for market participants to be aware of whether an NMS Stock
ATS is a significant source of liquidity for an NMS stocks and
therefore, must provide fair access. Although Exhibit C of Form ATS-R
requires an ATS to notify the Commission when it has crossed a fair
access threshold in a particular calendar quarter,\509\ there is
currently no requirement that an ATS must notify the public when it has
done so. The Commission preliminarily believes that having such
information publicly available will help market participants better
evaluate trading opportunities and where to route orders in order to
reach their trading and/or investment objectives. The Commission
preliminarily believes that the disclosures that would be required by
Item 15 would help the Commission discover a potential violation of the
federal securities laws and rules or regulations thereunder in a more
expeditious manner than if the disclosures were not required.
---------------------------------------------------------------------------

\509\ See supra note 453.
---------------------------------------------------------------------------

Request for Comment
470. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 15 of Form ATS-N? Why or why not? If
so, what level of detail should be disclosed? Please be specific.
471. Do you believe Part IV, Item 15 of proposed Form ATS-N
captures the information that is most relevant to understanding the
operations of the NMS Stock ATS regarding the written standards for
granting access to trading on its system when it crosses the fair
access thresholds of Rule 301(b)(5)(i) (and does not meet the exception
set forth in Rule 301(b)(5)(iii))? Please explain.
472. Do you believe there is other information that market
participants might find relevant or useful regarding the written
standards for granting access to trading on its system when it crosses
the fair access thresholds of Rule 301(b)(5)(i) (and does not meet the
exception set forth in Rule 301(b)(5)(iii))? If so, describe such
information and explain whether, and if so why, such information should
be required to be provided under proposed Form ATS-N. Please support
your arguments.
473. Do you believe there is any information that would be required
by Part IV, Item 15 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
474. Is it sufficiently clear what information would be required by
Part IV, Item 15 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific.
475. Do you believe that the disclosures under Part IV, Item 15 of
proposed Form ATS-N would help market participants better evaluate
trading opportunities and where to route orders in order to reach their
investment objectives? Why or why not? Please support your arguments.
476. Do you believe that the imposition of the requirements of Rule

[[Page 81084]]

301(b)(5) on an NMS Stock ATS crossing the relevant volume thresholds
of Rule 301(b)(5)(i) should constitute a material change in the
operations of the NMS Stock ATS such that it should be reported to the
Commission in advance? Why or why not?
477. What are the potential costs and benefits of disclosing the
information required by Part IV, Item 15 of proposed Form ATS-N? Would
the proposed disclosures in Part IV, Item 15 of proposed Form ATS-N
require an NMS Stock ATS to reveal too much (or not enough) information
about its structure and operations? Why or why not? Please support your
arguments.
478. Do you believe there are other ways to obtain the same
information as would be required from NMS Stock ATSs by Part IV, Item
15 of proposed Form ATS-N other than through disclosure on proposed
Form ATS-N? If so, how else could this information be obtained and
would such alternative means be preferable to the proposed disclosures
in Part IV, Item 15?

P. Market Quality Statistics Published or Provided by the NMS Stock ATS
to Subscribers

Part IV, Item 16 of proposed Form ATS-N would require an NMS Stock
ATS to explain and provide certain aggregate platform-wide market
quality statistics that it publishes or provides to one or more
subscribers regarding the NMS Stock ATS.\510\ Under Item 16, if the NMS
Stock ATS publishes or otherwise provides to one or more subscribers
aggregate platform-wide order flow and execution statistics of the NMS
Stock ATS that are not otherwise required disclosures under Exchange
Act Rule 605 of Regulation NMS, it would be required to: (i) List and
describe the categories of the aggregate platform-wide order flow and
execution statistics published or provided; (ii) describe the metrics
and methodology used to calculate the aggregate platform-wide order
flow and execution statistics; and (iii) attach as Exhibit 5 the most
recent disclosure of the aggregate platform-wide order flow and
execution statistics published or provided to one or more subscribers
for each category or metric as of the end of the calendar quarter. An
NMS Stock ATS would not be required to develop or publish any new
statistics for purposes of making this disclosure; it would only be
required to make the disclosures for statistics it already otherwise
collects and publishes or provides to one or more subscribers to the
NMS Stock ATS.
---------------------------------------------------------------------------

\510\ An NMS Stock ATS would only be required to provide order
flow and execution statistics that are aggregated across the ATS as
a whole, not subscriber-specific order flow and execution
statistics.
---------------------------------------------------------------------------

The Commission preliminarily believes that some NMS Stock ATSs
voluntarily publish or otherwise provide to subscribers aggregate
platform-wide order flow and execution statistics that do not fall
under the statistical information that is required to be disclosed
under Exchange Act Rule 605,\511\ which requires market centers, such
as NMS Stock ATSs, to publish monthly reports of statistics on their
order executions. To the extent an NMS Stock ATS publishes or provides
such aggregate platform-wide statistics to one or more subscribers,
Part IV, Items 16(a) and (b) of proposed Form ATS-N would require the
NMS Stock ATS to list and describe the categories or metrics of the
statistics it publishes or provides to subscribers and describe any
criteria or methodology that the ATS uses to calculate those
statistics, respectively. Item 16(c) would require the NMS Stock ATS to
attach as Exhibit 5 the most recent disclosure of order flow and
execution statistics published or provided for each category or metric
as of the end of the calendar quarter.\512\ To comply with the
requirements of Item 16(c), an NMS Stock ATS would file a Form ATS-N
Amendment with an updated Exhibit 5 within 30 calendar days after the
end of each calendar quarter.\513\
---------------------------------------------------------------------------

\511\ 17 CFR 242.605.
\512\ For instance, if an NMS Stock ATS publishes or provides a
particular statistic on a daily basis, the NMS Stock ATS would
include in Exhibit 5 the statistic that was published or provided to
one or more subscribers on the last trading day of the calendar
quarter (e.g., the statistic published or provided on June 30th or
last trading day prior to June 30th). If an NMS Stock ATS publishes
or provides a particular statistic weekly, the NMS Stock ATS would
be required to include in Exhibit 5 the statistic that was published
or provided to one or more subscribers at the end of the week prior
to the end of the calendar quarter (e.g., the statistic published
for the last full week of June).
\513\ See proposed Rule 304(a)(2)(i)(B).
---------------------------------------------------------------------------

Under Part IV, Item 16, an NMS Stock ATS would be required to
explain and provide any aggregate platform-wide order flow or execution
statistic that is not otherwise a required disclosure under Exchange
Act Rule 605 and published or provided to one or more subscribers by
the NMS Stock ATS. An example of a type of statistic that would be a
required disclosure under Item 16 would be statistics related to the
percentage of midpoint executions on the NMS Stock ATS that the NMS
Stock ATS publishes or otherwise provides to subscribers. The NMS Stock
ATS would be required to list that category under Part IV, Item 16(a)
and explain how the NMS Stock ATS calculates that statistic under Item
16(b). Within 30 calendar days after the end of each calendar quarter,
the NMS Stock ATS would be required to attach an Exhibit 5 containing
the most recent percentage it disseminated during the previous quarter.
The Commission preliminarily believes that requiring the NMS Stock ATS
to provide the statistic on Form ATS-N on a quarterly basis would allow
market participants to obtain insight into the nature of trading on the
NMS Stock ATS on a sufficiently frequent basis while minimizing the
reporting burden for the NMS Stock ATS.
The Commission preliminarily believes that an NMS Stock ATS may
choose to create and publish or provide to one or more subscribers
information concerning order flow and execution quality for different
reasons. For example, the NMS Stock ATS may have concluded that
publication of certain statistics may highlight certain characteristics
of the NMS Stock ATS that would attract certain order flow. Or a
subscriber may have requested that the NMS Stock ATS provide certain
aggregated information concerning order flow and execution quality that
the subscriber needed to assess the ATS's operations. The Commission
notes that certain performance metrics and statistics may be important
factors for investors and subscribers in comparing and selecting an ATS
that is most appropriate for their investment objectives.\514\ Indeed,
Exchange Act Rule 605 currently requires ATSs to provide quarterly
public reports containing certain information concerning ATS
executions. As such, to the extent that an NMS Stock ATS has made a
determination to create and publish or provide to subscribers certain
aggregate platform-wide order flow and execution quality statistics,
the Commission preliminarily believes that others may also find such
information useful when evaluating an NMS Stock ATS as a possible venue
to which to route orders in order to accomplish their investing or
trading objectives.
---------------------------------------------------------------------------

\514\ See generally Tuttle: ATS Trading in NMS Stocks, supra
note 126.
---------------------------------------------------------------------------

The Commission also solicits comment on whether other standardized
statistical disclosures should be required from NMS Stock ATSs and the
nature and extent of any such metrics or statistics that commenters
believe should be disclosed.
Request for Comment
479. Do you believe the Commission should require the disclosure of
the information on Part IV, Item 16 of Form ATS-N? Why or why not? If
so, what

[[Page 81085]]

level of detail should be disclosed? Please be specific.
480. Do you believe that the statistics required on Part IV, Item
16 of Form ATS-N should be provided on a more or less frequent basis?
Why or why not? If so, how often should the statistics be provided
(e.g., on a daily, weekly, monthly, quarterly, or annual basis)? Please
support your arguments.
481. Is it sufficiently clear what information would be required by
Part IV, Item 16 of proposed Form ATS-N? Should the item be refined in
any way? If so, how? Please be specific.
482. Do you believe that the disclosures under Part IV, Item 16 of
proposed Form ATS-N would help market participants better evaluate
trading opportunities and where to route orders in order to reach their
investment objectives? Why or why not? Please support your arguments.
483. Do you believe that the Commission should require standardized
public disclosures of performance metrics or statistics for each NMS
Stock ATS? Why or why not? Please support your arguments. If so, what
metrics or statistics should NMS Stock ATSs be required to disclose
publicly? Please be specific.
484. What percentage of NMS Stock ATSs publish or provide market
quality statistics not otherwise required under Exchange Act Rule 605?
Please explain how you have calculated this number.
485. Do you believe that there are other statistics or data that an
NMS Stock ATS should be required to provide on proposed Form ATS-N that
would be useful to market participants that either subscribe to or are
considering subscribing to the NMS Stock ATS? If so, please identify
those metrics and explain how they would be useful to market
participants. Please support your arguments.
486. Should the Commission require NMS Stock ATSs to disclose on
Form ATS-N, statistics regarding the extent of trading by the broker-
dealer operator and its affiliates on the NMS Stock ATS? Why or why
not? If so, what statistics should be required to be disclosed? Please
support your arguments. If you believe that an NMS Stock ATS should
disclose statistics about the extent of its broker-dealer operator's
and its affiliates' trading activity on the NMS Stock ATS, how often
should these statistics be disclosed (e.g., on a weekly, monthly,
quarterly, annual basis)?
487. Do you believe there is any information that would be required
by Part IV, Item 16 of proposed Form ATS-N that an NMS Stock ATS should
not be required to disclose due to concerns regarding confidentiality,
business reasons, trade secrets, burden, or any other concerns? Why or
why not? Please support your arguments.
The Commission also notes that some industry participants have
previously requested public statistics about the quality of these
markets. In the 2010 Equity Market Structure Release, the Commission
solicited public comment about, among other things, market structure
performance and order execution quality, and how transparency could be
improved in these areas.\515\ For example, the Commission noted that an
important objective of many dark pools is to offer institutional
investors an efficient venue in which to trade in large size with
minimized market impact,\516\ and requested comment on the extent to
which dark pools meet this objective of improving execution quality for
the large orders of institutional investors.\517\ In seeking comment on
other tools to protect investor interests, the Commission also
requested comment on Exchange Act Rules 605 and Exchange Act Rule
606.\518\ Exchange Act Rule 606 requires broker-dealers to publish
quarterly reports on their routing practices, including the venues to
which they route orders for execution.\519\ Specifically, the
Commission asked about the currency of Exchange Act Rules 605 and 606
and whether the information provided on the reports was useful to
investors and their brokers in assessing the quality of order execution
and routing practices.\520\
---------------------------------------------------------------------------

\515\ See Equity Market Structure Release, supra note 124 at
3602-3614. See also supra Section III.D (discussing certain comments
received on the Equity Market Structure Release).
\516\ See Equity Market Structure Release, supra note 124 at
3612.
\517\ See id.
\518\ 17 CFR 242.606.
\519\ See 2010 Equity Market Structure Release, supra note 124,
at 3605-3606.
\520\ See id.
---------------------------------------------------------------------------

In response, some commenters stated their concern about the lack of
market quality information available to the public about ATSs and other
trading centers. For example, one commenter expressed support for
national securities exchanges and ATSs to disclose how often a
functionality is used and more market quality statistics, such as
quote-per-execution ratios, duration of quotes and number of times
orders are routed out without getting filled so that investors and
other market participants could better gauge execution quality.\521\
Another commenter stated that ``regulators should direct broker-dealers
to provide public reports of order routing and execution quality
metrics that are geared toward retail investors.'' \522\ This commenter
also stated that ``the Commission should direct broker-dealers to
provide institutional clients with standardized execution venue
statistical analysis reports'' and noted its commitment ``to working
with other industry groups to develop consistent industry templates,
which it believes will greatly enhance institutional investors' ability
to evaluate their brokers' routing practices and the quality of
execution provided by different venues.'' \523\ Another commenter
stated its belief that publicly available order routing and execution
quality statistics pursuant to Rules 605 and 606 do not provide
information to measure broker-dealers' and execution venues'
performance with respect to specific institutional investors and that
the reports are not presented in a uniform manner that allows for easy
comparison across different broker-dealers and venues.\524\
---------------------------------------------------------------------------

\521\ Goldman Sachs letter, supra note 175, at 10.
\522\ See SIFMA letter #2, supra note 175 at 12. For example,
the commenter suggested including information on ``(i) percent of
shares Improved, (ii) average price improvement, (iii) net Price
Improvement per share, and (iv) effective/quoted spread ratio.''
\523\ See SIFMA letter #2, supra note 175 at 13. The commenter
gave examples of the types of information (per venue) that should be
incorporated into these reports as: (i) Percentage of orders
executed, (ii) average number of shares ordered and executed, (iii)
fill rates--overall, taken, added, and routed, and (iv) percentage
executed displayed and undisplayed.
\524\ See letter from Dorothy M. Donohue, Deputy General
Counsel, Investment Company Institute; Stuart J. Kaswell, Executive
Vice President & Managing Director, General Counsel, Managed Funds
Association; and Randy Snook, Executive Vice President, Securities
Industry and Financial Markets Association, dated October 23, 2014,
at 2.
This commenter also provided a template for disclosure of order
routing and execution quality information that institutional
investors could request from their broker-dealers, which included,
among other things: The number of total shares routed as actionable
IOIs; the percent of shares routed to the venue by the broker that
resulted in executions at that venue); the average length of time
(measured in milliseconds) that orders (other than IOCs) were posted
to a venue before being filled or cancelled; the average size, by
number of shares, of each order actually executed on the venue; the
aggregate number of shares executed at the venue that were priced at
or near the mid-point between the bid and the offer; and the
percentage of total shares executed that were executed at or near
the midpoint between the bid and the offer. See id. at ``Broker
Routing Venue Analysis Template Definitions.''
---------------------------------------------------------------------------

With regard to the comment that the execution quality statistics
currently made public under Rules 605 and 606 are inadequate, the
Commission notes that it is considering proposing to amend Rules 600
and 606 to standardize and improve transparency around how broker-
dealers handle and route institutional customer orders. These

[[Page 81086]]

revisions being considered would include addressing commenter concerns
regarding disclosures by broker-dealers about the trading venues to
which they route orders, particularly with respect to order and
execution sizes, fill rates, price improvement, and the use of
actionable indications of interests.\525\ The Commission also is
considering disclosures to facilitate the ability of institutional
investors to assess potential conflicts of interest and risks of
information leakage.
---------------------------------------------------------------------------

\525\ See id.
---------------------------------------------------------------------------

Request for Comment
488. Do you believe that there is information that the Commission
should require NMS Stock ATSs to disclose other than the information
that is currently available to market participants from order execution
reports pursuant to Exchange Act Rule 605? Why or why not? Please
support your arguments. If so, what information should be disclosed and
how would the information be useful to market participants? Please
explain. Do you believe that there is information that the Commission
should require a broker-dealer operator of the NMS Stock ATS to
disclose other than the information that is currently available to
market participants from order routing reports pursuant to Exchange Act
Rules 606? Why or why not? Please support your arguments.
489. Do you believe that there are other means by which market
quality metrics should be required to be made available by NMS Stock
ATSs to market participants, other than as disclosures on proposed Form
ATS-N? Why or why not? Please support your arguments. If so, please
identify by what means and why? Please support your arguments.
490. Do you believe that an NMS Stock ATS should be required to
disclose information about orders entered into its system and the
ultimate disposition of such orders? Why or why not? Please support
your arguments. For example, should NMS Stock ATSs disclose information
regarding the average order size, average execution size, and
percentage of orders marked immediate or cancel? Why or why not? Please
support your arguments.
491. Do you believe that NMS Stock ATSs should be required to
disclose whether the NMS Stock ATS provided order flow and execution
statistics to some subscribers and not others? Why or why not? Please
support your arguments.
492. Do you believe that NMS Stock ATSs should be required to
disclose execution information such as the total number and percentage
of shares executed at the midpoint, total number and percentage of
shares executed at the national best bid, total number and percentage
of shares executed at the national best offer, total number and
percentage of shares executed between the national best bid and the
midpoint, and total number and percentage of shares executed between
the midpoint and the national best offer? Why or why not? Please
support your arguments. If so, do you believe such information should
be disclosed publicly on an aggregated basis or should the information
be disclosed to each subscriber based on its own orders? Please support
your arguments.
493. Do you believe that the joint-industry plan should be amended
for publicly disseminating consolidated trade data to require real-time
disclosure of the identity of NMS Stock ATSs on reports of their
executed trades? Why or why not? Please support your arguments.
Alternatively, should executions on NMS Stock ATSs be publicly
disseminated on a delayed basis? \526\ Why or why not? Please support
your arguments. If so, how should this be done and what would be the
appropriate delay? Please explain.
---------------------------------------------------------------------------

\526\ FINRA Rule 4552 requires each ATS to report to FINRA
weekly volume information and number of trades regarding equity
securities transactions within the ATS. Each ATS is also required to
use a single MPID when reporting information to FINRA and to report
weekly aggregate volume information on a security-by-security basis
to FINRA.
---------------------------------------------------------------------------

494. Do you believe that there are other data elements that should
be provided by NMS Stock ATSs in the consolidated trade data? What are
they and why should they be required? Please be specific.

IX. Proposed Amendment to Rule 301(b)(10): Written Safeguards and
Written Procedures To Protect Confidential Trading Information

Current Rule 301(b)(10) of Regulation ATS \527\ requires every ATS
to have in place safeguards and procedures to protect subscribers'
confidential trading information and to separate ATS functions from
other broker-dealer functions, including proprietary and customer
trading.\528\ In the Regulation ATS Adopting Release, the Commission
recognized that some broker-dealer operators provide traditional
brokerage services as well as access to their ATS(s).\529\ The
Commission further stated that Rule 301(b)(10) was not intended to
preclude an ATS from providing its traditional brokerage services;
rather, Rule 301(b)(10) was designed to prevent the misuse of private
customer information in the system for the benefit of other customers,
the ATS's operator, or its employees.\530\ The Commission also stated
its belief that the sensitive nature of trading information subscribers
send to ATSs requires such systems to take certain steps to ensure the
confidentiality of such information.\531\ To illustrate its point, the
Commission provided the example that unless subscribers consent,
registered representatives of an ATS should not disclose information
regarding trading activities of such subscribers to other subscribers
that could not be ascertained from viewing the ATS's screens directly
at the time the information is conveyed.\532\ As a result of its
concerns regarding confidentiality, the Commission adopted Rule
301(b)(10), which was designed to eliminate the potential for abuse of
the confidential trading information that subscribers send to
ATSs.\533\
---------------------------------------------------------------------------

\527\ See 17 CFR 242.301(b)(10).
\528\ See Regulation ATS Adopting Release, supra note 7, at
70879.
\529\ See id.
\530\ See id.
\531\ See id.
\532\ The Commission stated that its concern regarding
confidentiality grew out of its inspections of some ECNs, during
which the Commission and its staff found that some of the broker-
dealers operating ECNs used the same personnel to operate the ECN as
they did for more traditional broker-dealer activities, such as
handling customer orders that were received by telephone. These
types of situations create the potential for misuse of the
confidential trading information in the ECN, such as customers'
orders receiving preferential treatment, or customers receiving
material confidential information about orders in the ECN. See id.
\533\ See id.
---------------------------------------------------------------------------

Rule 301(b)(10), however, does not currently require that the
safeguards and procedures mandated under Rule 301(b)(10) be
memorialized in writing. The Commission is now proposing to amend Rule
301(b)(10) to require that such safeguards and procedures be reduced to
writing.\534\ Specifically, the Commission proposes to amend Rule
301(b)(10)(i) to require that all ATSs (including non-NMS Stock ATSs)
establish written safeguards and written procedures to protect
subscribers' confidential trading information.\535\ This would include
an ATS adopting written safeguards and written procedures that limit
access to the confidential trading information of subscribers to those
employees of the ATS who are operating the system or are responsible
for its compliance with

[[Page 81087]]

Regulation ATS or any other applicable rules,\536\ and implementing
written standards controlling employees of the ATS trading for their
own accounts.\537\ The Commission is also proposing to amend Rule
301(b)(10)(ii) to require that the oversight procedures, which an ATS
adopts and implements to ensure that the above safeguards and
procedures are followed, be in writing.\538\
---------------------------------------------------------------------------

\534\ As discussed above, proposed Form ATS-N would also require
NMS Stock ATSs to describe the written safeguards and procedures.
See Part III, Item 10 of Proposed Form ATS-N. See also supra Section
VII.B.11.
\535\ See proposed Rule 301(b)(10)(i).
\536\ See proposed Rule 301(b)(10)(i)(A).
\537\ See proposed Rule 301(b)(10)(i)(B).
\538\ See proposed Rule 301(b)(10)(ii).
---------------------------------------------------------------------------

The Commission continues to believe that safeguards and procedures
to ensure the confidential treatment of ATS subscribers' trading
information are important, and that the potential for misuse of such
information continues to exist. The Commission preliminarily believes
that requiring an ATS to reduce to writing those safeguards and
procedures, as well as its oversight procedures to ensure that such
safeguards and procedures are followed, would strengthen the
effectiveness of the ATS's safeguards and procedures and would better
enable the ATS to protect confidential subscriber trading information
and implement and monitor the adequacy of, and the ATS's compliance
with, its safeguards and procedures. For example, if an ATS were
required to reduce its safeguards and procedures to writing, it could
self-audit--or if it chose to do so, undergo a third-party audit--for
compliance with those safeguards and procedures, and also assess their
adequacy. In addition, the Commission preliminarily believes that
reducing ATSs' safeguards and procedures under Rule 301(b)(10) to
writing will help the Commission and its staff, and the staff of the
SRO of which an ATS's broker-dealer operator is a member, evaluate
whether an ATS has established such procedures and safeguards, whether
the ATS has implemented and is abiding by them, and whether they comply
with the requirements of Rule 301(b)(10). This should enable the
Commission, and the applicable SRO(s), to exercise more effective
oversight of ATSs regarding the ATSs' compliance with Rule 301(b)(10)
and other federal securities laws, rules, and regulations. The
Commission also preliminary believes that its proposal would benefit
market participants because they would be able to better evaluate the
implementation of such safeguards and procedures, due to the proposed
rule to reduce those safeguards and procedures to writing.
Request for Comment
495. Do you believe the Commission should require ATSs to reduce to
writing their safeguards and procedures as described above? Why or why
not? Should the requirement apply to all ATSs or only a subset such as
NMS Stock ATSs? Please support your arguments.
496. Do you believe that requiring ATSs to reduce to writing their
safeguards and procedures, as proposed, would help to ensure that
subscribers' confidential trading information is protected and not
misused? If not, why not? Please support your arguments.
497. Are there other conditions that the Commission should
implement to achieve the goal of protecting subscribers' confidential
trading information? If so, what are they and why would they be
preferable? Please be specific.
498. Currently, how common is it for ATSs to reduce to writing
their safeguards and procedures to protect subscribers' confidential
trading information and/or their oversight procedures to ensure that
those safeguards and procedures are followed? For ATSs that have not
reduced their safeguards and procedures to protect subscribers'
confidential trading information to writing, how do they currently
ensure their compliance with the requirements of Rule 301(b)(10)?
Please be specific.
499. For ATSs that have not reduced to writing their safeguards and
procedures to protect subscribers' confidential trading information
and/or their oversight procedures to ensure that those safeguards and
procedures are followed, how long would it take to do so? Please
explain.

X. Recordkeeping Requirements

The Commission is proposing to amend Rules 303(a)(1) and 303(a)(2)
of Regulation ATS to reflect its proposed amendments to Rule 301(b)(2)
\539\ and 301(b)(10),\540\ and its proposed addition of Rule 304.\541\
In addition, the Commission is proposing to make a minor technical
amendment to Rule 303.
---------------------------------------------------------------------------

\539\ See supra Section IV.C.
\540\ See supra Section IX.
\541\ See supra Section IV.C.
---------------------------------------------------------------------------

Currently, unless not required to comply with Regulation ATS
pursuant to Rule 301(a) \542\ of Regulation ATS, ATS must comply with
the recordkeeping requirements of Regulation ATS. Specifically, Rule
301(b)(8) \543\ requires an ATS to make and keep current the records
specified in Rule 302 \544\ and to preserve the records specified in
Rule 303.\545\ In the Regulation ATS Adopting Release, the Commission
stated that the requirements to make and preserve records set forth in
Regulation ATS are necessary to create a meaningful audit trail and
permit surveillance and examination to help ensure fair and orderly
markets.\546\
---------------------------------------------------------------------------

\542\ 17 CFR 242.301(a).
\543\ See 17 CFR 242.301(b)(8).
\544\ See 17 CFR 242.302.
\545\ See 17 CFR 242.303.
\546\ See Regulation ATS Adopting Release, supra note 7, at
70877-78.
---------------------------------------------------------------------------

Rule 303(a)(1) requires an ATS to preserve certain records for at
least three years, the first two years in an easily accessible
place.\547\ Specifically, Rule 303(a)(1) \548\ requires an ATS to
preserve: All records required to be made pursuant to Rule 302; all
notices provided to subscribers, including notices addressing hours of
operation, system malfunctions, changes to system procedures, and
instructions pertaining to access to the ATS; documents made or
received in the course of complying with the system capacity,
integrity, and security standards in Rule 301(b)(6), if applicable;
\549\ and, if the ATS is subject to the fair access requirements under
Rule 304(b)(5),\550\ a record of its access standards. Rule 303(a)(2)
\551\ requires that certain other records must be kept for the life of
the ATS and any successor enterprise, including partnership articles or
articles of incorporation (as applicable), and copies of reports filed
pursuant to Rule 301(b)(2),\552\ which includes current Form ATS, and
records made pursuant to Rule 301(b)(5).\553\ In particular, reports
required to be maintained for the life of the ATS or any successor
enterprise include initial operation reports, amendments, and cessation
of operations reports, filed on Form ATS.\554\
---------------------------------------------------------------------------

\547\ See 17 CFR 242.303(a)(1).
\548\ See 17 CFR 242.303(a)(1).
\549\ See supra notes 96-100 and accompanying text.
\550\ See supra notes 92-95 and accompanying text.
\551\ See 17 CFR 242.303(a)(2).
\552\ See 17 CFR 242.301(b)(2).
\553\ See supra notes 92-95 and accompanying text.
\554\ See 17 CFR 242.301(b)(2).
---------------------------------------------------------------------------

The Commission is proposing to amend the record preservation
requirements of Rule 303 to incorporate the preservation of records
that would be created pursuant to the proposed requirements that NMS
Stock ATSs file Forms ATS-N, Form ATS-N Amendments, and notices of
cessation instead of Form ATS. Specifically, the Commission is
proposing to amend Rule 303(a)(2)(ii) to require that an ATS shall
preserve, for the life of the enterprise and of any successor
enterprise, copies of reports filed pursuant to Rule 301(b)(2) or--in
the case of an NMS

[[Page 81088]]

Stock ATS--Rule 304, and records made pursuant to Rule 301(b)(5).\555\
As a result, because an NMS Stock ATS would be required to file Forms
ATS-N, Form ATS-N Amendments, and notices of cessation pursuant to
proposed Rule 304, instead of on Form ATS, the NMS Stock ATS would be
required to preserve those reports for the life of the enterprise and
of any successor enterprise pursuant to the proposed amendments to Rule
303(a)(2).\556\ The Commission is not proposing any amendments to the
recordkeeping requirements of Rule 302, or any other amendments to the
record preservation requirements of Rule 303(a)(2).
---------------------------------------------------------------------------

\555\ See proposed Rule 301(a)(2)(ii).
\556\ The Commission notes that an NMS Stock ATS that had
previously made filings on Form ATS would be required to preserve
those filings for the life of the enterprise, as well as filings
made going forward on Form ATS-N.
---------------------------------------------------------------------------

The Commission is also proposing amendments to the record
preservation requirements of Rule 303(a)(1) to incorporate the
Commission's proposed amendments to Rule 301(b)(10),\557\ which would
require an ATS to reduce to writing its safeguards and procedures to
ensure confidential treatment of subscribers' trading information and
the oversight procedures to ensure that those safeguards and procedures
are followed.\558\ Accordingly, the Commission is proposing to require
an ATS, for a period of not less than three years, the first two years
in an easily accessible place, to preserve at least one copy of the
written safeguards and written procedures to protect subscribers'
confidential trading information and the written oversight procedures
created in the course of complying with Rule 301(b)(10).\559\ The
Commission is not proposing to amend any other aspects of the records
preservation requirements of Rule 303(a)(1). The Commission
preliminarily believes that the proposed amendments to Rule 303 are
necessary to create a meaningful audit trail of an ATS's current and
previous written safeguards and procedures pursuant to Rule 301(b)(2)
and permit surveillance and examination to help ensure fair and orderly
markets,\560\ without imposing any undue burden on ATSs.
---------------------------------------------------------------------------

\557\ See proposed Rule 301(b)(10).
\558\ See supra Section VII (discussing the Commission's
proposed amendments to Rule 301(b)(10)).
\559\ See proposed Rule 303(a)(1)(v).
\560\ See Regulation ATS Adopting Release, supra note 7, at
70877-78.
---------------------------------------------------------------------------

Finally, the Commission proposes to make a minor technical
amendment to Rule 303(a). Currently, Rule 303(a) references ``paragraph
(b)(9) of Sec. 242.301'' when setting forth the record preservation
requirements for ATSs. The Commission is proposing to change the above
reference to ``paragraph (b)(8) of Sec. 242.301'' because Rule
301(b)(8) sets forth the recordkeeping requirements for ATSs.
Request for Comment
500. Do you believe the Commission should amend the recordkeeping
requirements for ATSs as proposed? Why or why not?
501. Do you believe that there are any other requirements of Rule
303 that should be amended to satisfy the objectives of this proposal?
If so, what are they and why?
502. Do you believe that the proposed amendments to the record
preservation requirements of Rule 303 are reasonable? If not, why?
Please support your arguments.

XI. General Request for Comment

The Commission is requesting comments from all members of the
public. The Commission particularly requests comment from the point of
view of persons who operate ATSs that would meet the proposed
definition of NMS Stock ATS, subscribers to those systems, investors,
and registered national securities exchanges. The Commission seeks
comment on all aspects of the proposed rule amendments and proposed
form, particularly the specific questions posed above. Commenters
should, when possible, provide the Commission with data to support
their views. Commenters suggesting alternative approaches should
provide comprehensive proposals, including any conditions or
limitations that they believe should apply, the reasons for their
suggested approaches, and their analysis regarding why their suggested
approaches would satisfy the objectives of the proposed amendments. The
Commission will carefully consider the comments it receives.
503. Do you believe that there is other information about the
nature or extent of the operations of an NMS Stock ATS that should be
disclosed on proposed Form ATS-N? Are there specific topics about which
the Commission should request more information? If so, what information
should be disclosed and why?
504. Do you believe that there are activities of an NMS Stock ATS
broker-dealer operator and its affiliates that may give rise to
potential conflicts of interest, other than those described, that
should be disclosed on Form ATS-N? If so, what information should be
disclosed and why? If so, what are they and why?
505. Is there other information or data that would be useful for a
market participant to consider when evaluating an NMS Stock ATS as a
potential trading center for its orders? If so, what are they and why?

XII. Paperwork Reduction Act

Certain provisions of the proposal contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\561\ The titles of these requirements
are:
---------------------------------------------------------------------------

\561\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

Requirements for Alternative Trading Systems That Are Not
National Securities Exchanges--Rule 301, Form ATS and Form ATS-R, 17
CFR 242.301 (OMB Control No. 3235-0509);
Rule 303 (17 CFR 242.303) Record Preservation Requirements
for Alternative Trading Systems (OMB Control No. 3235-0505).
Rule 304 and Form ATS-N (a proposed new collection of
information).
We are submitting these requirements to the Office of Management
and Budget (``OMB'') for review and approval in accordance with the PRA
and its implementing regulations.\562\ We are applying for an OMB
control number for the proposed new collection of information in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. If adopted,
responses to the new collection of information would be mandatory. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid OMB control number.\563\
---------------------------------------------------------------------------

\562\ 44 U.S.C. 3507; 5 CFR 1320.11.
\563\ 5 CFR 1320.11(l).
---------------------------------------------------------------------------

A. Summary of Collection of Information

The proposed amendments to Regulation ATS include two new
categories of obligations that would require a collection of
information within the meaning of the PRA. The first category relates
to Rule 301(b)(10) of Regulation ATS \564\ and would apply to all ATSs,
while the second category relates to proposed Form ATS-N and would
apply only to NMS Stock ATSs.
---------------------------------------------------------------------------

\564\ 17 CFR 242.301(b)(10).
---------------------------------------------------------------------------

1. Requirements Relating to Rule 301(b)(10) of Regulation ATS
Under Rule 301(b)(10) of Regulation ATS, all ATSs are currently
required to: (1) Establish adequate safeguards and procedures to
protect subscribers'

[[Page 81089]]

confidential trading information; and (2) adopt and implement adequate
oversight procedures to ensure that the safeguards and procedures
established to protect subscribers' confidential trading information
are followed. Rule 301(b)(10) of Regulation ATS further requires that
the safeguards and procedures to protect subscribers' confidential
trading information shall include: (1) 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 (2) implementing
standards controlling employees of the ATS trading for their own
accounts. The proposed amendments to Regulation ATS would require
written safeguards and written procedures to protect subscribers'
confidential trading information and written oversight procedures to
ensure that the safeguards and procedures are followed.
In addition, the Commission proposes to amend Rule 303(a)(1) \565\
of Regulation ATS to provide that all ATSs must preserve at least one
copy of their written safeguards and written procedures to protect
subscribers' confidential trading information and the written oversight
procedures created in the course of complying with Rule 301(b)(10) of
Regulation ATS. Under the proposed amendment, Rule 303(a)(1)(v) would
be added to Regulation ATS to require an ATS to preserve such written
safeguards and written procedures, and written oversight procedures for
a period of not less than three years, the first two years in an easily
accessible place.\566\
---------------------------------------------------------------------------

\565\ 17 CFR 242.303(a)(1).
\566\ Id.
---------------------------------------------------------------------------

2. Requirements Relating to Proposed Rules 301(b)(2)(viii) and 304 of
Regulation ATS, Including Proposed Form ATS-N
As described above, the Commission proposes that any ATS that meets
the definition of an NMS Stock ATS would be required to complete Form
ATS-N and file it with the Commission in a structured format.\567\ Upon
the Commission declaring a Form ATS-N effective, the Commission would
make the Form ATS-N publicly available. The Commission would also make
publicly available upon filing all properly filed Form ATS-N Amendments
and notices of cessation on Form ATS-N. The proposed amendments to
Regulation ATS would also require each NMS Stock ATS to make public via
posting on its Web site a direct URL hyperlink to the Commission's Web
site that contains the documents enumerated in proposed Rule 304(b)(2).
---------------------------------------------------------------------------

\567\ See generally supra Section IV.
---------------------------------------------------------------------------

Proposed Form ATS-N consists of five parts. First, the entity
submitting the filing would indicate whether it is submitting or
withdrawing an initial filing. The entity would also indicate the type
of filing--whether the filing is a Form ATS-N, a Form ATS-N Amendment
(whether a material amendment, periodic amendment, or correcting
amendment), or a notice of cessation, and if it is a notice of
cessation, the date the NMS Stock ATS will cease to operate. If the
filing is a Form ATS-N Amendment, the NMS Stock ATS would also be
required to provide a brief narrative description of the amendment and
a redline(s) showing changes to Part III and/or Part IV of proposed
Form ATS-N. Part I would require that entity to state the name of the
Registered Broker Dealer of the NMS Stock ATS (i.e., the broker-dealer
operator), the name under which the NMS Stock ATS conducts business, if
any, the MPID of the NMS Stock ATS, and whether it is an NMS Stock ATS
currently operating pursuant to a previously filed initial operation
report on Form ATS. Part II would require registration information
regarding the broker-dealer operator of the ATS, such as the broker-
dealer's file number with the Commission, the name of the national
securities association with which the broker-dealer operator is a
member, the effective dates of the broker-dealer's registration with
the Commission and membership in the national securities association,
and the broker-dealer operator's CRD Number. In addition, Part II would
require the address of the physical location of the NMS Stock ATS
matching system, the NMS Stock ATS's mailing address, and a URL to the
Web site of the NMS Stock ATS. Part II would also require information
regarding the legal status of the broker-dealer operator of the NMS
Stock ATS (e.g., corporation, partnership, sole proprietorship) and its
date of formation. Furthermore, Part II of proposed Form ATS-N would
require the NMS Stock ATS to attach the following three exhibits: (1)
Exhibit 1--a copy of any materials currently provided to subscribers or
other persons related to the operations of the NMS Stock ATS or the
disclosures on Form ATS-N; (2) Exhibit 2A--a copy of the most recently
filed or amended Schedule A of the broker-dealer operator's Form BD
disclosing information relating to direct owners and executive
officers; and (3) Exhibit 2B--a copy of the most recently filed or
amended Schedule B of the broker-dealer operator's Form BD disclosing
information related to indirect owners. In lieu of attaching Exhibits
2A and 2B to proposed Form ATS-N, the NMS Stock ATSs would be able to
provide a URL address for where the required documents can be found.
Part III of proposed Form ATS-N would require an NMS Stock ATS to
provide certain disclosures related to the activities of the broker-
dealer operator and its affiliates in connection with the NMS Stock
ATS. Part III consists of ten items, which are summarized here, and
explained in greater detail below in the discussion of the estimated
burdens related to each disclosure requirement. Part III of proposed
Form ATS-N would include disclosures relating to: (1) Whether the
broker-dealer operator, or any of its affiliates, operate or control
any non-ATS trading centers and how such non-ATS trading centers
coordinate or interact with the NMS Stock ATS, if at all; (2) whether
the broker-dealer operator, or any of its affiliates, operates another
NMS Stock ATS and how such other NMS Stock ATS coordinates or interacts
with the NMS Stock ATS completing the Form ATS-N, if at all; (3) the
products and services offered by the broker-dealer operator, or any of
its affiliates, to subscribers in connection with their use of the NMS
Stock ATS; (4) whether the broker-dealer operator, or any of its
affiliates, has any formal or informal arrangement with an unaffiliated
person(s), or affiliate(s) of such person(s), that operates a trading
center regarding access to the NMS Stock ATS, including preferential
routing arrangements; (5) whether the broker-dealer operator or any of
its affiliates enter orders or other trading interest on the NMS Stock
ATS and the manner in which such trading is done; (6) whether the
broker-dealer operator or any of its affiliates use a SOR(s) (or
similar functionality), an algorithm(s), or both to send or receive
orders or other trading interest to or from the NMS Stock ATS, and the
interaction or coordination between the SOR(s) (or similar
functionality) or algorithm(s) and the NMS Stock ATS; (7) whether there
are any employees of the broker-dealer operator that service the
operations of the NMS Stock ATS that also service any other business
unit(s) of the broker-dealer operator or any affiliate(s) other than
the NMS Stock ATS, and the roles and responsibilities of such shared
employees; (8) whether any operation, service, or function of the NMS
Stock ATS is performed by any

[[Page 81090]]

person(s) other than the broker-dealer operator, a description of such
operation, service, or function, and whether those person(s), or any of
their affiliates, may enter orders or other trading interest on the NMS
Stock ATS; (9) whether the NMS Stock ATS makes available or applies any
service, functionality, or procedure of the NMS Stock ATS to the
broker-dealer operator or its affiliates that is not available or does
not apply to a subscriber(s) to the NMS Stock ATS and a description of
such service, functionality, or procedure; and (10) a description of
the written safeguards and written procedures to protect the
confidential trading information of subscribers to the NMS Stock ATS,
including (a) a description of the means by which a subscriber can
consent or withdraw consent to the disclosure of confidential trading
information, (b) identification of the positions or titles of any
persons that have access to confidential trading information, the type
of confidential trading information those persons can access, and the
circumstances under which they can access it, (c) a description of the
written standards controlling employees of the NMS Stock ATS trading
for their own accounts, and (d) a description of the written oversight
procedures to ensure that the ATS's Rule 301(b)(10) safeguards and
procedures are implemented and followed.
Part IV of proposed Form ATS-N would require an NMS Stock ATS to
provide certain disclosures related to the manner of operations of the
NMS Stock ATS. Part IV consists of 15 items, which are summarized here,
and explained in greater detail below in the discussion of the
estimated burdens related to each disclosure requirement. Part IV of
proposed Form ATS-N would include disclosures relating to: (1)
Subscribers to the NMS Stock ATS, including any eligibility
requirements to gain access to the services of the ATS, the terms or
conditions of any contractual agreement for access, the types of
subscribers and other persons that use the services of the ATS, any
formal or informal arrangement the NMS Stock ATS may have with a
subscriber or person to provide liquidity to the ATS (including the
terms and conditions of each arrangement and the identity of any
liquidity provider that is an affiliate of the broker-dealer operator),
the circumstances by which a subscriber or other person may be limited
or denied access to the NMS Stock ATS, and any differences in the
treatment of different subscribers and persons with respect to
eligibility, terms and conditions of use, criteria for distinguishing
among subscribers or other persons, and limitations and denials of
access; (2) the days and hours of operation of the NMS Stock ATS,
including the times when orders or other trading interest are entered
and the time when pre-opening or after-hours trading occur, and whether
there are any differences in when orders or other trading interest may
be entered by different subscribers or persons; (3) the order types and
modifiers entered on the NMS Stock ATS, including their
characteristics, operations, how they are ranked and executed on the
ATS (such as priority vis-[agrave]-vis other orders), eligibility and
conditions for routing to other trading centers, the available time-in-
force instructions for each order type, whether the availability and
terms and conditions of each order type is the same for all subscribers
and persons, any requirements and handling procedures for minimum order
sizes, odd-lot orders or mixed-lot orders, including whether such
requirements and procedures are the same for all subscribers and
persons, and any messages sent to or received by the NMS Stock ATS
indicating trading interest, including any differences in the terms and
conditions for such messages for different subscribers and persons; (4)
the means by which subscribers and other persons connect to the NMS
Stock ATS and enter orders or other trading interest on the NMS Stock
ATS (e.g., direct FIX connection or indirect connection via the broker-
dealer operator's SOR or any intermediate functionality, algorithm or
sales desk); any co-location services or other means by which any
subscriber or other persons may enhance the speed by which to send or
receive orders, trading interest, or messages to or from the NMS Stock
ATS; and any differences in the terms and conditions for connecting and
entering trading interest or co-location services for different
subscribers or persons; (5) the segmentation of orders or other trading
interest on the NMS Stock ATS and notice about segmentation to
subscribers or persons, including the criteria used to segment orders
or other trading interest on the NMS Stock ATS, any notice provided to
subscribers or persons about the segmented category that a subscriber
or a person is assigned, any differences in segmentation (or notice
about segmentation) for different subscribers or persons, and order
preferencing and its effect on order priority and interaction; (6) the
means and circumstances by which orders or other trading interest on
the NMS Stock ATS are displayed or made known outside the NMS Stock
ATS, type of information displayed, any differences in display for
different subscribers and persons, and to whom orders and trading
interest is displayed; (7) the trading services of the NMS Stock ATS,
including the means used by the ATS to bring multiple buy and sell
orders together, the established, non-discretionary methods dictating
the terms of trading on the facilities of the NMS Stock ATS, trading
procedures related to price protection mechanisms, short sales, locked-
crossed markets, the handling of execution errors, time-stamping of
orders and executions, or price improvement functionality, and any
differences for different subscribers and persons; (8) the procedures
governing trading in the event the NMS Stock ATS suspends trading or
experiences a system disruption or malfunction, including any
differences in the procedures among subscribers and persons; (9) the
opening, reopening or closing processes, or after-hours trading
procedures of the NMS Stock ATS; (10) the circumstances under which
orders or other trading interest are routed from the NMS Stock ATS to
another trading center, and any differences in the means by which
orders are routed among subscribers and persons; (11) the market data
used by the NMS Stock ATS and the source of that market data, and the
specific purpose for which market data is used by the ATS, including
how it is used to determine the NBBO; (12) the fees, rebates, or other
charges of the NMS Stock ATS and whether such fees are not the same for
all subscribers and persons; (13) arrangements or procedures for trade
reporting of transactions on the NMS Stock ATS, and arrangements or
procedures undertaken by the NMS Stock ATS to facilitate the clearance
and settlement of transaction on the ATS, including any differences in
these procedures among subscribers and persons; (14) information
related to the NMS Stock ATS's order display and execution obligations
under Rule 301(b)(3) of Regulation ATS, if applicable; (15) information
related to the NMS Stock ATS's obligations under the fair access
requirements of Rule 301(b)(5) of Regulation ATS, if applicable; and
(16) aggregate market quality statistics published or provided to one
or more subscribers.
Part V of proposed Form ATS-N would require an NMS Stock ATS to
provide certain basic information about the point of contact for the
NMS Stock ATS, such as the point of contact's name, title, telephone
number and email

[[Page 81091]]

address. Part V would also require the NMS Stock ATS to consent to
service of any civil action brought by, or any notice of any proceeding
before, the Commission or an SRO in connection with the ATS's
activities.
The Commission proposes that Form ATS-N would be filed
electronically and require an electronic signature. Consequently, the
proposed amendments to Regulation ATS would require that every NMS
Stock ATS have the ability to file forms electronically with an
electronic signature. The Commission preliminarily believes that most,
if not all, ATSs that transact in NMS stock currently have the ability
to access and submit an electronic form such that the requirement to
file Form ATS-N electronically with an electronic signature would not
impose new implementation costs. The burdens related to electronic
submission and providing an electronic signature are included in the
burden hour estimates provided below.
In addition, the Commission proposes to amend Rule 303(a)(2)(ii)
\568\ of Regulation ATS to provide that all ATSs must preserve copies
of all reports filed pursuant to Rule 304, which includes Form ATS-N
filings, for the life of the enterprise and any successor enterprise.
---------------------------------------------------------------------------

\568\ 17 CFR 242.303(a)(2)(ii).
---------------------------------------------------------------------------

Furthermore, under this proposal, an ATS that effects transactions
in both NMS stocks and non-NMS stocks would be required to file both a
Form ATS-N with respect to its trading of NMS stocks and a revised Form
ATS that removes discussion of those aspects of the ATS related to the
trading of NMS stocks. The ATS would also be required to file two Forms
ATS-R--one to report its trading volume in NMS stocks and another to
report its trading volume in non-NMS stocks.

B. Proposed Use of Information

1. Proposed Amendments to Rules 301(b)(10) of Regulation ATS
As noted above, the proposed amendments to Rule 301(b)(10) of
Regulation ATS would require all ATSs to have in place written
safeguards and written procedures to protect subscribers' confidential
trading information. Proposed Rule 303(a)(1)(v) of Regulation ATS would
require all ATSs to preserve at least one copy of those written
safeguards and written procedures.
The Commission preliminarily believes that both the Commission and
the SRO of which the ATS's broker dealer-operator is a member will use
these written safeguards and written procedures in order to better
understand how each ATS protects subscribers' confidential trading
information from unauthorized disclosure and access. The Commission
preliminarily believes that the information contained in the records
required to be preserved by proposed Rule 303(a)(1)(v) would be used by
examiners and other representatives of the Commission, state securities
regulatory authorities, and SROs to evaluate whether ATSs are in
compliance with Regulation ATS as well as other applicable rules and
regulations. The Commission also preliminarily believes that the
proposed requirements to memorialize in writing the safeguards and
procedures to protect subscribers' confidential trading information
would assist ATSs in more effectively complying with their existing
legal requirements under Regulation ATS; in particular, the
requirements to protect the confidentiality of subscribers' trading
information under Rule 301(b)(10) of Regulation ATS.
2. Proposed Rules 301(b)(2)(viii), 304 of Regulation ATS, Including
Proposed Form ATS-N, and 301(b)(9)
Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS would
require each NMS Stock ATS to file a Form ATS-N, Form ATS-N Amendments,
and a notice of cessation on proposed Form ATS-N.\569\ As noted above,
proposed Form ATS-N would require information regarding the broker-
dealer operator of the NMS Stock ATS and, in some instances affiliates
of the broker-dealer operator, and the operation of the NMS Stock ATS,
including detailed disclosures regarding the ATS's method of operation,
order types and access criteria. Additionally, an ATS that effects
transactions in both NMS stocks and non-NMS stocks would be required to
file both a Form ATS-N with respect to its trading of NMS stocks and a
revised Form ATS that removes discussion of those aspects of the ATS
relating to the trading of NMS stocks.\570\ Under the proposed
amendments to Rule 301(b)(9), an ATS that effects trades in both NMS
stocks and non-NMS stocks would be required to file two Forms ATS-Rs--
one reporting its trading volume in NMS stocks and the other reporting
its trading volume in non-NMS stocks.\571\ The information filed on
proposed Form ATS-N would be publicly available on the Commission's Web
site and each NMS Stock ATS would be required to post on the NMS Stock
ATS's Web site a direct URL hyperlink to the Commission's Web site that
contains the documents enumerated in proposed Rule 304(b)(2), but
information filed on Forms ATS and ATS-R would be kept confidential,
subject to the provisions of current applicable law.
---------------------------------------------------------------------------

\569\ Specifically, proposed Rule 304(a)(1) would require an NMS
Stock ATS to file a Form ATS-N prior to the NMS Stock ATS commencing
operations. Proposed Rule 304(a)(2)(i) would require an NMS Stock
ATS to file amendments to its proposed Form ATS-N: (A) At least 30
calendar days prior to the date of implementation of a material
change to the operations of the NMS Stock ATS or to the activities
of the broker-dealer operator or its affiliates that are subject to
disclosure on Form ATS-N; (B) within 30 calendar days after the end
of each calendar quarter to correct any other information on
proposed Form ATS-N that has become inaccurate; or (C) promptly, to
correct any information on proposed Form ATS-N that was inaccurate
when originally filed. Proposed Rule 304(a)(3) would require an NMS
Stock ATS to notice its cessation of operations at least 10 business
days before the date on which the NMS Stock ATS ceases operation.
\570\ See proposed Rule 301(b)(2)(viii).
\571\ See proposed Rule 301(b)(9).
---------------------------------------------------------------------------

The Commission preliminarily believes that market participants
would use the information publicly disclosed on proposed Form ATS-N to
source, evaluate, and compare and contrast information about different
NMS Stock ATSs, including information relating to the broker-dealer
operator and any potential conflicts of interests it may have with
respect to its operation of the NMS Stock ATS. The Commission also
preliminarily believes that market participants would use the
information publicly disclosed on proposed Form ATS-N to source,
evaluate, and compare and contrast information about, among other
things, an NMS Stock ATS's eligibility requirements, trading hours,
order types, connection and order entry functionalities, segmentation
of order flow, display of orders and other trading interests, trading
platform functionality, procedures governing trading during a
suspension of trading, system disruption, or system malfunction,
opening, closing, and after-hours trading processes or procedures,
routing procedures, market data usages and sources, fees, trade
reporting, clearing, and settlement, order display and execution access
standards, fair access standards, and market quality statistics
published or provided to one or more subscribers. Accordingly, the
Commission preliminarily believes that market participants would use
the information disclosed on proposed Form ATS-N to better evaluate to
which trading venue they may want to subscribe and/or route orders for
execution in order to accomplish their investing or trading objectives.
The Commission preliminarily believes it will use the information

[[Page 81092]]

disclosed on proposed Form ATS-N, Form ATS, and Form ATS-R to oversee
the growth and development of NMS Stock ATSs, including those that also
effect transactions in non-NMS stocks, and to evaluate whether those
systems operate in a manner consistent with the federal securities laws
should the disclosures provided on Form ATS-N reveal potential non-
compliance with federal securities laws. In particular, the Commission
preliminarily believes that the information collected and reported to
the Commission by NMS Stock ATSs would enable the Commission to
evaluate better the operations of NMS Stock ATSs with regard to the
Commission's duty under the Exchange Act to remove impediments to and
perfect the mechanisms of a national market system for securities \572\
and evaluate the competitive effects of these systems to ascertain
whether the regulatory framework remains appropriate to the operation
of such systems. The information provided on Form ATS-N should also
assist the SRO for the broker-dealer operator in exercising oversight
over the broker-dealer operator. For example, by having to describe
their safeguards and procedures to protect the confidential trading
information of subscribers, and knowing that such descriptions will be
public, NMS Stock ATSs may be encouraged to carefully consider the
adequacy of their means of protecting the confidential trading
information of subscribers.
---------------------------------------------------------------------------

\572\ See 15 U.S.C. 78b (providing that the necessity for the
Exchange Act is, among other things, ``to require appropriate
reports, to remove impediments to and perfect the mechanisms of a
national market system for securities . . . and to impose
requirements necessary to make such regulation and control
reasonably complete and effective . . .'').
---------------------------------------------------------------------------

The Commission also proposes to amend Rule 303(a)(2)(ii) of
Regulation ATS to provide that all ATSs must preserve copies of all
reports filed pursuant to proposed Rule 304 for the life of the
enterprise and any successor enterprise. The Commission preliminarily
believes that the information contained in the records required to be
preserved by the proposed amendment to Rule 303(a)(2)(ii) would be used
by examiners and other representatives of the Commission, state
securities regulatory authorities, and SROs to evaluate whether ATSs
are in compliance with Regulation ATS as well as other applicable rules
and regulations.

C. Respondents

The ``collection of information'' requirements under the proposed
amendments to Regulation ATS relating to Rule 301(b)(10) and proposed
Rule 303(a)(1)(v), as described above, would apply to all ATSs,
including NMS Stock ATSs. The ``collection of information''
requirements under the proposed amendments to Regulation ATS relating
to proposed Rule 304, Form ATS-N, and the proposed amendments to Rule
303(a)(2)(ii), as described above, would apply only to NMS Stock ATSs,
and the ``collection of information'' requirements under the proposed
amendments to Rule 301(b)(9), as described above, would apply to NMS
Stock ATSs that also effect trades in both NMS stocks and non-NMS
stocks.
Currently, there are 84 ATSs that have filed Form ATS with the
Commission. Of these 84 ATSs, 46 would meet the definition of an NMS
Stock ATS.\573\ Accordingly, the Commission estimates that 84 entities
would be required to comply with the proposed amendments related to
Rule 301(b)(10) of Regulation ATS and 46 entities would be required to
complete Form ATS-N.\574\
---------------------------------------------------------------------------

\573\ Data compiled from Form ATS submitted to the Commission as
of November 1, 2015. That is, 46 ATS have disclosed on their Form
ATS that they trade or expect to trade NMS stock.
\574\ The Commission recognizes that there may be new entities
that will seek to become ATSs, or NMS Stock ATSs, that would be
required to comply with the proposed amendments to Rule 301(b)(10).
From 2012 through the first half of 2015, there has been an average
of 8 Form ATS initial operation reports filed each year with the
Commission. Similarly, there may be some ATSs that may cease
operations in the normal course of business or possibly in response
to the proposed amendments to Regulation ATS. From 2012 through the
first half of 2015, there has been an average of 11 ATSs, including
those that trade NMS stocks, that have ceased operations. For the
purposes of this paperwork burden analysis, the Commission assumes
that there are 84 respondents that would be required to comply with
the proposed amendments to Rule 301(b)(10), if adopted. The
Commission is estimating that the number of entities that may file a
Form ATS initial operation report would generally offset any ATSs
that may file a Form ATS cessation of operations report.
---------------------------------------------------------------------------

In addition, the Commission notes that there are currently 11 ATSs
that trade, or have indicated in Exhibit B to their Form ATS that they
expect to trade, both NMS stocks and non-NMS stocks on the ATS.\575\
Under the proposed amendments to Regulation ATS, these 11 entities
would be required to file a Form ATS-N to disclose information about
their NMS stock activities and file a Form ATS to disclose information
about their non-NMS stock activities. Consequently, these 11 ATSs would
have to amend their Forms ATS to remove discussion of those aspects of
the ATS related to the trading of NMS stocks and on an ongoing basis,
file separate Forms ATS-R to report trading volume in NMS stocks and
trading volume in non-NMS stocks.\576\
---------------------------------------------------------------------------

\575\ Data compiled from Forms ATS and ATS-R submitted to the
Commission as of November 1, 2015. These 11 ATSs are included within
the 46 NMS Stock ATSs.
\576\ Pursuant to Rule 301(b)(9), all ATSs are required to file
Form ATS-R within 30 calendar days after the end of each calendar
quarter in which the market has operated, and within 10 calendar
days after the ATS ceases to operate. For ATSs that trade both NMS
stocks and non-NMS stocks, the ATS would report its transactions in
NMS stocks on one Form ATS-R, and its transaction volume in other
securities on a separate Form ATS-R.
---------------------------------------------------------------------------

With respect to proposed Form ATS-N, the Commission recognizes
there may be entities that might file a Form ATS-N to operate an NMS
Stock ATS in the future. From 2012 through the first half of 2015,
there has been an average of 2 new ATSs per year that disclose that
they trade or expect to trade NMS stocks on their initial operation
reports, which would therefore fall within the proposed definition of
an NMS Stock ATS. Similarly, some ATSs that currently trade NMS stocks
may choose to cease operations rather than comply with the proposed
amendments requiring them to file proposed Form ATS-N. Other ATSs may
choose to cease operations in the normal course of business. From 2012
through the first half of 2015, there has been an average of 6 ATSs
that trade NMS stocks that have ceased operations each year.
The Commission preliminarily believes that most ATSs that currently
trade NMS stocks would continue to operate notwithstanding the proposed
amendments to Regulation ATS. For the purposes of this analysis of the
paperwork burden associated with the proposed amendments to Regulation
ATS, the Commission assumes that there will be 46 respondents. The
Commission preliminarily believes that this number is reasonable, as it
assumes that most ATSs that currently trade NMS stocks would file a
Form ATS-N with the Commission, and acknowledges that there may be some
ATSs that cease operations altogether and other entities that may
choose to commence operations as an NMS Stock ATS. Based on the number
of initial filings and cessation of operations reports on current Form
ATS for ATSs that trade NMS stocks described above, the Commission
estimates that, 2 to 3 new entities will file to become an NMS Stock
ATS and 4 to 6 NMS Stock ATSs will cease operations in each of the next
three years.

[[Page 81093]]

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Proposed Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS
a. Baseline Measurements
Under current Rule 301(b)(10) of Regulation ATS,\577\ all ATSs must
establish adequate safeguards and procedures to protect subscribers'
confidential trading information, as well as oversight procedures to
ensure such safeguards and procedures are followed. As discussed below,
the Commission preliminarily believes that ATSs--in particular, ATSs
whose broker-dealer operators are large, multi-service broker-dealers--
generally have and maintain in writing their safeguards and procedures
to protect subscribers' confidential trading information, as well as
the oversight procedures to ensure such safeguards and procedures are
followed.\578\ However, neither Rule 301(b)(10) nor Rule 303(a)(1) of
Regulation ATS currently requires that an ATS have and preserve those
safeguards and procedures in writing.
---------------------------------------------------------------------------

\577\ 17 CFR 242.301(b)(10).
\578\ See infra Section XIII.B.4.
---------------------------------------------------------------------------

For ATSs that currently have and preserve in written format the
safeguards and procedures to protect subscribers' confidential trading
information under Rule 301(b)(10) of Regulation ATS, the Commission
preliminarily estimates that the average annual burden they voluntarily
undertake to update and preserve those written safeguards and written
procedures is 4 hours.\579\ Because neither current Rule 301(b)(1) nor
current Rule 303(a)(1) requires an ATS to have and preserve its
safeguards and procedures to protect subscribers' confidential trading
information in writing, this burden is not reflected in the current PRA
baseline burdens for Rules 301 and 303.\580\ As such, in accordance
with the below analysis, the Commission would modify the current PRA
burdens for Rules 301 and 303 to account for the proposed requirement
that ATSs have and preserve in written format the safeguards and
procedures to protect subscribers' confidential trading
information.\581\
---------------------------------------------------------------------------

\579\ Attorney at 2 hours + Compliance Clerk at 2 hours = 4
burden hours. For ATSs that do not have their safeguards and
procedures or oversight procedures in a written format, these firms
would incur a one-time initial burden to record their safeguards and
procedures as well as their oversight procedures in a written format
as described below.
\580\ See FR Doc. 2014-02143, 79 FR 6236 (February 3, 2014)
(Request to OMB for Extension of Rule 301 and Forms ATS and ATS-R;
SEC File No. 270-451; OMB Control No. 3235-0509) (hereinafter ``Rule
301 PRA Update''); FR Doc. 2013-17474, 78 FR 43943 (July 22, 2013)
(Request to OMB for Extension of Rule 303; SEC File No. 270-450; OMB
Control No. 3235-0505) (hereinafter ``Rule 303 PRA Update'').
\581\ See infra note 587 and accompanying text.
---------------------------------------------------------------------------

b. Burden
The Commission recognizes that proposed Rules 301(b)(10) and
303(a)(1)(v) of Regulation ATS would impose certain burdens on
respondents. For ATSs that currently have and preserve in written
format the safeguards and procedures to protect subscribers'
confidential trading information and written oversight procedures to
ensure such safeguards and procedures are followed, the Commission
preliminarily believes that there will be no increased burden under the
proposed amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation
ATS. The Commission preliminarily believes that the current practices
of those ATSs would already be in compliance with the proposed rules.
Therefore, the proposed amendments should not require those ATSs to
take any measures or actions in addition to those currently undertaken.
For ATSs that have not recorded in writing their safeguards and
procedures to protect subscribers' confidential trading information and
oversight procedures to ensure such safeguards and procedures are
followed, there will be an initial, one-time burden to memorialize them
in a written document(s). The Commission preliminarily estimates that
an ATS's initial, one-time burden to put in writing its safeguards and
procedures to protect subscribers' confidential trading information and
the oversight procedures to ensure such safeguards and procedures are
followed would be approximately 8 hours,\582\ but the Commission
preliminarily estimates that the burden could range between 5 and 10
hours.\583\ Because ATSs are already required to have safeguards and
procedures to protect subscribers' confidential trading information and
to have oversight procedures to ensure such safeguards and procedures
are followed, the Commission preliminarily believes that recording
these items in a written format would not impose a substantial burden
on ATSs. Consequently, the Commission preliminarily believes that ATSs
would rely on internal staff to record the ATS's Rule 301(b)(10)
procedures in writing. The Commission preliminarily estimates that, of
the 84 current ATSs, 15 ATSs might not have their safeguards and
procedures to protect subscribers' confidential trading information or
oversight procedures to ensure such safeguards and procedures are
followed in writing, and would therefore be subject to this one-time
initial burden.\584\ Accordingly, the Commission preliminarily
estimates that the aggregate initial, one-time burden on all ATSs would
be 150 hours based on the Commission's highest approximation of the
additional burden per ATS.\585\
---------------------------------------------------------------------------

\582\ Attorney at 7 hours + Compliance Clerk at 1 hour = 8
burden hours.
\583\ Attorney at 4-9 hours + Compliance Clerk at 1 hour = 5-10
burden hours.
\584\ It is likely that most, if not all, ATSs fulfill their
Rule 301(b)(10) obligations in writing, given the practical
difficulty in ensuring such safeguards and procedures, as well as
oversight procedures, are ``adequate,'' as required under Rule
301(b)(10), and contain all necessary components. The Commission
solicits comment on the accuracy of this estimate.
\585\ (Attorney at 9 hours + Compliance Clerk at 1 hour) x (15
ATSs) = 150 burden hours. See supra note 583 and accompanying text.
---------------------------------------------------------------------------

As explained above, the Commission preliminarily estimates that the
average annual, ongoing burden per ATS to update and preserve written
safeguards and written procedures to protect subscribers' confidential
trading information, as well as to update and preserve the written
standards controlling employees of the ATS trading for their own
account and the written oversight procedures, would be 4 hours.\586\ As
a result, the Commission preliminarily estimates that the total
aggregate, ongoing burden per year for all ATSs would be 336
hours,\587\ and thus, the Commission is modifying the current PRA
burden estimates for Rules 301 and 303 to account for this increased
burden on ATSs.
---------------------------------------------------------------------------

\586\ See supra note 579 and accompanying text.
\587\ (Attorney at 2 hours + Compliance Clerk at 2 hours) x 84
ATSs = 336 burden hours.
---------------------------------------------------------------------------

2. Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including
Proposed Form ATS-N
a. Baseline Measurements
Currently, Rule 301(b)(2)(i) of Regulation ATS \588\ requires an
ATS to file an initial operation report on current Form ATS at least 20
days prior to commencing operation as an alternative trading system.
Current Form ATS requires information regarding the operation of the
ATS, including, among other things, classes of subscribers, the types
of securities traded, the outsourcing of operations of the ATS to other
entities, the procedures governing the entry of orders, the means of
access to the ATS, and procedures governing execution and reporting.
Regarding amendments to an existing Form ATS, Rule 301(b)(2)(ii) of
Regulation ATS \589\

[[Page 81094]]

requires an ATS to file amendments to its current Form ATS at least 20
calendar days prior to implementing a material change to its
operations. Rule 301(b)(2)(iii) of Regulation ATS \590\ requires an ATS
to file amendments to its current Form ATS within 30 calendar days
after the end of each calendar quarter if any information contained in
its initial operation report becomes inaccurate and has not been
previously reported to the Commission.\591\ Regarding shutting down an
ATS, Rule 301(b)(2)(v) of Regulation ATS \592\ requires an ATS to
promptly file a cessation of operation report on current Form ATS upon
ceasing operations as an ATS.
---------------------------------------------------------------------------

\588\ 17 CFR 242.301(b)(2)(i).
\589\ 17 CFR 242.301(b)(2)(ii).
\590\ 17 CFR 242.301(b)(2)(iii).
\591\ In addition, Rule 301(b)(2)(iv) requires an ATS to
promptly file an amendment on current Form ATS after the discovery
that any information previously filed on current Form ATS was
inaccurate when filed. 17 CFR 242.301(b)(2)(iv).
\592\ 17 CFR 242.301(b)(2)(v).
---------------------------------------------------------------------------

The Commission's currently approved estimate for an initial
operation report on current Form ATS is 20 hours to gather the
necessary information, provide the required disclosures in Exhibits A
through I, and submit the Form ATS to the Commission.\593\ With respect
to Form ATS amendments, the Commission understands, based on the review
of Form ATS amendments by the Commission and its staff, that ATSs that
trade NMS stocks typically amend their Form ATS on average twice per
year.\594\ The frequency and scope of Form ATS amendments vary
depending on whether the ATS is implementing a material change or a
periodic change. Some ATSs may not change the manner in which they
operate or anything else that might require an amendment to Form ATS in
a given year while others may implement a number of changes during a
given year that require Form ATS amendments. The Commission estimates
that the current average compliance burden for each amendment to Form
ATS is approximately 6 hours.\595\ Accordingly, the estimated average
annual ongoing burden of updating and amending Form ATS is
approximately 12 hours per NMS Stock ATS.\596\ With respect to ceasing
operations, the currently approved average estimated compliance burden
for an ATS to complete a cessation of operations report is 2 hours to
check the appropriate box on Form ATS and send the cessation of
operations report to the Commission.\597\ The Commission's currently
approved estimate for the average compliance burden for each Form ATS-R
filing is 4 hours.\598\
---------------------------------------------------------------------------

\593\ Attorney at 13 hours + Compliance Clerk at 7 hours = 20
burden hours. See Rule 301 PRA Update, supra note 580, 79 FR 6237.
\594\ See id.
\595\ Attorney at 4.5 hours + Compliance Clerk at 1.5 hours = 6
burden hours. See id.
\596\ 2 Form ATS Amendments filed annually x 6 burden hours per
Form ATS Amendment = 12 burden hours per ATS.
\597\ Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 2
burden hours. See id.
\598\ Attorney at 3 hours + Compliance Clerk at 1 hour = 4
burden hours. See id.
---------------------------------------------------------------------------

b. Burdens
The Commission recognizes that proposed Rules 301(b)(2)(viii) and
304 of Regulation ATS, including proposed Form ATS-N, would impose
certain burdens on respondents.\599\ Although the Commission
preliminarily believes that many of the disclosures required by
proposed Form ATS-N are currently required by Form ATS, proposed Form
ATS-N would require an NMS Stock ATS to provide significantly more
detail in those disclosures than currently is required by Form ATS.
Proposed Form ATS-N would also require additional disclosures not
currently mandated by current Form ATS such as those contained in Part
III of proposed Form ATS-N. Under the proposed amendments to Regulation
ATS, NMS Stock ATSs would be required to complete and file the enhanced
and additional disclosures on proposed Form ATS-N.\600\ Section
XII.D.2.b.i below provides the estimated burden above the current Form
ATS baseline of each item of proposed Form ATS-N. The Commission notes
that many of the proposed disclosure items on proposed Form ATS-N are
already required disclosures by respondents in whole or in part on
current Form ATS, while other disclosure items on proposed Form ATS-N
are novel (i.e., current Form ATS does not require some form of the
proposed disclosure). Section XII.D.2.b.ii aggregates these new burdens
and the additional burdens above the current Form ATS baseline that
will be imposed by proposed Form ATS-N.
---------------------------------------------------------------------------

\599\ In establishing the estimates below with respect to
proposed Form ATS-N, the Commission has considered its estimate of
the burden for an SRO to amend a Form 19b-4. Specifically, the
Commission estimated that 34 hours is the amount of time required to
complete an average rule filing and 129 hours is the amount of time
required to complete a complex rule filing, and three hours is the
amount of time required to complete an average amendment to a rule
filing. See Securities Exchange Act Release No. 50486 (October 4,
2004), 69 FR 60287 (October 8, 2004), 60294.
\600\ These disclosures would be provided on proposed Form ATS-N
and may have to be amended periodically as provided in proposed Rule
304.
---------------------------------------------------------------------------

i. Analysis of Estimated Additional Burden for Proposed Form ATS-N
Parts I and II of proposed Form ATS-N would require disclosure of
certain general information regarding the broker-dealer operator and
the NMS Stock ATS. Part I of proposed Form ATS-N would require the NMS
Stock ATS to state the name of its broker-dealer operator, the name
under which the NMS Stock ATS conducts business, if any, the MPID of
the NMS Stock ATS, and whether it is an NMS Stock ATS operating
pursuant to a previously filed initial operation report on Form ATS.
Part II of proposed Form ATS-N would require the address of the
physical location of the NMS Stock ATS matching system and the NMS
Stock ATS's mailing address. Part II of proposed Form ATS-N would also
require registration information of the broker-dealer operator,
including its SEC File Number, the effective date of the broker-dealer
operator's registration with the Commission, its CRD Number, the name
of its national securities association, and the effective date of the
broker-dealer operator's membership with the national securities
association. In addition, Part II of proposed Form ATS-N would require
disclosure of certain information regarding the legal status of the
broker-dealer operator and would require the NMS Stock ATS to provide a
URL address to its Web site. Finally, Part II would require the NMS
Stock ATS to attach Exhibit 1 (a copy of any materials provided to
subscribers or any other persons related to the operations of the NMS
Stock ATS or the disclosures on Form ATS-N), Exhibit 2A (a copy of the
most recently filed or amended Schedule A of the broker-dealer
operator's Form BD disclosing information related to direct owners and
executive officers), and Exhibit 2B (a copy of the most recently filed
or amended Schedule B of the broker-dealer operator's Form BD
disclosing information related to indirect owners). In lieu of
attaching those exhibits to Form ATS-N, the NMS Stock ATSs would be
able to provide a URL address to where the required documents can be
found.
Under current Form ATS, an ATS is required to provide all of the
information that would be required under Parts I and II of proposed
Form ATS-N with the exception of: (1) Its Web site address; (2) the
effective date of the broker-dealer operator's registration with the
Commission; (3) the name of the national securities association and
effective date of the broker-dealer operator's membership with the
national securities association;

[[Page 81095]]

(4) the MPID of the NMS Stock ATS; (5) the broker-dealer operator's
legal status (e.g., corporation or partnership); (6) the date of
formation and the state in which the broker-dealer operator was formed;
and (7) copies of the broker-dealer operator's most recently filed or
amended Schedules A and B of Form BD.\601\ Current Form ATS, however,
requires an ATS to provide a copy of its governing documents, such as
its constitution and bylaws,\602\ which would not be required in
proposed Form ATS-N. The Commission preliminarily believes that all
ATSs currently have access to all of these items because such
information is germane to the operation of its broker-dealer operator.
Accordingly, the Commission preliminarily estimates that, on average,
preparing Parts I and II for a Form ATS-N would add 0.5 hours to the
current baseline for an initial operation report on current Form ATS.
The aggregate initial burden on all NMS Stock ATSs to complete Parts I
and II of proposed Form ATS-N would be 23 hours above the current
baseline.\603\
---------------------------------------------------------------------------

\601\ Exhibit I of Current Form ATS requires ATS to provide a
list with the full legal name of those direct owners reported on
Schedule A of Form BD, but not a copy of Schedule A.
\602\ Exhibit D of Form ATS requires an ATS to provide a copy of
its constitution, articles of incorporation or association, with all
amendments, and of the existing bylaws or corresponding rules or
instruments, whatever the name.
\603\ Compliance Clerk at 0.5 hours x 46 NMS Stock ATSs = 23
burden hours.
---------------------------------------------------------------------------

Part III, Item 1 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether or not the broker-dealer operator or any of its
affiliates operate or control any non-ATS trading center(s), and if so,
to (1) identify the non-ATS trading center(s); and (2) describe any
interaction or coordination between the identified non-ATS trading
center(s) and the NMS Stock ATS including: (i) Circumstances under
which subscriber orders or other trading interest sent to the NMS Stock
ATS are displayed or otherwise made known to the identified non-ATS
trading center(s) before entering the NMS Stock ATS; (ii) circumstances
under which subscriber orders or other trading interest received by the
broker-dealer operator or its affiliates may execute, in whole or in
part, in the identified non-ATS trading center(s) before entering the
NMS Stock ATS; and (iii) circumstances under which orders or other
trading interest are removed from the NMS Stock ATS and sent to the
identified non-ATS trading center(s). Under Proposed Form ATS-N,
affiliates of the broker-dealer operator would only include any person
that, directly or indirectly, controls, is under common control with,
or is controlled by, the broker-dealer operator. The affiliates of the
broker-dealer operator that might operate non-ATS trading centers under
this proposal would thus be ``control affiliates'' that are either
controlled by the broker-dealer operator or under common control with
another entity. Consequently, because the broker-dealer operator would
control all affiliates or would be under common control with those
affiliates, the broker-dealer operator should be aware of whether its
affiliates operate a non-ATS trading center or in most instances,
should otherwise be able to readily obtain such information from its
affiliates.\604\
---------------------------------------------------------------------------

\604\ To the extent the broker-dealer operator is currently
unaware of whether its affiliates operate a non-ATS trading center,
the Commission preliminarily believes that the broker-dealer
operator could readily obtain this information from its affiliates.
---------------------------------------------------------------------------

To the extent the operation of a non-ATS trading center operated or
controlled by the broker-dealer operator or any of its affiliates does
not interact with the NMS Stock ATS (e.g., the two platforms do not
share order flow or route trading interest between one another), the
proposed disclosure requirement in Part III, Item 1, would require only
that the NMS Stock ATS identify the non-ATS trading center in Item 1(a)
and note that that there is no interaction between the non-ATS trading
center and the NMS Stock ATS in Item 1(b). To the extent the operation
of a non-ATS trading center of the broker-dealer operator or its
affiliates interacts with the NMS Stock ATS, the Commission
preliminarily believes that the NMS Stock ATS would likely already be
aware of how such operation may interact with the NMS Stock ATS. If
there is substantial interaction between the non-ATS trading center and
the NMS Stock ATS, the burden related to this disclosure would be
higher.
The Commission understands that most, but not all, broker-dealer
operators of NMS Stock ATSs currently, either by themselves or through
their affiliates, operate or control a non-ATS trading center. The
Commission preliminarily estimates that, on average, preparing Part
III, Item 1 for a Form ATS-N would add 10 hours to the current baseline
for an initial operation report on current Form ATS. This would result
in an aggregate initial burden of 460 hours above the baseline for all
NMS Stock ATSs to complete Part III, Item 1 of proposed Form ATS-
N.\605\
---------------------------------------------------------------------------

\605\ (Attorney at 8 hours + Compliance Manager at 2 hours) x 46
NMS Stock ATSs = 460 burden hours.
---------------------------------------------------------------------------

Part III, Item 2 of proposed Form ATS-N would require an NMS Stock
ATS to state whether the broker-dealer operator, or any of its
affiliates, operates one or more NMS Stock ATSs other than the NMS
Stock ATS named on the Form ATS-N, and, if so, to (1) identify the NMS
Stock ATS(s) and provide its MPID(s); and (2) describe any interaction
or coordination between the NMS Stock ATS(s) identified and the NMS
Stock ATS named on the Form ATS-N including: (i) The circumstances
under which subscriber orders or other trading interest received by the
broker-dealer operator or any of its affiliates to be sent to the NMS
Stock ATS named in the Form ATS-N may be sent to any identified NMS
Stock ATS(s); (ii) circumstances under which subscriber orders or other
trading interest to be sent to the NMS Stock ATS named on the Form ATS-
N are displayed or otherwise made known in any other identified NMS
Stock ATS(s); and (iii) the circumstances under which a subscriber
order received by the NMS Stock ATS named on the Form ATS-N may be
removed and sent to any other identified NMS Stock ATS(s). Broker-
dealer operators of multiple NMS Stock ATSs would already be aware of
how their NMS Stock ATSs may interact with one another and those of its
affiliates by, for example, sharing order flow between each other.\606\
Further, as noted above, affiliates under this proposed disclosure
requirement would be control affiliates that are either controlled by
the broker-dealer operator or under common control with another entity.
Consequently, the NMS Stock ATS should already be aware through its
control or common control of whether its affiliates operate another NMS
Stock ATS.
---------------------------------------------------------------------------

\606\ To the extent the broker-dealer operator or its affiliates
operate multiple NMS Stock ATSs but there is no possibility of
interaction between such NMS Stock ATSs, proposed Form ATS-N would
only require that this fact be noted in Part III, Item 2(b).
---------------------------------------------------------------------------

Based on the currently filed Forms ATS reviewed by the Commission
during the third quarter of 2015, the Commission estimates that there
are 6 broker-dealer operators that operate, by themselves or through an
affiliate, multiple ATSs that trade NMS stocks. The Commission notes
that broker-dealer operators operating multiple NMS Stock ATSs, by
themselves or with their affiliates, would be required to complete Part
III, Item 2 of proposed Form ATS-N for each NMS Stock ATS. The
Commission preliminarily believes that it would not be a significant
burden for a broker-dealer operator to identify all of the NMS Stock
ATSs operated by

[[Page 81096]]

either itself or its affiliates because, among other reasons, FINRA
maintains an updated list of ATSs that trade equity securities on its
public Web site.\607\ Furthermore, the disclosure requirement in Part
III, Item 2(b) to describe the interaction of the various NMS Stock
ATSs should generally be the same for each NMS Stock ATS, reducing the
overall hour burden for completing multiple Forms ATS-N.\608\ The
Commission also notes that the disclosure requirement in Part III, Item
2 would not impose any significant burden on broker-dealer operators
that, by themselves or with their affiliates, do not operate multiple
NMS Stock ATSs. For broker-dealer operators operating multiple NMS
Stock ATSs, by themselves or with their affiliates, the Commission
preliminarily estimates that, on average, preparing Part III, Item 2
for a Form ATS-N would add 4 hours to the current baseline for an
initial operation report on current Form ATS. This would result in an
aggregate initial hourly burden on such broker-dealer operators of 24
hours above the current baseline.\609\
---------------------------------------------------------------------------

\607\ See FINRA Equity ATS Firm List, https://www.finra.org/file/finra-equity-ats-firms-list.
\608\ In other words, a broker-dealer operator that operates NMS
Stock ATSs ``A'' and ``B'' would likely be able to use the
disclosure in A's Form ATS-N for Part III, Item 2 for B as well.
\609\ As noted above, the Commission estimates that there are
currently approximately 6 broker-dealer operators that operate, by
themselves or through an affiliate, multiple ATSs that trade NMS
stocks. As such the increased burden would be calculated as follows:
6 operators of multiple NMS Stock ATSs x (Attorney at 2 hours +
Senior Systems Analyst 2 hours) = 24 burden hours.
---------------------------------------------------------------------------

Part III, Item 3 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether or not the broker-dealer operator or any of its
affiliates offer subscribers of the NMS Stock ATS any products or
services used in connection with trading on the NMS Stock ATS (e.g.,
algorithmic trading products, market data feeds). If so, the NMS Stock
ATS would be required to describe the products and services and
identify the types of subscribers (e.g., retail, institutional,
professional) to which such services or products are offered, and if
the terms and conditions of the services or products are not the same
for all subscribers, describe any differences. These products and
services may vary widely across NMS Stock ATSs, some of which may offer
no additional products or services in connection with access to the NMS
Stock ATS and others that may offer a wide array of other products or
services such as trading algorithms, order management systems, or
market data services. Because the broker-dealer operator controls all
aspects of the NMS Stock ATS, it should already be aware of all the
products and services that it or its affiliates provide to subscribers
in connection with subscribers' access to the ATS. Accordingly, the
Commission preliminarily believes that listing and describing these
products and services in Part III, Item 3 would not impose a
substantial burden on respondents. In addition, Part III, Item 3 would
also require the NMS Stock ATS to describe which products and services
are offered to which type of subscriber and any differences in the
terms or conditions of the services or products among subscribers.
Depending on the extent to which the terms and conditions of the
services or products vary among subscribers, the hourly burden related
to completing Part III, Item 3 would likely vary. The Commission
preliminarily estimates that, on average, preparing Part III, Item 3
for a Form ATS-N would add 3 hours to the current baseline for an
initial operation report on current Form ATS. This would result in an
aggregate initial burden of 138 hours above the current baseline for
all NMS Stock ATSs to complete Part III, Item 3 of proposed Form ATS-
N.\610\
---------------------------------------------------------------------------

\610\ (Compliance Manager at 2 hours + Senior Marketing Manager
at 1 hour) x 46 NMS Stock ATSs = 138 burden hours.
---------------------------------------------------------------------------

Part III, Item 4 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether or not the broker-dealer operator or any of its
affiliates have any formal or informal arrangement with an unaffiliated
person(s), or affiliate(s) of such person, that operates a trading
center regarding access to the NMS Stock ATS, including preferential
routing arrangements, and, if so, to identify the person(s) and the
trading center(s) and describe the terms of the arrangement(s). The
Commission understands from discussions with ATSs that some ATSs that
currently trade NMS stock have arrangements with other ATSs to provide
mutual access to the each other's respective ATSs. The Commission
recognizes that an NMS Stock ATS could also have arrangements with
other trading centers such as a non-ATS trading center or a national
securities exchange. In addition, there may be NMS Stock ATSs that have
no arrangements with any other trading center. As the broker-dealer
operator controls all aspects of the operation of the NMS Stock ATS,
the broker-dealer operator should already be aware of any such
arrangements providing for mutual access or preferential routing that
it has with other trading centers. Accordingly, the Commission
preliminarily estimates that, on average, preparing Part III, Item 4
for a Form ATS-N would add 4 hours to the current baseline for an
initial operation report on current Form ATS. This would result in an
aggregate initial burden of 184 hours above the current baseline for
all NMS Stock ATSs to complete Part III, Item 4 of proposed Form ATS-
N.\611\
---------------------------------------------------------------------------

\611\ (Attorney at 2 hours + Compliance Manager at 2 hours) x 46
NMS Stock ATSs = 184 burden hours.
---------------------------------------------------------------------------

Part III, Item 5 of proposed Form ATS-N would require certain
disclosures related to the trading activity of the broker-dealer
operator or its affiliates on the NMS Stock ATS. Specifically, Part
III, Item 5 would require the NMS Stock ATS to disclose whether or not
the broker-dealer operator or any of its affiliates enters orders or
other trading interest on the NMS Stock ATS, and, if so, to provide
detailed disclosures describing such trading activity.\612\ As the
broker-dealer operator controls all aspects of the operation of the NMS
Stock ATS, the broker-dealer operator should already know all of the
subscribers to the NMS Stock ATS, including any affiliates that trade
on the ATS, whether the broker-dealer operator itself trades on the NMS
Stock ATS, and how the broker-dealer operator or its affiliates trade
on the NMS Stock ATS.\613\ The Commission preliminarily believes that
this knowledge should allow NMS Stock ATSs to readily identify and list
all affiliates that trade on the NMS Stock ATS pursuant to Part III,
Item 5(a) without a significant burden. The broker-dealer operator may
have to inquire as to the capacity in which each of its affiliates
trade, the means by

[[Page 81097]]

which they enter orders or other trading interest to the ATS, and any
means by which a subscriber can be excluded from interacting with the
orders or other trading interest of the broker-dealer operator or its
affiliates pursuant to Items 5(b), (c), and (d). However, as previously
noted, because the disclosure requirements with respect to affiliates
would only apply to control affiliates, which would either be
controlled by the broker-dealer operator or under common control with
the broker-dealer operator, the broker-dealer operator may already have
this information or would likely be able to obtain the information
required under Items 5(b) and (c) without a significant burden.
Accordingly, the Commission preliminarily estimates that, on average,
preparing Part III, Item 5 for a Form ATS-N would add 5 hours to the
current baseline for an initial operation report on current Form ATS.
This would result in an aggregate initial burden of 230 hours above the
current baseline for all NMS Stock ATSs to complete Part III, Item 5 of
proposed Form ATS-N.\614\
---------------------------------------------------------------------------

\612\ Specifically, the NMS Stock ATS would be required to: (a)
Identify each affiliate and business unit of the broker-dealer
operator that may enter orders or other trading interest on the NMS
Stock ATS; (b) describe the circumstances and capacity in which each
identified affiliate and business unit enters orders or trading
interest on the NMS Stock ATS (e.g., proprietary or agency); (c)
describe the means by which each identified affiliate and business
unit enters orders or other trading interest on the NMS Stock ATS
(e.g., directly through a FIX connection to the NMS Stock ATS, or
indirectly, by way of the broker-dealer operator's SOR (or similar
functionality), algorithm, intermediate application, or sales desk);
and (d) describe any means by which a subscriber can be excluded
from interacting or trading with orders or other trading interest of
the broker-dealer operator or its affiliates on the NMS Stock ATS.
\613\ There may be some NMS Stock ATSs for which neither the
broker-dealer operator nor its affiliates trade on the NMS Stock ATS
at all, and thus, for which the disclosures required under Part III,
Item 5 would impose no significant burden. However, based on the
review of Forms ATS by the Commission and its staff and discussions
with broker-dealer operators, the Commission understands that a
majority of ATSs that trade NMS stocks currently either trade in
their own ATSs, either by themselves or with or through their
affiliates.
\614\ (Attorney at 2 hours + Compliance Manager at 3 hours) x 46
NMS Stock ATSs = 230 burden hours.
---------------------------------------------------------------------------

Part III, Item 6 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether the broker-dealer operator, or any of its
affiliates, use a SOR(s) (or similar functionality), an algorithm(s),
or both to send or receive subscriber orders or other trading interest
to or from the NMS Stock ATS.\615\ The Commission and its staff
understand from conversations with ATSs that nearly every ATS that
trades NMS stocks currently uses some form of SOR (or similar
functionality) or algorithm. The Commission recognizes that the SOR(s)
(or similar functionality) of the broker-dealer operator or its
affiliates and any algorithm(s) employed by the broker-dealer operator
or its affiliates to enter orders onto the NMS Stock ATS may vary
widely among ATSs with respect to the manner in which they operate, the
information they send or receive, and how the SOR(s) (or similar
functionality) and/or algorithm(s) may determine to route certain
orders to the NMS Stock ATS as opposed to other venues. Accordingly,
the Commission preliminarily believes that the burdens associated with
the disclosures in Part III, Item 6 of proposed Form ATS-N are likely
to vary depending on the complexity of the SOR(s) (or similar
functionality) and/or algorithm(s), its significance to the operation
of the NMS Stock ATS, and the functions and roles that it performs.
---------------------------------------------------------------------------

\615\ Specifically, Part III, Item 6 of proposed Form ATS-N
would require the NMS Stock ATS to: (a) Identify the SOR(s) (or
similar functionality) or algorithm(s) and identify the person(s)
that operates the SOR(s) (or similar functionality) or algorithm(s),
if other than the broker-dealer operator; and (b) describe the
interaction or coordination between the identified SOR(s) (or
similar functionality) or algorithm(s), including any information or
messages about orders or other trading interest (e.g., IOIs) that
the SOR(s) (or similar functionality) or algorithm(s) send or
receive to or from the NMS Stock ATS and the circumstances under
which such information may be shared with any person.
---------------------------------------------------------------------------

For example, in responding to Part III, Item 6(b), which would
require an NMS Stock ATS to describe, among other things, any
information or messages about orders or other trading interest that the
SOR(s) (or similar functionality) and algorithm(s) send or receive to
or from the NMS Stock ATS, an NMS Stock ATS that uses IOIs to
facilitate trades on the NMS Stock ATS and that uses its SOR(s) (or
similar functionality) and/or algorithm(s) to facilitate the sending of
those IOIs to relevant persons would likely have a substantially
greater burden in responding to Item 6(b) due to the number of messages
that may be associated with an IOI and the subsequent responses to that
IOI than an NMS Stock ATS that does not use IOIs. Accordingly, the
Commission preliminarily estimates that, on average, preparing Part
III, Item 6 for a Form ATS-N would add 10 hours to the current baseline
for an initial operation report on current Form ATS. This would result
in an aggregate initial burden of 460 hours above the current baseline
for all NMS Stock ATSs to complete Part III, Item 6 of proposed Form
ATS-N.\616\
---------------------------------------------------------------------------

\616\ (Attorney at 4 hours + Compliance Manager at 3 hours + Sr.
Systems Analyst at 3 hours) x 46 NMS Stock ATSs = 460 burden hours.
---------------------------------------------------------------------------

Part III, Item 7 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether it has any shared employees,\617\ and identify
the business unit(s) and/or the affiliate(s) of the broker-dealer
operator to which the shared employee(s) provides services and identify
the position(s) or title(s) that the shared employee(s) holds in the
business unit(s) and/or affiliate(s) of the broker-dealer operator; and
(2) describe the roles and responsibilities of the shared employee(s)
at the NMS Stock ATS and the business unit(s) and/or affiliate(s) of
the broker-dealer operator. As the broker-dealer operator controls all
aspects of the NMS Stock ATS, it should already be aware of all of its
employees and likely aware of any other roles or functions that such
employees provide to other business units or affiliates of the broker-
dealer operator. The Commission therefore preliminarily believes that
the NMS Stock ATS should be able to obtain this information readily.
The extent of this disclosure burden would likely vary depending on the
number of employees of the NMS Stock ATS and the extent to which such
employees' roles are solely dedicated to operating the NMS Stock ATS
versus also servicing other business unit(s) of the broker-dealer
operator or its affiliates. Accordingly, the Commission preliminarily
estimates that, on average, preparing Part III, Item 7 for a Form ATS-N
would add 4 hours to the current baseline for an initial operation
report on current Form ATS. This would result in an aggregate initial
burden of 184 hours above the current baseline for all NMS Stock ATSs
to complete Part III, Item 7 of proposed Form ATS-N.\618\
---------------------------------------------------------------------------

\617\ See supra Section VII.B.8 describing who would be
considered a shared employee of the broker-dealer operator.
\618\ (Attorney at 2 hours + Compliance Manager at 2 hours) x 46
NMS Stock ATSs = 184 burden hours.
---------------------------------------------------------------------------

Part III, Item 8 of proposed Form ATS-N would require an NMS Stock
ATS to disclose whether any operation, service, or function of the NMS
Stock ATS is performed by any person(s) other than the broker-dealer
operator of the NMS Stock ATS, and if so to: (1) Identify the person(s)
(in the case of a natural person, to identify only the person's
position or title) performing the operation, service, or function and
note whether this service provider(s) is an affiliate of the broker-
dealer, if applicable; (2) describe the operation, service, or function
that the identified person(s) provides and describe the role and
responsibilities of that person(s); and (3) state whether the
identified person(s), or any of its affiliates, may enter orders or
other trading interest on the NMS Stock ATS and, if so, describe the
circumstances and means by which such orders or other trading interest
are entered on the NMS Stock ATS. The Commission notes that this
proposed disclosure requirement is similar to the Exhibit E disclosure
requirement under the current Form ATS.\619\ The only additional
disclosure requirement beyond that required currently by Exhibit E to
Form ATS would be Item 8(c), which would require the NMS Stock ATS to
state whether or not the service provider or the service provider's
affiliate may transact on the NMS Stock ATS, and if so, the
circumstances and means by which they may do so. The Commission
preliminarily believes based on its

[[Page 81098]]

review of Form ATS Exhibit E disclosures that most, but not all,
service providers to ATSs are not typically entities that would
transact on the ATS by themselves. Based on Commission experience,
affiliates of service providers to some ATSs that transact in NMS stock
may subscribe to that ATS. An NMS Stock ATS may have to ask the service
provider about the nature of the service provider's affiliates to
ensure that such affiliates are not subscribers to the NMS Stock ATS or
may otherwise be able to transact on the NMS Stock ATS to complete this
disclosure. Accordingly, the Commission preliminarily estimates that,
on average, preparing Part III, Item 8 for a Form ATS-N would add 3
hours to the current baseline for an initial operation report on
current Form ATS. This would result in an aggregate initial burden of
138 hours above the baseline for all NMS Stock ATSs to complete Part
III, Item 8 of proposed Form ATS-N.\620\
---------------------------------------------------------------------------

\619\ Exhibit E of Form ATS requires an ATS to provide the name
of any entity, other than the ATS, that is involved in the operation
of the ATS, including the execution, trading, clearing, and settling
of transactions on behalf of the ATS, and to provide a description
of the role and responsibilities of each entity.
\620\ (Attorney at 1 hour + Compliance Manager at 2 hours) x 46
NMS Stock ATSs = 138 burden hours.
---------------------------------------------------------------------------

Part III, Item 9 of proposed Form ATS-N would require an NMS Stock
ATS to identify and describe any service, functionality, or procedure
of the NMS Stock ATS available to the broker-dealer operator or its
affiliates that is not available or does not apply to a subscriber(s)
to the NMS Stock ATS. The Commission is not currently aware of any NMS
Stock ATS that provides services, functionalities, or procedures to
itself or its affiliates and not to subscribers, although the
Commission recognizes that an NMS Stock ATS could do so. To the extent
that the services, functionalities, or procedures of the NMS Stock ATS
provided to the broker-dealer operator or its affiliates on the NMS
Stock ATS differ from those provided to non-affiliated subscribers, the
NMS Stock ATS would have to describe all such differences in Item 9.
Depending on the extent of such differences, the hourly burden for
providing these disclosures would vary. Conversely, if there are no
differences between the services, functionalities, or procedures of the
NMS Stock ATS that are provided to the broker-dealer operator or its
affiliates relative to subscribers, Part III, Item 9 would only require
the NMS Stock ATS to note this fact. Accordingly, the Commission
preliminarily estimates that, on average, preparing Part III, Item 9
for a Form ATS-N would add 2 hours to the current baseline for an
initial operation report on current Form ATS. This would result in an
aggregate initial burden of 92 hours above the current baseline for all
NMS Stock ATSs to complete Part III, Item 9 of proposed Form ATS-
N.\621\
---------------------------------------------------------------------------

\621\ (Attorney at 1.5 hours + Compliance Manager at 0.5 hour) x
46 NMS Stock ATSs = 92 burden hours.
---------------------------------------------------------------------------

Part III, Item 10 of proposed Form ATS-N would require certain
disclosures related to the NMS Stock ATS's written safeguards and
written procedures to protect the confidential trading information of
subscribers pursuant to Rule 301(b)(10) of Regulation ATS.\622\ As
previously discussed, NMS Stock ATSs would be required under the
proposed amendments to Regulation ATS to write their policies and
procedures under Rule 301(b)(10) of Regulation ATS. Part III, Item 10
of proposed Form ATS-N would require a description of these policies
and procedures. Because NMS Stock ATSs would have already incurred an
hourly burden in connection with writing its policies and procedures
pursuant to Rule 301(b)(10) of Regulation ATS, the Commission
preliminarily believes that Item 10 would impose only a minimal burden
on NMS Stock ATSs to describe such written policies and procedures.
Part III, Item 10(b) of proposed Form ATS-N would also require an NMS
Stock ATS to identify the positions or titles of any persons that can
access the confidential trading information of subscribers, a
description of what information such persons can access, and the
circumstances under which such persons can access the confidential
trading information. The Commission preliminarily believes that NMS
Stock ATSs should, pursuant to their existing obligations under Rule
301(b)(10), be aware of all persons that can access the confidential
trading information of subscribers, the circumstances under which such
persons can access that information, and what information they can
access. As NMS Stock ATSs should already have this knowledge, the
Commission preliminarily believes that the proposed disclosures of Item
10(b) would not be overly burdensome for an NMS Stock ATS to complete.
Accordingly, the Commission preliminarily estimates that, on average,
preparing Part III, Item 10 for a proposed Form ATS-N would add 2 hours
above the current baseline for an initial operation report on current
Form ATS. This would result in an aggregate initial burden of 92 hours
above the current baseline for all NMS Stock ATSs to complete Item 10
of Part III of proposed Form ATS-N.\623\
---------------------------------------------------------------------------

\622\ Specifically, an NMS Stock ATS would be required to: (1)
Describe the means by which a subscriber may consent or withdraw
consent to the disclosure of confidential trading information to any
persons (including the broker-dealer operator and any of its
affiliates); (2) identify the positions or titles of any persons
that have access to confidential trading information, describe the
confidential trading information to which the persons have access,
and describe the circumstances under which the persons can access
confidential trading information; (3) describe the written standards
controlling employees of the NMS Stock ATS that trade for employees'
accounts; and (4) describe the written oversight procedures to
ensure that the safeguards and procedures are implemented and
followed.
\623\ (Attorney at 1 hour + Compliance Manager at 1 hour) x 46
NMS Stock ATSs = 92 burden hours.
---------------------------------------------------------------------------

Part IV, Item 1 of proposed Form ATS-N would require an NMS Stock
ATS to disclose, among other things, information regarding: (1) Any
eligibility requirements to access the NMS Stock ATS; (2) the terms and
conditions of any contractual agreements for granting access to the NMS
Stock ATS for the purpose of effecting transactions in securities or
for submitting, disseminating, or displaying orders on the NMS Stock
ATS; (3) the types of subscribers and other persons that use the
services of the NMS Stock ATS; (4) any formal or informal arrangement
the NMS Stock ATS has with liquidity providers; and (5) any
circumstances by which access to the NMS Stock ATS can be limited or
denied and the procedures or standards that are used to determine such
action. For each disclosure, the NMS Stock ATS would also be required
to explain whether there are any differences in how these requirements,
terms, conditions, criteria, procedures, and/or standards are applied
among subscribers and persons.
The Commission notes that the proposed disclosure requirements of
Part IV, Item 1 of proposed Form ATS-N are, in large part, already
required under current Form ATS. Exhibit A of current Form ATS requires
an ATS to describe its classes of subscribers (e.g., broker-dealer,
institutional, or retail) and any differences in access to services
offered by the ATS to different groups or classes of subscribers. Part
IV, Item 1 of proposed Form ATS-N requires the disclosure of similar
information to Exhibit A, but Part IV, Item 1 would expressly require
significantly more detail, and a greater number of disclosures, than
Exhibit A of current Form ATS including with respect to the terms and
conditions of use and eligibility to become a subscriber. The
Commission notes that ATSs currently vary in the depth of their
discussion of subscribers in Exhibit A of their Forms ATS, with some
providing a fulsome description that would likely include

[[Page 81099]]

most of the express disclosures proposed under Part IV, Item 1 of
proposed Form ATS-N, while other ATSs might not, for example, provide
details surrounding differing eligibility requirements among
subscribers.
Depending on the complexity of the NMS Stock ATS, the different
types of subscribers, and, most significantly, the extent to which the
terms and conditions vary among subscribers, the disclosure burden
related to Part IV, Item I of proposed Form ATS-N would likely vary.
For example, an NMS Stock ATS with two classes of subscribers with
identical terms and conditions of use, eligibility criteria, and the
same circumstances and process regarding limiting and denying services
of the NMS Stock ATS would likely have less of a burden than an NMS
Stock ATS with five groups of subscribers with varying terms and
conditions of use, eligibility criteria, and differing circumstances
and processes for which they may be limited or denied the services of
the NMS Stock ATS. Accordingly, the Commission preliminary estimates
that, on average, preparing Part IV, Item 1 of a Form ATS-N would add 6
hours to the current baseline for an initial operation report on
current Form ATS to respond to the more detailed questions regarding
subscribers to the NMS Stock ATS. This would result in an aggregate
initial burden of 276 hours above the current baseline for all NMS
Stock ATSs to complete Part IV, Item 1 of proposed Form ATS-N.\624\
---------------------------------------------------------------------------

\624\ (Attorney at 4 hours + Compliance Manager at 2 hours) x 46
NMS Stock ATSs = 276 burden hours.
---------------------------------------------------------------------------

Part IV, Item 2 of proposed Form ATS-N would require an NMS Stock
ATS to provide the days and hours of operation of the NMS Stock ATS,
including the times when orders or other trading interest are entered
on to the NMS Stock ATS and the time when pre-opening or after-hours
trading may occur. It would also require the NMS Stock ATS to explain
differences, if any, among subscribers and persons in the times when
orders or other trading interest are entered on the NMS Stock ATS.
Current Form ATS does not specify similar disclosures, so the
Commission preliminarily estimates that respondents would incur
additional burdens above the current baseline when preparing the
disclosures required under Part IV, Item 2 of proposed Form ATS-N. The
NMS Stock ATS should already be aware of the hours during which it
operates and whether and when it permits pre-opening or after-hours
trading. Based on the experience of the Commission and its staff
reviewing Form ATS and ATS-R filings, the Commission preliminarily
believes that most ATSs that currently trade NMS stocks do not provide
for after-hours or pre-opening trading of NMS stock. For NMS Stock ATSs
for which the times when orders or other trading interest may be sent
to the NMS Stock ATS are not the same for all subscribers and persons,
the disclosure burden related to Part IV, Item 2 would likely increase.
Accordingly, the Commission preliminarily estimates that, on average,
preparing Part IV, Item 2 for a Form ATS-N would add 0.5 hours to the
current baseline for an initial operation report on current Form ATS.
This would result in an aggregate initial burden of 23 hours above the
current baseline for all NMS Stock ATSs to complete Part IV, Item 2 of
proposed Form ATS-N.\625\
---------------------------------------------------------------------------

\625\ Compliance Manager at 0.5 hours x 46 NMS Stock ATSs = 23
burden hours.
---------------------------------------------------------------------------

Part IV, Item 3 of proposed Form ATS would require an NMS Stock ATS
to provide a detailed disclosure of the order types available on the
NMS Stock ATS. Part IV Item 3(a) would require an NMS Stock ATS to
describe any types of orders that are entered to the NMS Stock ATS,
their characteristics, operations, and how they are handled on the NMS
Stock ATS.\626\ Part IV, Item 3(b) would require the NMS Stock ATS to
describe any differences if the availability of its order types, and
their terms and conditions, are not the same for all subscribers and
persons. Part IV, Item 3(c) would require an NMS Stock ATS to describe
any requirements and handling procedures for minimum order sizes, odd-
lot orders, and mixed-lot orders and to describe any differences if the
requirements and handling procedures for minimum order sizes, odd-lot,
or mixed-lot orders are not the same for all subscribers and persons.
Part IV, Item 3(d) would require an NMS Stock ATS to describe any
messages sent to or received by the NMS Stock ATS indicating trading
interest (e.g., IOIs, actionable IOIs or conditional orders), including
the information contained in the message, the means under which
messages are transmitted, the circumstances in which messages are
transmitted (e.g., automatically by the NMS Stock ATS, or upon the
subscriber's request), and the circumstances in which they may result
in an execution on the NMS Stock ATS; the NMS Stock ATS would also be
required to describe any differences among subscribers and persons if
the terms and conditions regarding these messages, IOIs, and
conditional orders are not the same for all subscribers and persons.
---------------------------------------------------------------------------

\626\ This would include: (i) Priority for each order type; (ii)
conditions for each order type; (iii) order types designed not to
remove liquidity (e.g., post-only orders); (iv) order types that
adjust their price as changes to the order book occur (e.g., price
sliding orders or pegged orders) or have a discretionary range; (v)
the time-in-force instructions that can be used or not used with
each order type; (vi) the availability of order types across all
forms of connectivity to the NMS Stock ATS and differences, if any,
between the availability of an order type across these forms of
connectivity; (vii) whether an order type is eligible for routing to
other trading centers; and (viii) the circumstances under which
order types may be combined with a time-in-force or another order
type, modified, replaced, canceled, rejected, or removed from the
NMS Stock ATS.
---------------------------------------------------------------------------

The Commission notes that some of the proposed disclosure
requirements of Part IV, Item 3 of proposed Form ATS-N are already
required under current Form ATS. Exhibit F of current Form ATS requires
an ATS to describe, among other things, the manner of operation and the
procedures governing order entry and execution of the ATS. Part IV,
Item 3 of proposed Form ATS-N would require significantly more detail,
and a greater number of disclosures, in regard to types of orders than
Exhibit F of current Form ATS. ATSs that trade NMS stocks currently
vary in the extent of their disclosures relating to order types as
provided in Exhibit F. Some provide a relatively fulsome discussion of
different order types and to whom they are made available, while other
ATSs that trade NMS stocks do not provide substantial detail in this
area. Depending on the extent to which an ATS that trades NMS stocks
already discloses most of the information regarding order types and
trading interest on Exhibit F of its Form ATS, as well as the variety
and complexity of different order types available, the proposed
disclosure burden of Part IV, Item 3 of proposed Form ATS-N will likely
vary among NMS Stock ATSs. For example, those NMS Stock ATSs that send
and receive actionable IOIs and/or conditional orders would be required
to draft a detailed explanation regarding those order types for Part
IV, Item 3(d), whereas NMS Stock ATSs without such order types would
simply state that they do not send and receive IOIs and conditional
orders. Accordingly, the Commission preliminarily estimates that, on
average, preparing Part IV, Item 3 of a Form ATS-N would add 6 hours to
the current baseline for an initial operation report on current Form
ATS, depending on such factors as described above. This would result in
an aggregate initial burden of 276 hours above the current baseline for
an initial operation report on current Form ATS for all NMS

[[Page 81100]]

Stock ATSs to complete Part IV, Item 3 of proposed Form ATS-N.\627\
---------------------------------------------------------------------------

\627\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr.
Systems Analyst at 3 hours) x 46 NMS Stock ATSs = 276 burden hours.
---------------------------------------------------------------------------

Part IV, Item 4 of proposed Form ATS-N would require an NMS Stock
ATS to disclose the means by which subscribers or other persons connect
and send orders to the NMS Stock ATS. Part IV, Item 4(a) would require
the NMS Stock ATS to describe the means by which subscribers or other
persons connect to the NMS Stock ATS and enter orders or other trading
interest on the NMS Stock ATS (e.g., via a direct FIX connection to the
ATS or an indirect connection via the broker-dealer operator's SOR, any
intermediate functionality, algorithm, or sales desk). This item would
also require the NMS Stock ATS to describe any differences if the terms
and conditions for connecting and entering orders or other trading
interest are not the same for all subscribers and persons. Part IV,
Item 4(b) would require the NMS Stock ATS to describe any co-location
services or any other means by which any subscriber or other persons
may enhance the speed by which to send or receive orders, trading
interest, or messages to or from the NMS Stock ATS, the terms and
conditions of such co-location services, and to describe any
differences if the terms and conditions of the co-location services are
not the same for all subscribers and persons.
The Commission notes that some of the proposed disclosure
requirements of Part IV, Item 4 of proposed Form ATS-N are already
required under current Form ATS. Exhibit F of current Form ATS requires
an ATS to describe, among other things, the means of access to the ATS.
Part IV, Item 4 of proposed Form ATS-N would expressly require
significantly more detail, and a greater number of disclosures, in
regard to order entry, connectivity, and co-location services than
Exhibit F of current Form ATS. ATSs that currently trade NMS stocks
vary in the depth of their disclosures related to order entry.
Currently, most ATSs that trade NMS stocks do not provide much or any
detail regarding the extent to which they provide co-location services
or other speed advantages to subscribers or persons trading on the ATS.
Accordingly, the Commission preliminarily estimates that respondents
would incur an additional burden above the current baseline when
preparing the disclosures required under Part IV, Item 4 of proposed
Form ATS-N. The Commission preliminarily estimates that, on average,
preparing Part IV, Item 4 for a Form ATS-N would add 5 hours to the
current baseline for an initial operation report on current Form ATS to
provide a more detailed description of the connection and order entry
procedures, a description of any co-location or speed-advantage
services, as well as any differences among subscribers and other
persons with respect to these disclosures. This would result in an
aggregate initial burden of 230 hours above the current baseline for
all NMS Stock ATSs to complete Item 4 of Part IV of proposed Form ATS-
N.\628\
---------------------------------------------------------------------------

\628\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr.
Systems Analyst at 2 hours) x 46 NMS Stock ATSs = 230 burden hours.
---------------------------------------------------------------------------

Part IV, Item 5 of proposed Form ATS-N would require an NMS Stock
ATS to explain if and how it segments order flow, the type of notice
about such segmentation that it provides to subscribers, and whether
subscribers, the broker-dealer operator, or its affiliates may submit
order preferencing instructions. Part IV, Item 5(a) would require an
NMS Stock ATS to describe any segmentation of orders or other trading
interest on the NMS Stock ATS (e.g., classification by type of
participant, source, nature of trading activity), and to describe the
segmentation categories, the criteria used to segment these categories,
and procedures for determining, evaluating, and changing segmented
categories. This item would require an NMS Stock ATS to describe any
differences if the segmented categories, the criteria used to segment
these categories, and any procedures for determining, evaluating, or
changing segmented categories are not the same for all subscriber and
persons. Part IV, Item 5(b) would require the NMS Stock ATS to state
whether it notifies subscribers or persons about the segmentation
category that a subscriber or a person is assigned and to describe any
notice provided to subscribers or persons about the segmented category
that they are assigned and the segmentation identified in Item 5(a),
including the content of any notice and the means by which any notice
is communicated. If the notice is not the same for all subscribers and
persons, the NMS Stock ATS would be required to describe any
differences. Part IV, Item 5(c) would require an NMS Stock ATS to
describe any means and the circumstances by which a subscriber, the
broker-dealer operator, or any of its affiliates may designate an order
or trading interest submitted to the NMS Stock ATS to interact or not
to interact with specific orders, trading interest, or persons on the
NMS Stock ATS (e.g., designating an order or trading interest to be
executed against a specific subscriber) and how such designations
affect order priority and interaction.
The Commission notes that some of the proposed disclosure
requirements of Part IV, Item 5 of proposed Form ATS-N are already
required under current Form ATS. Exhibit F of current Form ATS requires
an ATS to describe, among other things, the manner of operation and the
procedures governing order entry and execution of the ATS. However,
Exhibit F of current Form ATS does not expressly enumerate the level of
detail that an ATS must provide in regard to its segmentation of order
flow and does not expressly ask for an ATS to describe any notice to
subscribers regarding segmentation or explain any means and
circumstances for order preferencing, whereas Part IV, Item 5 of
proposed Form ATS-N would require detailed disclosures in regard to
these subjects.\629\ Based on its review of Exhibit F disclosures, the
Commission understands that most, but not all, ATSs that currently
trade NMS stocks segment orders in some manner and that many NMS Stock
ATSs allow subscribers to enter some order preferencing criteria or
limits. These ATSs vary in the depth of their description as to how
they segment order flow and order preferencing. For instance, most ATSs
that currently trade NMS stocks do not expressly provide the Commission
with a description of the means by which persons might be notified
about segmentation, as would be required by Part IV, Item 5(b) of
proposed Form ATS-N. Accordingly, the Commission preliminarily
estimates that respondents would incur an additional burden above the
current baseline when preparing the disclosures required under Part IV,
Item 5 of proposed Form ATS-N. The Commission preliminarily estimates
that, on average, preparing Part IV, Item 5 for a Form ATS-N would add
7 hours to the current baseline for an initial operation report on
current Form ATS to provide a detailed description of how, if at all,
the NMS Stock ATS segments order flow, provides any notice to those
trading on the NMS Stock ATS regarding segmentation, and allows order
preferencing. This would result in an aggregate initial burden of 322
hours above the current baseline for

[[Page 81101]]

all NMS Stock ATSs to complete Part IV, Item 5 of proposed Form ATS-
N.\630\
---------------------------------------------------------------------------

\629\ Though Exhibit F of current Form ATS, unlike Item 5(b) of
Part IV of proposed Form ATS-N, does not expressly require ATSs to
describe the content of any notice to subscribers regarding
segmentation, Exhibit F does require a copy of any materials
currently provided to subscribers, which could include such a
notice.
\630\ (Attorney at 2 hours + Compliance Manager at 2.5 hours +
Sr. Systems Analyst at 2.5 hours) x 46 NMS Stock ATSs = 322 burden
hours.
---------------------------------------------------------------------------

Part IV, Item 6(a) of proposed Form ATS-N would require an NMS
Stock ATS to describe any means and circumstances by which orders or
other trading interest on the NMS Stock ATS are displayed or made known
outside the NMS Stock ATS and the information about the orders and
trading interest that are displayed. If the display of orders or other
trading interest is not the same for all subscribers and persons, the
NMS Stock ATS would be required to describe any differences. Part IV,
Item 6(b) of proposed Form ATS-N would require the NMS Stock ATS to
identify the subscriber(s) or person(s) (in the case of a natural
person, the NMS Stock ATS would only identify the person's position or
title) to whom the orders and trading interest are displayed or
otherwise made known. Although Exhibit F of current Form ATS requires
an ATS to describe, among other things, the manner of operation and the
procedures governing order entry and execution of the ATS, Exhibit F
does not expressly state that an ATS must explain if and how order
information is displayed or otherwise made known outside the NMS Stock
ATS. The Commission understands from its review of Forms ATS filings
that a majority of ATSs that trade NMS stocks provide some form of IOI
or conditional order that would likely need to be described in Part IV,
Item 6 of proposed Form ATS-N.\631\ Depending on the variety of trading
interest that shares some trading information outside of the NMS Stock
ATS and the complexity of such information sharing, the disclosure
burden in responding to Part IV, Item 6 would likely vary among NMS
Stock ATSs. The Commission also notes that there is currently one ATS
that trades NMS stocks that operates as an ECN. This ATS would have to
describe in Part IV, Item 6 how it displays orders and other
information about trading interest on the ATS. Accordingly, the
Commission preliminarily estimates that, on average, preparing Part IV,
Item for a Form ATS-N would add 5 hours to the current baseline for an
initial operation report on current Form ATS, depending on such factors
as described above. This would result in an aggregate initial burden of
230 hours above the current baseline for all NMS Stock ATSs to complete
Part IV, Item 6 of proposed Form ATS-N.\632\
---------------------------------------------------------------------------

\631\ See supra Part IV, Item 6 of proposed Form ATS-N.
\632\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr.
Systems Analyst at 2 hours) x 46 NMS Stock ATSs = 230 burden hours.
---------------------------------------------------------------------------

Part IV, Item 7 of proposed Form ATS-N would require an NMS Stock
ATS to describe its trading services in detail. Part IV, Items 7(a) and
7(b) of proposed Form ATS-N would require an NMS Stock ATS to disclose
the means or facilities used by the NMS Stock ATS to bring together the
orders of multiple buyers and sellers, as well as the established, non-
discretionary methods that dictate the terms of trading among multiple
buyers and sellers on the facilities of the NMS Stock ATS, including
rules and procedures governing the priority, pricing methodologies,
allocation, matching, and execution of orders and other trading
interest. Part IV, Item 7(c) would require the NMS Stock ATS to
describe any trading procedures related to price protection mechanisms,
short sales, locked-crossed markets, the handling of execution errors,
time-stamping of orders and executions, or price improvement
functionality. For all disclosures required under Item 7, the NMS Stock
ATS would also be required to describe any differences in the
availability of a functionality regarding its trading services among
subscribers and persons.
The Commission notes that some of the proposed disclosure
requirements of Part IV, Item 7 of proposed Form ATS-N are already
required under current Form ATS. Exhibit F of current Form ATS requires
an ATS to describe, among other things, the manner of operation and the
procedures governing order entry and execution of the ATS. These
required disclosures in Exhibit F of Form ATS are similar to those set
forth in Item 7 of proposed Form ATS-N, which would require disclosures
relating to matching methodology, order interaction rules, and
execution procedures of the NMS Stock ATS. Consequently, the Commission
preliminarily believes that NMS Stock ATSs already have some experience
completing Exhibit F that would lessen the burden related to responding
to the more detailed disclosures in Items 7(a), (b), and (c) of Part IV
of proposed Form ATS-N.
Furthermore, Part IV, Item 7 of proposed Form ATS-N would require
an NMS Stock ATS to describe how the NMS Stock ATS meets the two prongs
necessary to meet the Exchange Act's definition of ``exchange''
pursuant to Rule 3b-16(a) under the Exchange Act in Items 7(a) and
(b).\633\ Based on reviews of Form ATS submissions, the Commission
understands that ATSs that currently trade NMS stocks generally do not
explicitly explain how their systems meet the requirements of each
prong under Rule 3b-16, which are necessary in order to constitute an
ATS. Those systems seeking to operate as NMS Stock ATSs would be
required to draft those explanations, or modify existing descriptions
of their current system as they may provide currently in Form ATS, to
meet the disclosure requirements of Part IV, Item 7 of proposed Form
ATS-N.
---------------------------------------------------------------------------

\633\ See 17 CFR 240.3b-16 providing, among other things, that
an entity must (1) bring together the orders for securities of
multiple buyers and sellers; and (2) use 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).
---------------------------------------------------------------------------

Accordingly, the Commission preliminarily estimates that
respondents would incur an additional burden above the current baseline
when preparing the disclosures required under Part IV, Item 7 of
proposed Form ATS-N. The Commission preliminarily estimates that, on
average, preparing Part IV, Item 7 for a Form ATS-N would add 6 hours
to the current baseline for an initial operation report on current Form
ATS to provide a description of the NMS Stock ATS's trading services.
This would result in an aggregate initial burden of 276 hours above the
current baseline for all NMS Stock ATSs to complete Part IV, Item 7 of
proposed Form ATS-N.\634\
---------------------------------------------------------------------------

\634\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr.
Systems Analyst at 3 hours) x 46 NMS Stock ATSs = 276 burden hours.
---------------------------------------------------------------------------

[[Page 81102]]

some disclosures relating to system disruptions, malfunctions, and
other suspensions in their Exhibit F, Exhibit G, or in subscriber
manuals (or other materials provided to subscribers) that are required
to be provided to the Commission under Exhibit F of current Form ATS.
Consequently, the Commission preliminarily believes that NMS Stock ATSs
should be able to provide the proposed disclosures in Part IV, Item 8
of proposed Form ATS-N without a significant burden over the current
baseline as they should already be aware of how the ATS operates,
handles system disruptions, malfunctions or other suspensions. The
Commission recognizes, however, that Item Part IV, Item 8 is
significantly more specific and detailed in its proposed disclosure
requirements than current Form ATS.
Accordingly, the Commission preliminarily estimates that
respondents would incur an additional burden above the current baseline
when preparing the disclosures required under Part IV, Item 8 of
proposed Form ATS-N. The Commission preliminarily estimates that, on
average, preparing Part IV, Item 8 for a Form ATS-N would add 2.5 hours
to the current baseline for an initial operation report on current Form
ATS to provide a detailed description of the NMS Stock ATS's procedures
for system disruptions, malfunctions, or other suspensions. This would
result in an aggregate initial burden of 115 hours above the current
baseline for all NMS Stock ATSs to complete Part IV, Item 8 of proposed
Form ATS-N.\635\
---------------------------------------------------------------------------

\635\ (Attorney at 1 hour + Compliance Manager at .5 hours + Sr.
Systems Analyst at 1 hour) x 46 NMS Stock ATSs = 115 burden hours.
---------------------------------------------------------------------------

Part IV, Item 9 of proposed Form ATS-N would require an NMS Stock
ATS to describe any opening, reopening and closing processes, and any
procedures for after-hours trading. Part IV, Item 9(a) of proposed Form
ATS-N would require an NMS Stock ATS to describe any opening and
reopening processes, including how orders or other trading interest are
matched and executed prior to the start of regular trading hours or
following a stoppage of trading in a security during regular trading
hours and how unexecuted orders or other trading interest are handled
at the time the NMS Stock ATS begins regular trading at the start of
regular trading hours or following a stoppage of trading in a security
during regular trading hours. The NMS Stock ATS would also be required
to describe any differences between pre-opening executions, executions
following a stoppage of trading in a security during regular trading
hours, and executions during regular trading hours. Part IV, Items 9(b)
and (c) would require an NMS Stock ATS to describe any closing process
and after-hours trading procedures, respectively, the manner in which
unexecuted orders or other trading interest are handled at the close of
regular trading, and how orders and trading interest are matched and
executed during after-hours trading. The NMS Stock ATS would also be
required to describe any differences between the closing and after-
hours executions versus executions during regular trading hours.
The Commission notes that some of the proposed disclosure
requirements of Part IV, Item 9 of proposed Form ATS-N are incorporated
by some ATSs that trade NMS stocks into Exhibit F of their current
Forms ATS, which requires an ATS to describe, among other things, the
manner of operation and the procedures governing order entry and
execution of the ATS. Currently, ATSs that trade NMS stocks vary in the
depth of their disclosures relating to opening, reopening, or closing
processes, and after-hours trading procedures. The Commission notes
that these opening, reopening, or closing processes, and after-hours
trading procedures, may vary widely across different NMS Stock ATSs,
with some, for example, allowing for pre-opening executions and routing
and after-hours trading and routing, while others may not have an
opening process and simply commence with regular trading without any
option for after-hours trading. In any case, NMS Stock ATSs should
already be aware of any opening, reopening or closing processes, and
after-hours trading procedures, they may have as well as any
differences in trading and execution during the opening, reopening, or
closing processes, and during after-hours trading. Accordingly, the
Commission preliminarily believes that preparing Part IV, Item 9 of
proposed Form ATS-N for a Form ATS-N would not impose a significant
additional burden above the current baseline for an initial operation
report on current Form ATS. The Commission preliminarily estimates
that, on average, preparing Part IV, Item 9 for a Form ATS-N would add
3 hours to the current baseline for an initial operation report on
current Form ATS to describe its opening, reopening, or closing
processes, and after-hours trading procedures. This would result in an
aggregate initial burden of 138 hours above the current baseline for
all NMS Stock ATSs to complete Part IV, Item 9 of proposed Form ATS-
N.\636\
---------------------------------------------------------------------------

\636\ (Compliance Manager at 2 hours + Sr. Systems Analyst at 1
hour) x 46 NMS Stock ATSs = 138 burden hours.
---------------------------------------------------------------------------

Part IV, Item 10 of proposed Form ATS-N would require an NMS Stock
ATS to describe its outbound routing functions. Part IV, Item 10(a) of
proposed Form ATS-N would require an NMS Stock ATS to describe the
circumstances under which orders or other trading interest are routed
from the NMS Stock ATS to another trading center, including whether
outbound routing occurs at the affirmative instruction of the
subscriber or at the discretion of the broker-dealer operator, and the
means by which routing is performed (e.g., a third party or order
management system, or a SOR (or similar functionality) or algorithm of
the broker-dealer operator or any of its affiliates). Part IV, Item
10(b) of proposed Form ATS-N would require an NMS Stock ATS to describe
any differences if the means by which orders or other trading interest
are routed from the NMS Stock ATS are not the same for all subscribers
and persons. Exhibit F of current Form ATS requires an ATS to describe,
among other things, the manner of operation and the procedures
governing order execution of the ATS, but it does not specifically
state the level of detail an ATS must provide when describing its
outbound routing procedures. Additionally, the Commission understands
based on disclosures in Form ATS submissions, some ATSs that currently
trade NMS stocks do not route orders out of the ATS. Consequently, the
disclosure burden related to Part IV, Item 10 of proposed Form ATS-N
would likely vary among NMS Stock ATSs depending on whether they route
orders at all, the variety of circumstances under which they may route
orders, and the variety of destinations or criteria to determine such
destinations to which an order or other trading interest may route.
Accordingly, the Commission preliminarily believes that the average
additional burden above the baseline imposed by Part IV, Item 10 of
proposed Form ATS-N may vary significantly among NMS Stock ATSs.
Accordingly, the Commission preliminarily estimates that, on average,
preparing Part IV, Item 10 for a Form ATS-N would add 6 hours to the
current baseline for an initial operation report on current Form ATS,
depending on such factors as described above. This would result in an
aggregate initial burden of 276 hours above the current baseline for
all NMS

[[Page 81103]]

Stock ATSs to complete Part IV, Item 10 of proposed Form ATS-N.\637\
---------------------------------------------------------------------------

\637\ (Attorney at 1 hour + Compliance Manager at 2 hours + Sr.
Systems Analyst at 3 hours) x 46 NMS Stock ATSs = 276 burden hours.
---------------------------------------------------------------------------

Part IV, Item 11 of proposed Form ATS would require an NMS Stock
ATS to describe its sources and uses of market data. Part IV, Item
11(a) would require an NMS Stock ATS to describe the market data used
by the NMS Stock ATS and the source of that market data (e.g., market
data feeds disseminated by the SIP and market data feeds disseminated
directly by an exchange or other trading center or third-party vendor
of market data). Part IV, Item 11(b) would require the NMS Stock ATS to
describe the specific purpose for which market data is used by the NMS
Stock ATS, including how market data is used to determine the NBBO,
protected quotes, pricing of orders and executions, and routing
destinations. Form ATS does not specifically require an ATS to describe
its sources of market data, though, this information is often important
to understanding the execution of orders on an ATS. The Commission is
aware based on Form ATS filings that many ATSs that trade NMS stocks
provide descriptions related to their use of market data, including
providing the name of their market data vendor. The Commission
preliminarily believes that the proposed disclosures under Part IV,
Item 11 would not impose any significant additional burden on NMS Stock
ATSs, which should already be aware of the market data that they use
and the manner in which they use it. Accordingly, the Commission
preliminarily estimates that, on average, preparing Part IV, Item 11
for a Form ATS-N would add 4 hours to the current baseline for an
initial operation report on current Form ATS to describe the sources of
market data and the manner in which the NMS Stock ATS uses market data.
This would result in an aggregate initial burden of 184 hours above the
current baseline for all NMS Stock ATSs to complete Part IV, Item 11 of
proposed Form ATS-N.\638\
---------------------------------------------------------------------------

\638\ (Compliance Manager at 2 hours + Sr. Systems Analyst at 2
hours) x 46 NMS Stock ATSs = 184 burden hours.
---------------------------------------------------------------------------

Part IV, Item 12 of proposed Form ATS-N would require an NMS Stock
ATS to make certain disclosures regarding its fees, rebates, and other
charges. Part IV, Item 12(a) of proposed Form ATS-N would require an
NMS Stock ATS to describe any fees, rebates, or other charges of the
NMS Stock ATS (e.g., connectivity fees, subscription fees, execution
fees, volume discounts) and provide the range (e.g., high and low) of
such fees, rebates, or other charges. Part IV, Item 12(b) of proposed
Form ATS-N would require the NMS Stock ATS to describe any differences
if the fees, rebates, or other charges of the NMS Stock ATS are not the
same for all subscribers and persons. Current Form ATS does not require
an ATS to disclose and explain its fee structure, and based on
Commission experience, few, if any, do so in their current Form ATS
filings. The Commission recognizes that, like national securities
exchanges, NMS Stock ATSs may adopt a variety of fee structures that
may include rebates, incentives for subscribers to bring liquidity to
the NMS Stock ATS, more traditional transaction-based fee structures,
and other fees such as a monthly subscriber access fee. Depending on
the complexity and variety of an NMS Stock ATS's fee structure and the
extent to which these fees are not the same for all subscribers and
persons, the proposed disclosure burden related to Part IV, Item 12 of
proposed Form ATS-N will likely vary. Accordingly, the Commission
preliminarily estimates that, on average, preparing Part IV, Item 12
for a Form ATS-N would add 5 hours to the current baseline for an
initial operation report on current Form ATS to describe the NMS Stock
ATS's fee structure and any differences among subscribers and persons
relating to fees, rebates, or other charges. This would result in an
aggregate initial burden of 230 hours above the current baseline for
all NMS Stock ATSs to complete Part IV, Item 12 of proposed Form ATS-
N.\639\
---------------------------------------------------------------------------

\639\ (Attorney at 1 hour + Compliance Manager at 3 hours + Sr.
Systems Analyst at 1 hour) x 46 NMS Stock ATSs = 230 burden hours.
---------------------------------------------------------------------------

Part IV, Item 13 of proposed Form ATS would require an NMS Stock
ATS to describe any arrangements or procedures for trade reporting,
clearance, and settlement on the NMS Stock ATS. Part IV, Item 13(a) of
proposed Form ATS-N would require an NMS Stock ATS to describe any
arrangements or procedures for reporting transactions on the NMS Stock
ATS and if the trade reporting procedures are not the same for all
subscribers and persons, the NMS Stock ATS would be required to
describe any differences. Part IV, Item 13(b) of proposed Form ATS-N
would require an NMS Stock ATS to describe any arrangements or
procedures undertaken by the NMS Stock ATS to facilitate the clearance
and settlement of transactions on the NMS Stock ATS (e.g., whether the
NMS Stock ATS becomes a counterparty, whether it submits trades to a
registered clearing agency, or whether it requires subscribers to have
arrangements with a clearing firm). If the clearance and settlement
procedures are not the same for all subscribers and persons, the NMS
Stock ATS would be required to describe any differences. The Commission
notes that some of the proposed disclosure requirements of Part IV,
Item 13 of proposed Form ATS-N are already required under current Form
ATS. Exhibit F of current Form ATS requires ATSs to describe, among
other things, their procedures governing execution, reporting,
clearance, and settlement of transactions effected through the ATS.
Consequently, ATSs that currently trade NMS stocks already have
experience providing disclosures related to how they report, clear, and
settle transactions on the ATS. Accordingly, the Commission
preliminarily believes that preparing Part IV, Item 13 for a Form ATS-N
would not impose a significant additional burden above the current
baseline for an initial operation report on current Form ATS. The
Commission preliminarily estimates that, on average, preparing Part IV,
Item 13 for a Form ATS-N would add 0.5 hours to the current baseline
for an initial operation report on current Form ATS to provide a more
detailed description of the NMS Stock ATS's trade reporting, clearance,
and settlement arrangements or procedures. This would result in an
aggregate initial burden of 23 hours above the current baseline for all
NMS Stock ATSs to complete Part IV, Item 13 of proposed Form ATS-
N.\640\
---------------------------------------------------------------------------

\640\ Compliance Manager at 0.5 hours x 46 NMS Stock ATSs = 23
burden hours.
---------------------------------------------------------------------------

Part IV, Item 14 of proposed Form ATS-N would require an NMS Stock
ATS to provide the following information if the NMS Stock ATS displays
orders in an NMS stock to any person other than employees of the NMS
Stock ATS and executed 5% or more of the average daily trading volume
in that NMS stock as reported by an effective transaction reporting
plan for four of the preceding six calendar months: (a) The ticker
symbol for each NMS stock for each of the last 6 calendar months; (b) a
description of the manner in which the NMS Stock ATS displays such
orders on a national securities exchange or through a national
securities association; and (c) a description of how the NMS Stock ATS
provides access to such orders displayed in the national market system
equivalent to the access to other orders displayed on that exchange or
association. Part IV, Item 15 of proposed Form ATS-N would require an
NMS Stock ATS to provide the following

[[Page 81104]]

information if the NMS Stock ATS executed 5% or more of the average
daily trading volume in an NMS stock as reported by an effective
transaction reporting plan for four of the preceding six calendar
months: (a) The ticker symbol for each NMS stock for each of the last 6
calendar months; and (b) a description of the written standards for
granting access to trading on the NMS Stock ATS. Current Form ATS does
not require an ATS to disclose the information that would be required
under Part IV, Items 14 and 15 of proposed Form ATS-N. However, based
on the experience of the Commission and its staff, the Commission
preliminarily believes that no ATSs currently executed 5% or more of
the average daily volume in an NMS Stock as reported by an effective
transaction reporting plan for four of the preceding six calendar
months, and the Commission preliminarily believes that most--if not
all--ATSs that currently trade NMS stocks already have procedures in
place to prevent that threshold from being crossed on the ATS's system.
Historically, ATSs have crossed these thresholds very rarely, with at
most three ATSs that trade NMS stocks crossing either of the thresholds
in any given year.
If, however, an NMS Stock ATS were to cross these 5% thresholds, a
disclosure burden related to amending a Form ATS-N to complete Part IV,
Items 14 and 15 of proposed Form ATS-N would result. Because Items 14
and 15 of Part IV are tied to existing obligations that arise from
crossing the 5% thresholds pursuant to Rule 301(b)(3) and Rule
301(b)(5)(ii)(A) of Regulation ATS, respectively, the Commission
preliminarily believes that NMS Stock ATSs should already be generally
aware of the procedures they would follow if the 5% thresholds were
crossed, which should reduce the burden associated with the disclosures
that would be required under Items 14 and 15. The Commission notes that
an NMS Stock ATS would only have to respond to Part IV, Items 14 or 15
of a Form ATS-N if the NMS Stock ATS previously operated as an ATS and
triggered the applicable 5% thresholds. The Commission further notes
that NMS Stock ATSs would be less likely to have to complete Item 14 as
compared to Item 15 because Item 14 requires as an additional
precondition that the NMS Stock ATS displays orders in an NMS stock to
a person other than employees of the NMS Stock ATS. For new NMS Stock
ATSs (i.e., NMS Stock ATSs that did not previously operate as an ATS),
the NMS Stock ATS would not have been in operation for at least four
months to trigger the applicable thresholds, meaning that such NMS
Stock ATSs would only be required to complete Item 14 or 15 (or both)
in a Form ATS-N Amendment. The Commission preliminarily estimates that
completion of Part IV, Item 14 or 15 in a Form ATS-N Amendment (or in a
Form ATS-N in the case of an NMS Stock ATS that previously operated as
an ATS), would be 5 hours per item.
As explained above, the Commission notes that triggering the 5%
threshold, a precondition necessary to require completion of Part IV,
Items 14 and 15 of proposed Form ATS-N, currently occurs, and the
Commission preliminarily estimates would continue to occur, very
infrequently. Based on the review of Form ATS and Form ATS-R
disclosures by the Commission and its staff, the Commission
preliminarily estimates that 1 NMS Stock ATS would have to complete
Item 14 and 2 NMS Stock ATSs would have to complete Item 15 in any
given year. Accordingly, the Commission preliminarily estimates that
the disclosures that would be required under Part IV, Items 14 and 15
of proposed Form ATS-N would result in an aggregate initial burden of
15 hours above the current baseline.\641\
---------------------------------------------------------------------------

\641\ (Attorney at 2 hours + Compliance Manager at 1 hour + Sr.
Systems Analyst at 2 hours) x 3 NMS Stock ATSs = 15 burden hours.
---------------------------------------------------------------------------

Part IV, Item 16 of proposed Form ATS-N would require an NMS Stock
ATS to explain and provide certain aggregate platform-wide market
quality statistics that it publishes or otherwise provides to
subscribers regarding the NMS Stock ATS. Under Item 16, if the NMS
Stock ATS publishes or otherwise provides to one or more subscribers
aggregate platform-wide order flow and execution statistics of the NMS
Stock ATS that are not otherwise required disclosures under Exchange
Act Rule 605 of Regulation NMS, it would be required to: (i) List and
describe the categories of the aggregate platform-wide order flow and
execution statistics published or provided; (ii) describe the metrics
and methodology used to calculate the aggregate platform-wide order
flow and execution statistics; and (iii) attach as Exhibit 5 the most
recent disclosure of the aggregate platform-wide order flow and
execution statistics published or provided to one or more subscribers
for each category or metric as of the end of the calendar quarter. An
NMS Stock ATS would not be required to develop or publish any new
statistics for purposes of making the required disclosures under Item
16; it would only be required to make the disclosures for statistics it
already otherwise collects and publishes in the course of its
operations. Thus, NMS Stock ATSs that do not publish or otherwise
provide aggregate platform-wide market quality statistics would not
incur any additional burden due to the proposed disclosure requirements
of Item 16. For NMS Stock ATSs that do provide such statistics, Item 16
would impose an additional burden above the baseline because current
Form ATS does not require the disclosure of market quality statistics.
The Commission preliminarily estimates that preparing Part IV, Item 16
for a Form ATS-N would add 7 hours to the current baseline for an
initial operation report on current Form ATS. This would result in an
aggregate initial burden of 322 hours above the current baseline for
all NMS Stock ATSs to complete Part IV, Item 16 of proposed Form ATS-
N.\642\
---------------------------------------------------------------------------

\642\ (Attorney at 1 hour + Compliance Manager at 1 hour +
Senior Systems Analyst at 5 hours) x 46 NMS Stock ATSs = 322 burden
hours.
---------------------------------------------------------------------------

ii. Estimated Burden above the Current Baseline for a Form ATS-N, Form
ATS-N Amendment, and Notice of Cessation on Form ATS-N

A. Proposed Form ATS-N

Based on the above analysis of the estimated additional burden for
a proposed Form ATS-N, the Commission preliminarily estimates that a
proposed Form ATS-N will, on average, require an estimated 121.3 burden
hours above the current baseline for an initial operation report on
current Form ATS. This results in an estimated 141.3 hours in total,
including the current baseline.\643\ The Commission notes that ATSs
that trade NMS stocks vary in terms of their structure and the manner
in which they operate. ATSs that currently trade NMS stocks also vary
with respect to the depth and extent of their disclosures on Form ATS.
Consequently, the Commission preliminarily believes that the estimated
hour burdens herein regarding proposed Form ATS-N would likely vary
among NMS Stock ATSs, depending on such

[[Page 81105]]

factors as the extent of their current disclosures on Form ATS, the
complexity and structure of their system, and the extent of their other
broker-dealer activities.
---------------------------------------------------------------------------

\643\ (Current Baseline at 20 hours) + (Parts I and II at 0.5
hours) + (Part III at an average of 47 hours) + (Part IV at an
average of 73.5 hours) + (Access to EFFS at 0.3 hours, see infra,
Section XII.D.2.b.iv) = 141.3 burden hours. The aggregate totals by
professional, including the baseline, are estimated to be
approximately 54.8 hours for an Attorney, 43.5 hours for a
Compliance Manager, 34.5 hours for a Sr. Systems Analyst, 1 hour for
a Sr. Marketing Manager, and 7.5 hours for a Compliance Clerk.
This preliminary estimated burden for a Form ATS-N includes the
hour burden associated with completing Part III, Item 2 and Part IV,
Items 14 and 15 of proposed Form ATS-N. As explained above, however,
the Commission preliminarily believes that the majority of NMS Stock
ATSs would not be required to complete those items of the proposed
form.
---------------------------------------------------------------------------

B. Form ATS-N Amendments

As previously noted, the Commission currently estimates that ATSs
that trade NMS stocks submit 2 amendments, on average, each year.\644\
The Commission preliminarily estimates that the 46 respondents will
file 3 Form ATS-N Amendments each year, for an estimated total of 138
Form ATS-N Amendments. The Commission notes that proposed Rule
304(a)(2) of Regulation ATS will contain the same three general
categories of required amendments for proposed Form ATS-N as Rule
301(b)(2) of Regulation ATS currently requires for current Form
ATS.\645\ However, due to the greater detail and number of disclosures
required by proposed Form ATS-N, the Commission preliminarily believes
that respondents may find it necessary to file a greater number of
amendments to proposed Form ATS-N than ATSs that trade NMS stocks
currently do on Form ATS. For example, many of the disclosures related
to the broker-dealer operator of the NMS Stock ATS contained in Part
III of proposed Form ATS-N, which are not required disclosures under
current Form ATS, would require an NMS Stock ATS to file Form ATS-N
Amendments if the information provided on Form ATS-N changed.
---------------------------------------------------------------------------

\644\ See supra note 594 and accompanying text. During the
fiscal year of 2014, the Commission received 101 amendments from
ATSs that trade NMS stocks, of which there were approximately 45 at
any given time during 2014. Some ATSs that trade NMS stocks filed as
many as 3 amendments while others did not file any amendments in
2014.
\645\ See 17 CFR 242.301(b)(2).
---------------------------------------------------------------------------

As noted above, the Commission currently estimates that the hourly
burden related to an amendment to Form ATS is 6 hours.\646\ The
Commission preliminarily estimates that the average hourly burden above
this current baseline of 6 hours for each Form ATS-N Amendment would be
3 hours to accommodate the more voluminous and detailed disclosures
required by Form ATS-N as compared to Form ATS.\647\ An NMS Stock ATS
would also be required to provide a brief narrative description of the
amendment at the top of Form ATS-N and a redline(s) showing changes to
Part III and/or Part IV of proposed Form ATS-N.\648\ The Commission
preliminarily estimates that this requirement would add an additional
burden of 0.5 hours to draft the summary and prepare the redline
version(s) showing the amendments the NMS Stock ATS is making.\649\
This would result in a total estimated hourly burden, including the
baseline, of 9.5 hours for a Form ATS-N Amendment,\650\ and an
aggregate annual burden on all NMS Stock ATSs of 1,311 hours.\651\ The
Commission notes that the frequency and scope of Form ATS-N Amendments
would likely vary, similar to amendments to Form ATS, depending on
whether the NMS Stock ATS is implementing a significant change
requiring substantial revisions to its Form ATS-N or whether the
changes are less significant, such as updating the address of the NMS
Stock ATS. Some NMS Stock ATSs might not file any Form ATS-N Amendments
in a given year, while others--such as NMS Stock ATSs that publish or
otherwise provide to one or more subscribers aggregate platform-wide
market quality statistics that would be covered by Part IV, Item 16 of
proposed Form ATS-N \652\--may file several Form ATS-N Amendments per
year.
---------------------------------------------------------------------------

\646\ See supra note 595 and accompanying text.
\647\ Attorney at 1 hour + Compliance Manager at 2 hours = 3
burden hours above the baseline.
\648\ See Exhibits 3A and 4A to proposed Form ATS-N.
\649\ Compliance Clerk at 0.5 hours. The Commission notes that
most word processing software provides for this functionality.
\650\ Attorney at 5.5 hours + Compliance Manager at 2 hours +
Compliance Clerk at 2 hours = 9.5 burden hours.
\651\ 138 amendments per year x 9.5 hours = 1,311 aggregate
burden hours. The Commission further estimates that gaining access
to EFFS for one additional person on an annual basis would require
0.15 burden hours for each NMS Stock ATS, or 7 hours annually for
all NMS Stock ATSs (46 x 0.15 hours = 6.9 hours). Therefore, the
aggregate burden hours equals 1,317.9 hours (1,311 hours + 6.9
hours).
\652\ See supra Section VIII.P.
---------------------------------------------------------------------------

C. Notice of Cessation on Proposed Form ATS-N

As previously noted, from 2012 through the first half of 2015,
there have been an average of 6 ATSs that trade NMS stocks that cease
operations each year.\653\ Although it is unclear how many NMS Stock
ATSs might cease operations each year going forward, for purposes of
making a PRA burden estimate, the Commission is estimating that this
average would generally remain the same for NMS Stock ATSs using Form
ATS-N as economic conditions, business reasons, and other factors may
cause some NMS Stock ATSs to cease operations. Accordingly, the
Commission preliminarily estimates that 6 respondents may to file a
cessation of operation report on proposed Form ATS-N each year. The
Commission preliminarily believes that the burden for filing a
cessation of operation report on proposed Form ATS-N will not be
significantly greater than that for filing a cessation of operation
report on current Form ATS because proposed Form ATS-N does not contain
any additional requirements for a cessation of operation report. For
both Form ATS and proposed Form ATS-N, the primary requirement is to
check the appropriate box indicating that the ATS is ceasing
operations. Accordingly, the Commission preliminarily estimates that
the average compliance burden for each response would be 2 hours.\654\
This would result in an aggregate annual burden of 12 hours for NMS
Stock ATSs that choose to cease operations and submit a cessation of
operation report on Form ATS-N.\655\
---------------------------------------------------------------------------

\653\ See supra Section XII.C.
\654\ Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 4
burden hours. See supra note 597, and accompanying text.
\655\ 2 burden hours x 6 NMS Stock ATSs = 12 aggregate annual
burden hours.
---------------------------------------------------------------------------

iii. ATSs That Transact in Both NMS and Non-NMS Stocks
Under proposed Rule 301(b)(2)(viii) of Regulation ATS, an ATS that
effects trades in both NMS stocks and non-NMS stocks would have to
submit a Form ATS-N with respect to its trading of NMS stocks and a
revised Form ATS that removes discussion of those aspects of the ATS
related to the trading of NMS stocks. Under the proposed amendments to
Rule 301(b)(9), an ATS that effects trades in both NMS stocks and non-
NMS stocks would also be required to file separate Forms ATS-R--one
disclosing trading volume in NMS stocks and one disclosing trading
volume in non-NMS stocks. Therefore, ATSs that are subject to these
proposed requirements would incur: (1) the above baseline burdens
related to filing a Form ATS-N and Form ATS-N Amendments; \656\ (2) the
additional burden of filing a new Form ATS to only disclose information
related to non-NMS stock trading activity on the ATS; \657\ and (3) the
burden of completing and filing two Forms ATS-R.\658\
---------------------------------------------------------------------------

\656\ See supra Sections XII.D.2.b.ii.A and B.
\657\ See supra Section XII.D.2.a and accompanying text for the
baseline estimates for submitting an IOR for Form ATS and amendments
to Form ATS.
\658\ See supra note 598 and accompanying text for the baseline
estimate for submitting a Form ATS-R.
---------------------------------------------------------------------------

Accordingly, the Commission estimates that the total hourly burden
for an ATS to separately file a Form ATS for its non-NMS stock trading

[[Page 81106]]

activity and Form ATS-N for its NMS stock trading activity would be 20
burden hours for the initial operation report on Form ATS for its non-
NMS stock trading activity and 141.3 burden hours for its Form ATS-N.
The Commission notes that the estimated hour burden related to the
initial operation report submission on Form ATS for non-NMS stock
trading activity might be less than the estimated 20 burden hours, as,
to the extent the NMS Stock ATS in question is currently operating, the
description of its non-NMS stock trading activity should already be
contained in its existing Form ATS.\659\ As previously noted, there are
currently 11 ATSs that trade, or have indicated that they expect to
trade in Exhibit B to their Form ATS, both NMS stocks and non-NMS
stocks on the ATS. Consequently, the Commission preliminarily estimates
that the aggregate initial burden on ATSs to file these separate forms
would be 1,774.3 hours, and the aggregate annual burden for filing
amendments to both forms would be 445.5 hours.\660\
---------------------------------------------------------------------------

\659\ The hourly burden related to amendments to its Form ATS
and Form ATS-N would remain unchanged: 6 estimated burden hours for
amendments to Form ATS, and 9.5 estimated burden hours for Form ATS-
N Amendments. See supra notes 646-650 and accompanying text.
\660\ (Form ATS initial operation report at 20 hours + Form ATS-
N at 141.3 hours) x 11 ATSs = 1,774.3 aggregate burden hours. Using
the estimates of 2 amendments each year to Form ATS, see supra
Section XII.D.2.a, and 3 amendments each year to Form ATS-N, see
supra Section XII.D.2.b.ii.B, the ongoing aggregate burden for these
bifurcated ATSs would be ((2 Form ATS Amendments per year x 6 hours)
+ (3 Form ATS-N Amendments per year x 9.5 hours)) x 11 respondents =
445.5 aggregate ongoing burden hours per year relating to
amendments.
---------------------------------------------------------------------------

The Commission estimates that the total burden for completing and
filing two Form ATS-R would be 4.5 hours, which is 0.5 hours \661\
above the current baseline burden of 4 hours for filing a Form ATS-
R.\662\ The Commission preliminarily believes that ATSs required to
file two Forms ATS-R would incur an additional burden above the
baseline because they would be required to divide their trading
statistics between two forms and file each form separately. The
Commission does not believe that those ATSs would incur any additional
burden to collect the required information because they currently
assemble that information when preparing their current Form ATS-R
filings. As previously noted, there are currently 11 ATSs that trade,
or have indicated that they expect to trade in Exhibit B to their Form
ATS, both NMS stocks and non-NMS stocks on the ATS; those ATSs would be
required to file a pair of Forms ATS-R four times annually.
Consequently, the Commission estimates that the aggregate annual burden
of filing two Forms ATS-R for those ATS that effect transactions in
both NMS stocks and non-NMS stocks would be 198 hours.\663\
---------------------------------------------------------------------------

\661\ Attorney at .5 hours = .5 burden hours.
\662\ See supra note 598 and accompanying text for the baseline
estimate for submitting a Form ATS-R.
\663\ ((Attorney at 3.5 hours + Compliance Clerk at 1 hour) x (4
filings annually)) x 11 ATSs = 198 aggregate burden hours.
---------------------------------------------------------------------------

iv. Access to EFFS
The Commission proposes that Form ATS-N would be submitted
electronically in a structured format and require an electronic
signature.\664\ Currently, ATSs that transact in NMS stock do not have
the ability to access and submit an electronic form. The proposed
amendments to Regulation ATS would require that every NMS Stock ATS
have the ability to submit forms electronically with an electronic
signature. The Commission's proposal contemplates the use of an online
filing system, the EFFS. Based on the widespread use and availability
of the Internet, the Commission preliminarily believes that filing Form
ATS-N in an electronic format would be less burdensome and a more
efficient filing process for NMS Stock ATSs and the Commission, as it
is likely to be less expensive and cumbersome than mailing and filing
paper forms to the Commission.
---------------------------------------------------------------------------

\664\ The Commission notes that all estimated burden hours with
regard to completing Parts I-V of proposed Form ATS-N, which are
explained above and herein, include the estimated burden associated
with the proposed requirement that NMS Stock ATSs file proposed Form
ATS-N in a structured format, including narrative responses that are
block-text tagged.
---------------------------------------------------------------------------

To access EFFS, an NMS Stock ATS would have to submit to the
Commission an External Account User Application (``EAUA'') to register
each individual at the NMS Stock ATS who would access the EFFS system
on behalf of the NMS Stock ATS. The Commission is including in its
burden estimates the burden for completing the EAUA for each individual
at an NMS Stock ATS who would request access to EFFS. The Commission
estimates that initially, on average, two individuals at each NMS Stock
ATS would request access to EFFS through the EAUA, and each EAUA would
take 0.15 hours to complete and submit. Therefore, each NMS Stock ATS
would require a total of 0.3 hours to complete the requisite
EAUAs,\665\ or approximately 13.8 hours for all NMS Stock ATSs.\666\
The Commission also preliminarily estimates that annually, on average,
one individual at each NMS Stock ATS will request access to EFFS
through the EAUA.\667\ Therefore, the ongoing burden to complete the
EAUA would be 0.15 hours annually for each NMS Stock ATS,\668\ or
approximately 6.9 hours annually for all NMS Stock ATSs.\669\
---------------------------------------------------------------------------

\665\ 0.15 hours per EAUA x 2 individuals = 0.3 burden hours per
NMS Stock ATS. These estimates are based on the Commission and its
staff's experience with EFFS and EAUAs pursuant to Rule 19b-4 under
the Exchange Act. The 0.3 hours represents the time spent by two
attorneys. The Commission believes it is appropriate to estimate
that, on average, each NMS Stock ATS will submit two EAUAs
initially.
\666\ 0.30 hours x 46 NMS Stock ATSs = 13.8 burden hours.
\667\ The Commission estimates that annually, on average, one
individual at each NMS Stock ATS will request access to EFFS through
EAUA to account for the possibility that an individual who
previously had access to EFFS may no longer be designated as needing
such access.
\668\ 0.15 hours per EAUA x 1 individual = 0.15 burden hours.
\669\ 0.15 hours x 46 NMS Stock ATSs = 6.9 burden hours.
---------------------------------------------------------------------------

In addition, the Commission estimates that each NMS Stock ATS will
designate 2 individuals to sign Form ATS-N each year. An individual
signing a Form ATS-N must obtain a digital ID, at the cost of
approximately $25 each year. Therefore, each NMS Stock ATS would pay
approximately $50 annually to obtain digital IDs for the individuals
with access to EFFS for purposes of signing Form ATS-N,\670\ or
approximately $2,300 for all NMS Stock ATSs.\671\
---------------------------------------------------------------------------

\670\ $25 per digital ID x 2 individuals = $50 per NMS Stock
ATS.
\671\ $50 per NMS Stock ATS x 46 NMS Stock ATSs = $2,300.
---------------------------------------------------------------------------

v. Public Posting on NMS Stock ATS's Web Site
Proposed Rule 304(b)(3) would require each NMS Stock ATS to make
public via posting on the NMS Stock ATS's Web site a direct URL
hyperlink to the Commission's Web site that contains the documents
enumerated in proposed Rule 304(b)(2). The Commission preliminarily
estimates that each NMS Stock ATS would incur an initial, one-time
burden to program and configure its Web site in order to post the
required direct URL hyperlink pursuant to proposed Rule 304(b)(3). The
Commission preliminarily estimates that this initial, one-time burden
would be approximately 2 hours.\672\ Because the Commission
preliminarily believes that many broker-dealer operators currently
maintain a Web site for their NMS Stock ATSs, the Commission
preliminarily estimates that the aggregate initial, one-time

[[Page 81107]]

burden would be approximately 92 hours.\673\
---------------------------------------------------------------------------

\672\ Senior Systems Analyst at 2 burden hours.
\673\ Senior Systems Analyst at 2 hours x 46 NMS Stock ATSs = 92
burden hours.
---------------------------------------------------------------------------

vi. Recordkeeping Requirements
As noted above, the Commission proposes to amend Rule 303(a)(2)(ii)
\674\ of Regulation ATS to provide that all ATSs must preserve copies
of all reports filed pursuant to proposed Rule 304 for the life of the
enterprise and any successor enterprise.
---------------------------------------------------------------------------

\674\ 17 CFR 242.303(a)(2)(ii).
---------------------------------------------------------------------------

Rule 303(a)(ii) currently requires an ATS to preserve copies of
reports filed pursuant to Rule 301(b)(2), which include all Form ATS
filings, for the life of the enterprise and any successor enterprise.
Because NMS Stock ATSs that solely trade NMS stocks would be filing
Form ATS-N in lieu of Form ATS under this proposal, the Commission
believes that the proposed amendment to Rule 303(a)(ii) would not
result in any burden for those ATSs that is not already accounted for
under the current baseline burden estimate for Rule 303.\675\ For the
11 ATSs that trade, or have indicated in Exhibit B to their Form ATS
that they expect to trade both NMS stocks and non-NMS stocks on the
ATS, the Commission preliminarily estimates that the burden above the
current baseline estimate for preserving records relating to compliance
with the proposed amendment to Rule 303(a)(ii) would be approximately 3
hours annually per ATS for a total annual burden above the current
baseline burden estimate of 33 hours for all respondents.\676\
Accordingly, the Commission proposes to modify the current PRA burden
for Rule 303 to account for the increased burden on ATSs that trade
both NMS stocks and non-NMS stocks.
---------------------------------------------------------------------------

\675\ To comply with all of the record preservation requirements
of Rule 303, the Commission currently estimates that ATSs spend
approximately 1,380 hours per year. See Rule 303 PRA Update, supra
note 580, 78 FR 43943. At an average cost per burden hour of
$104.20, the resultant total related cost of compliance is $143,796
per year (1,380 burden hours x $104.20/hour). See id.
\676\ 3 additional burden hours x 11 ATSs = 33 aggregate burden
hours.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

All collections of information pursuant to the proposed rules would
be mandatory for entities that meet the definition of NMS Stock ATS.

F. Confidentiality of Responses to Collection of Information

With respect to the proposed amendments to Rules 301(b)(2)(viii)
and 304 of Regulation ATS, including proposed Form ATS-N, the
Commission would make publicly available on its Web site all Forms ATS-
N upon being declared effective. The Commission would also make
publicly available on its Web site all properly filed Form ATS-N
Amendments, and notices of cessation on Form ATS-N. The Commission
would not make publicly available on its Web site Forms ATS-N that the
Commission has declared ineffective, but these forms would be available
for examination by the Commission and its staff, state securities
authorities, and self-regulatory organizations. The proposed Form ATS
amendments would also require each NMS Stock ATS that has a Web site to
post on the NMS Stock ATS's Web site a direct URL hyperlink to the
Commission's Web site that contains the documents enumerated in
proposed Rule 304(b)(2). The collection of information required by the
proposed amendments to Rules 301(b)(10), 303(a)(1)(v), 301(b)(9), and
303(a)(2)(ii) would not be made public, but would be used for
regulatory purposes by the Commission and the SRO(s) of which the ATS's
broker-dealer operator is a member. In Part III, Item 10 of Form ATS-N,
however, NMS Stock ATSs would be required to describe the written
safeguards and written procedures to ensure confidential treatment of
trading information that would be required under the proposed amendment
to Rule 301(b)(10); as explained above, the Commission would make
certain Form ATS-N filings publicly available. To the extent that the
Commission receives confidential information pursuant to this
collection of information, such information would be kept confidential,
subject to the provisions of applicable law.

G. Retention Period for Recordkeeping Requirements

All reports required to be made under proposed Rules
301(b)(2)(viii), 301(b)(9), and 304 of Regulation ATS, including
Proposed Form ATS-N, would be required to be preserved during the life
of the enterprise and any successor enterprise, pursuant to the
proposed amendment to Rule 303(a)(2) of Regulation ATS.
ATSs would be required to preserve a copy of their written
safeguards and written procedures to protect subscribers' confidential
trading information under proposed Rule 301(b)(10) of Regulation ATS
for not less than 3 years, the first 2 years in an easily accessible
place, pursuant to proposed Rule 303(a)(1)(v) of Regulation ATS.

H. Request for Comments

Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comment to:
1. Evaluate whether the proposed collection of information is
necessary for the proper performance of our functions, including
whether the information shall have practical utility;
2. Evaluate the accuracy of our estimate of the burden of the
proposed collection of information;
3. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
4. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.

Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090, with reference to File Number S7-23-15.
Requests for materials submitted to OMB by the Commission with regard
to this collection of information should be in writing, with reference
to File Number S7-23-15 and be submitted to the Securities and Exchange
Commission, Office of FOIA/PA Services, 100 F Street NE., Washington,
DC 20549-2736. As OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication, a
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days of publication.

XIII. Economic Analysis

A. Background

The Commission is concerned that the current regulatory
requirements relating to operational transparency for NMS Stock ATSs
may no longer fully meet the goals of furthering the public interest
and protecting investors. The market for NMS stock execution services
consists of registered national securities exchanges, NMS Stock ATSs,
and non-ATS broker-dealers that effect OTC transactions. As of the
second quarter of 2015, NMS Stock ATSs account for approximately 15.4%
of the total dollar volume in NMS stocks and compete with, and operate
similar to, registered national securities exchanges.

[[Page 81108]]

However, relative to registered national securities exchanges, there is
limited and differential information publicly available to market
participants about how NMS Stock ATSs operate, including how orders
interact, match, and execute, and the activities of the broker-dealer
operators and their affiliates. Not only is there a lack of consistency
with respect to the quality of information that market participants
receive from different NMS Stock ATSs, there are also differences due
to the fact that for a given NMS Stock ATS, some subscribers might have
more detailed information relative to other subscribers about how
orders interact, match, and execute on the ATS.
Currently, NMS Stock ATSs provide the Commission with notice of
their initial operations and changes to their operations on Form ATS.
Although some NMS Stock ATSs voluntarily make their Form ATS publicly
available on their Web site, they are not required to do so, as Form
ATS is ``deemed confidential when filed.'' \677\ In light of this,
subscribers to these NMS Stock ATSs may have more information about the
operations of these NMS Stock ATSs relative to subscribers to NMS Stock
ATSs that do not make their Form ATS public. Moreover, an NMS Stock ATS
may also make different information available to certain market
participants about its operations than it does to other market
participants. The Commission is concerned that this limited and
differential level of operational transparency around NMS Stock ATSs
may impede market participants' ability to adequately discern how their
orders interact, match, and execute on NMS Stock ATSs, or fully
understand the activities of an NMS Stock ATS's broker dealer-operator
and its affiliates, and the conflicts that may arise from such
activities. This could thereby impede a market participant's ability to
evaluate whether submitting order flow to a particular NMS Stock ATS
aligns with its business interests and would help it achieve its
investing or trading objectives. In addition, the Commission is
concerned that the current lack of transparency around the potential
conflicts of interest that arise from the activities of the broker-
dealer operator and its affiliates hinders market participants'
abilities to protect their interests when doing business on the NMS
Stock ATS.
---------------------------------------------------------------------------

\677\ See 17 CFR 242.301(b)(2)(vii).
---------------------------------------------------------------------------

The Commission is concerned that the current market for NMS stock
execution services does not address the problems described above.
Rather, when demanding services that are typically offered by NMS Stock
ATSs--particularly, dark pools--some market participants trade off the
less stringent transparency requirements applicable to NMS Stock ATSs,
as compared to national securities exchanges, in exchange for obtaining
some perceived advantages of trading on these venues, such as keeping
their orders dark prior to execution.\678\ Furthermore, the difficulty
involved in comparing the operations and execution quality of an NMS
Stock ATS to the operations and execution quality of national
securities exchanges or other NMS Stock ATSs may limit the ability of
market participants to judge whether that tradeoff actually benefits
either themselves or their customers when sending orders to a
particular NMS Stock ATS. For example, as noted above, a certain
category of subscribers may have access to services offered by an NMS
Stock ATS that are not offered to another category of subscribers, but
subscribers that fall under the latter category may not be fully aware
of any potential disadvantages when submitting orders to that NMS Stock
ATS.\679\ Furthermore, the Commission preliminarily believes that the
NMS Stock ATS would generally not have a strong incentive to fully
reveal how it operates to either category of subscriber under the
current regulatory regime.
---------------------------------------------------------------------------

\678\ See supra notes 123-126 and accompanying text.
\679\ See supra Section VII.B.4.
---------------------------------------------------------------------------

The Commission is proposing to amend Regulation ATS to adopt new
Rule 304, which would provide a process for the Commission to determine
if an NMS Stock ATS qualifies for the exemption from the definition of
``exchange'' pursuant to Rule 3a1-1(a)(2) and declare an NMS Stock
ATS's Forms ATS-N either effective or ineffective. The proposal would
also provide a process for the Commission to suspend, limit, or revoke
an NMS Stock ATS's exemption from the definition of ``exchange'' under
certain circumstances. The Commission is also proposing to amend
Regulation ATS to require NMS Stock ATSs to file Form ATS-N, which
would require NMS Stock ATSs to provide detailed disclosures about
their trading operations and the activities of their broker-dealer
operators and their affiliates. The Commission is proposing to make
certain Form ATS-N filings public by posting them on the Commission's
Web site and requiring each NMS Stock ATS that has a Web site to post
on the NMS Stock ATS's Web site a direct URL hyperlink to the
Commission's Web site that contains the documents enumerated in
proposed Rule 304(b)(2). The Commission is also proposing to amend Rule
301(b)(10) of Regulation ATS to require that all ATSs have their
procedures and safeguards to protect subscribers' confidential trading
information in writing. The proposed amendments seek to improve and
make more consistent the information available to market participants
regarding different NMS Stock ATSs' operations and the activities of
their broker-dealer operators and their affiliates. The proposed
amendments also aim to make the level and type of disclosures more
consistent between NMS Stock ATSs. The Commission preliminarily
believes that making publicly available a more consistent level of
information to all market participants would help them to better
evaluate NMS Stock ATSs as potential routing destinations for their
orders.
The Commission is sensitive to the economic consequences and
effects, including the costs and benefits, of its rules. The following
economic analysis identifies and considers the costs and benefits--
including the effects on efficiency, competition, and capital
formation--that may result from the amendments to Regulation ATS being
proposed. These costs and benefits are discussed below and have
informed the policy choices described throughout this release.\680\
---------------------------------------------------------------------------

\680\ Exchange Act Section 3(f) requires the Commission, when it
is engaged in rulemaking pursuant to the Exchange Act and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition and capital formation. See 15 U.S.C. 78c(f). In
addition, Exchange Act Section 23(a)(2) requires the Commission,
when making rules pursuant to the Exchange Act, to consider among
other matters the impact that any such rule would have on
competition and not to adopt any rule that would impose a burden on
competition that is not necessary or appropriate in furtherance of
the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

B. Baseline

The enhanced transparency and oversight of NMS Stock ATSs that the
Commission preliminarily believes would result from the proposed
amendments to Regulation ATS would increase the amount of information
and improve the quality of information available to all market
participants about the operations of NMS Stock ATSs and the activities
of their broker-dealer operators and their affiliates. As a result,
this information should better inform market participants making
decisions about which trading venue to route their orders to. The
proposed amendments would also affect the

[[Page 81109]]

competitive dynamics between trading venues that compete for order
flow. The numerous parties that would be affected by the proposed
amendments include: Existing NMS Stock ATSs; potential new NMS Stock
ATSs; current and potential subscribers of NMS Stock ATSs; broker-
dealers that are affiliated with NMS Stock ATSs and their customers;
non-ATS affiliated broker-dealers and their customers; broker-dealers
that do not operate NMS Stock ATSs but send order flow to NMS Stock
ATSs; institutional investors that periodically transact large trades
on NMS Stock ATSs; other persons that seek to effect transactions in
NMS stocks on ATSs; and registered national securities exchanges that
compete for order flow with NMS Stock ATSs.
The baseline against which economic costs and benefits, as well as
the impact of the proposed amendments on efficiency, competition, and
capital formation, are measured is the current market and regulatory
framework for trading NMS stocks. The baseline, discussed in further
detail below, includes statistics on the number of NMS Stock ATSs;
current reporting requirements for NMS Stock ATSs; the lack of public
disclosure of NMS Stock ATSs' operations, as well as disparate levels
of information available to market participants about NMS Stock ATSs'
operations and the activities of their broker-dealer operators and
their affiliates; and the competitive environment between registered
national securities exchanges and NMS Stock ATSs, among NMS Stock ATSs,
and between broker-dealers that operate NMS Stock ATSs and broker-
dealers that do not operate NMS Stock ATSs.
1. Current NMS Stock ATSs
In a concept release on equity market structure in 2010, the
Commission stated that in the third quarter of 2009 there were 37 dark
pools and ECNs that traded NMS stocks, and that they accounted for
18.7% of total NMS share volume.\681\ From mid-May to mid-September
2014, the trading volume of ATSs accounted for approximately 18% of the
total dollar volume in NMS stocks.\682\ During the second quarter in
2015, 38 ATSs traded NMS stocks \683\ and these 38 ATSs accounted for
approximately 59 billion shares traded in NMS stocks (approximately
$2.5 trillion in dollar volume), representing approximately 15.0% of
total share trading volume (15.4% of total dollar trading volume) on
all registered national securities exchanges, ATSs, and non-ATS OTC
trading venues in the second quarter of 2015.\684\ There have been
several changes in the market for NMS stocks execution services that
may explain the volatility in fraction of share and dollar volume
executed on NMS Stock ATSs since 2009. First, two ECNs have now
registered as national securities exchanges.\685\ Second, there has
been a rise in the number of ATSs operating as dark pools. Since the
third quarter of 2009, the number of ATSs operating as dark pools has
increased from 32 \686\ to more than 40 today.\687\ In 2009, dark pools
accounted for 7.9% of NMS share volume \688\ and by the second quarter
of 2015, they accounted for 14.9% of NMS share volume.\689\ In summary,
in recent years, the number of NMS Stock ATSs has increased, and the
percentage of NMS stocks executed in dark pools has also increased.
---------------------------------------------------------------------------

\681\ The Commission used data from the third quarter of 2009.
Of these 37 ATSs that traded NMS stocks, 32 were classified as dark
pools and 5 were classified as ECNs. These dark pools accounted for
7.9% of total NMS share volume and the ECNs accounted for 10.8% of
total NMS share volume. Of the 10.8% attributable to ECNs, 9.8% was
attributable to two ECNs that were operated by Direct Edge, which
subsequently registered as national securities exchanges. See 2010
Equity Market Structure Release, supra note 124, at 3598-3599.
\682\ See SCI Adopting Release, supra note 17, at 72266 n.148
and accompanying text and n.150.
\683\ See infra Table 1, ``NMS Stock ATSs Ranked by Dollar
Trading Volume--March 30, 2015 to June 26, 2015.''
\684\ See infra Table 1 ``NMS Stock ATSs Ranked by Dollar
Trading Volume--March 30, 2015 to June 26, 2015.'' Total dollar
trading volume on all exchanges and off-exchange trading in the
second quarter of 2015 was approximately $16.3 trillion and
approximately 397 billion shares. See id.
\685\ EDGA Exchange, Inc. and EDGX Exchange, Inc. (f/k/a Direct
Edge ECN) previously operated as ECNs and are now registered
national securities exchanges. See In the Matter of the Applications
of EDGX Exchange, Inc., and EDGA Exchange, Inc. for Registration as
National Securities Exchanges: Findings, Opinion, and Order of the
Commission, Securities Exchange Act Release No. 61698 (March 12,
2010), 75 FR 13151 (March 18, 2010) (File Nos. 10-194 and 10-196).
Prior to 2009, there were other ECNs that also became national
securities exchanges. BATS Exchange Inc. (f/k/a BATS ECN) previously
operated as an ECN and is now a registered national securities
exchange. See In the Matter of the Application of BATS Exchange Inc.
for Registration as National Securities Exchange: Findings, Opinion,
and Order of the Commission, Securities Exchange Act Release No.
58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-
198). NYSE Arca, Inc., (f/k/a Archipelago) previously operated as an
ECN and was acquired by the New York Stock Exchange LLC. See Order
Granting Approval of Proposed Rule Change and Amendment Nos. 1, 3,
and 5 Thereto and Notice of Filing and Order Granting Accelerated
Approval to Amendment Nos. 6 and 8 Relating to the NYSE's Business
Combination With Archipelago Holdings, Inc., Securities Exchange Act
Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006)
(SR-NYSE-2005-77). Finally, The Nasdaq Stock Market LLC, prior to
becoming a national securities exchange, acquired Brut ECN and INET
ECN. See In the Matter of the Application of the Nasdaq Stock Market
LLC for Registration as National Securities Exchange: Findings,
Opinion, and Order of the Commission, Securities Exchange Act
Release No. 53128 (January 13, 2006), 71 FR 3550, n.137 (January 23,
2006) (File No. 10-131).
\686\ See supra note 133 and accompanying text.
\687\ See supra note 134 and accompanying text.
\688\ See supra note 135 and accompanying text.
\689\ See infra Table 1 ``NMS Stock ATSs Ranked by Dollar
Trading Volume--March 30, 2015 to June 26, 2015'' and based on data
compiled from Forms ATS submitted to the Commission as of the end of
the second quarter of 2015.
---------------------------------------------------------------------------

2. Current Reporting Requirements for NMS Stock ATSs
Even though ATSs directly compete for order flow in NMS stocks with
national securities exchanges, ATSs are exempt from the definition of
``exchange'' and therefore are not required to register as national
securities exchanges with the Commission. An ATS qualifies for an
exemption from the definition of ``exchange'' provided by Exchange Act
Rule 3a1-1(a)(2) on the condition that it complies with Regulation ATS,
including registering as a broker-dealer, which includes joining a
self-regulatory organization, such as FINRA. Thus, ATSs can collect and
execute orders in securities electronically without registering as a
national securities exchanges under Section 6 of the Exchange Act.
A broker-dealer can become an ATS by filing an initial operation
report on Form ATS at least 20 days before commencing operations. Form
ATS requires, among other things, that the 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; the
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 execution; and trade reporting and clearance and settlement
of trades on the ATS. Form ATS is not approved by the Commission; \690\
rather, it provides the Commission with notice of an ATS's operations
prior to commencing operations.\691\
---------------------------------------------------------------------------

\690\ See supra Section II.B.
\691\ See Instruction A.1 to Form ATS.
---------------------------------------------------------------------------

An ATS must notify the Commission of any changes in its operations
by filing an amendment to its Form ATS initial operation report under
three circumstances. First, an ATS must amend Form ATS at least 20 days
prior to implementing any material change to the operation of the
ATS.\692\ Second, if any information contained in the initial operation
report becomes inaccurate and has not already been reported to the

[[Page 81110]]

Commission as an amendment, the ATS must file an amendment on Form ATS
within 30 calendar days after the end of each calendar quarter.\693\
Third, an ATS must also promptly file an amendment on Form ATS
correcting information that it previously reported on Form ATS after
discovery that the information was inaccurate when filed.\694\
Regulation ATS also requires ATSs to report certain information about
transactions on the ATS and information about certain activities on
Form ATS-R within 30 days after the end of each calendar quarter.\695\
Form ATS-R requires that ATSs report both total unit volume and dollar
volume of their transactions over the quarter, as well as a list of all
subscribers that were participants during the quarter and a list of all
securities traded on the ATS at any time during the quarter.\696\ In
addition to the reporting requirements of Form ATS and Form ATS-R,
there are other conditions under Regulation ATS, including those that
address order display and access; fees and fair access; capacity,
integrity, and security of automated systems; examinations,
inspections, and investigations; recordkeeping; procedures to protect
subscribers' confidential treatment of trading information; and
limitations on the name of the ATS.\697\
---------------------------------------------------------------------------

\692\ See 17 CFR 242.301(b)(2)(ii).
\693\ See 17 CFR 242.301(b)(2)(iii).
\694\ See 17 CFR 242.301(b)(2)(iv).
\695\ See 17 CFR 242.301(b)(9).
\696\ See Form ATS-R.
\697\ See supra Section II.B; see also 17 CFR 242.301(b).
---------------------------------------------------------------------------

All ATSs are currently members of FINRA and must therefore comply
with all FINRA rules applicable to broker-dealers. FINRA rules require
ATSs to report transaction volume. For instance, FINRA Rule 4552
requires each ATS to report to FINRA aggregate weekly trading volume on
a security-by-security basis.\698\ FINRA publishes the information
regarding NMS stocks in the S&P500 Index or the Russell 1000 Index and
certain exchange-traded products on a two-week delayed basis, and the
information on all other NMS stocks and OTC equity securities on a
four-week delayed basis.\699\ In addition to FINRA Rule 4552, other
rules pertaining to the operations of NMS Stock ATSs include FINRA
Rules 6160 and 6170, which pertain to the use of a Market Participant
Identifier (``MPID'') for trade reporting purposes.\700\
---------------------------------------------------------------------------

\698\ See FINRA Rule 4552.
\699\ See id.
\700\ See FINRA Rules 6160 and 6170.
---------------------------------------------------------------------------

3. Lack of Public Disclosure of NMS Stock ATS Operations and the
Activities of the Broker-Dealer Operator and the Broker-Dealer
Operator's Affiliates
Regulation ATS states that information on Form ATS is ``deemed
confidential when filed.'' \701\ In the Regulation ATS Adopting
Release, the Commission stated that preserving confidentiality of
information on Form ATS would provide ATSs ``with the necessary comfort
to make full and complete filings,'' and noted that information
required on Form ATS ``may be proprietary and disclosure of such
information could place alternative trading systems in a
disadvantageous competitive position.'' \702\
---------------------------------------------------------------------------

\701\ See 17 CFR 242.301(b)(2)(vii). While FINRA Rule 4552
requires dissemination of aggregate weekly trading volume on the ATS
by stock, this data does not reveal any information about the ATSs
trading operations. Some ATSs such as IEX Trading have voluntarily
made public information about order size and fill rates, as well as
volume that is matched and routed, on a monthly basis. See, e.g.,
IEX ATS Statistics, https://www.iextrading.com/stats/.
\702\ See Regulation ATS Adopting Release, supra note 7, at
70864.
---------------------------------------------------------------------------

Although the Commission does not require information provided on
Form ATS to be made publicly available, the Commission has observed
that some NMS Stock ATSs voluntarily make publicly available their
Forms ATS.\703\ However, even when ATSs publicly disclose their Form
ATS filings, it is often not easy for market participants to
systematically compare one NMS Stock ATS to another based on these
disclosures because the level of detail and the format in which it is
presented on these Form ATSs may vary among the NMS Stock ATSs. In
addition, the Commission notes that some of these NMS Stock ATSs do not
make public the full version of the Form ATS that has been filed with
the Commission. Also, NMS Stock ATSs are under no legal obligation to
keep current a Form ATS they have made publicly available, so market
participants cannot immediately confirm whether a publicly posted Form
ATS is the most recent filing of the NMS Stock ATS.
---------------------------------------------------------------------------

\703\ See supra note 156.
---------------------------------------------------------------------------

Furthermore, different information is made available to different
market participants regarding the operations of NMS Stock ATSs and the
activities of NMS Stock ATSs' broker-dealer operators and their
affiliates. NMS Stock ATSs that either voluntarily make their Form ATS
publicly available, or publish summary information of their operations,
may provide to market participants more information about their
operations than NMS Stock ATSs that do not make their Forms ATS or
information about their operations publicly available. Furthermore,
subscribers to an NMS Stock ATS may have greater access to information
about the NMS Stock ATS than other market participants, including the
NMS Stock ATS's subscriber manual and access to other subscriber
quotes.
NMS Stock ATSs also disclose some execution quality metrics.
Exchange Act Rule 605(a) requires every market center, including ATSs,
to make publicly available for each calendar month a report containing
standardized data on the covered orders in NMS stocks that it receives
for execution from any market participant.\704\ Data on execution
quality required under Exchange Act Rule 605(a) includes order sizes,
execution sizes, effective spreads, price improvement, and quarterly
volume of shares traded. As such, market participants have access to
actual market quality statistics of execution quality on NMS Stock
ATSs. The Commission recognizes that some NMS Stock ATSs may publish or
otherwise disclose to subscribers market quality statistics that may be
useful to those subscribers in addition to what is currently required
by Exchange Act Rule 605. However, the Commission does not believe that
such market quality statistics are standardized in terms of how they
are calculated, and it does not know how much information subscribers
that receive these market quality statistics have about how the NMS
Stock ATS calculates the statistics. The Commission preliminarily
believes that some subscribers may have access to more information
about a given NMS Stock ATS than other ATSs, and also may have more
information about that NMS Stock ATS than non-subscribers.
---------------------------------------------------------------------------

\704\ A covered order shall mean any market order or any limit
order (including immediate-or-cancel orders) received by a market
center during regular trading hours at a time when a consolidated
best bid and offer is being disseminated, and, if executed, is
executed during regular trading hours, but shall exclude any order
for which the customer requests special handling for execution,
including, but not limited to, orders to be executed at a market
opening price or a market closing price, orders submitted with stop
prices, orders to be executed only at their full size, orders to be
executed on a particular type of tick or bid, orders submitted on a
``not held'' basis, orders for other than regular settlement, and
orders to be executed at prices unrelated to the market price of the
security at the time of execution. See Rule 605(a)(8).
---------------------------------------------------------------------------

The differences in information that certain subscribers have about
an NMS Stock ATS's operations may be manifested through channels other
than having differential access to Form ATS, an NMS Stock ATS's
subscriber manual, or being granted access to certain market quality
statistics as provided by an NMS Stock ATS in addition to what is

[[Page 81111]]

currently publicly disclosed under Exchange Act Rule 605. To the extent
that the NMS Stock ATS provides access to services to certain
subscribers and not others, the subscribers with greater access to the
services of an NMS Stock ATS could be in a position to obtain more
knowledge and information about the operations of NMS Stock ATSs than
those subscribers who have limited access to the services of the NMS
Stock ATS. Therefore, subscribers who have greater access to services
offered by the NMS Stock ATS may be able to make more informed choices
about their trading decisions relative to subscribers who have limited
access to the services of the NMS Stock ATS. For instance, a broker-
dealer operator may offer products or services in connection with a
subscriber's use of the NMS Stock ATS, and, as a result, these
subscribers may receive more favorable terms from the broker-dealer
operator with respect to their use of the NMS Stock ATS. Such favorable
terms could include preferential routing arrangements, access to
certain order types, or access to a faster connection line to the ATS
via a co-location service, as opposed to through the broker-dealer
operator's SOR (or similar functionality) or algorithm. Granting access
to these favorable terms can result in these subscribers having more
detailed information about how their orders will interact, match, and
execute relative to those of other subscribers. With this detailed
information, these subscribers can make more nuanced decisions about
which trading venue suits their trading purposes relative to other
subscribers who do not have access to these services, and thus do not
possess an informational advantage.
Even if having greater access to the services of an NMS Stock ATS
yields additional information about the operations of the NMS Stock ATS
to certain subscribers, it is possible that subscribers that do not
have full access to services of the NMS Stock ATS, and the resulting
additional information, may still want to trade on NMS Stock ATSs in
spite of their relative informational disadvantage. It is possible that
had these subscribers possessed more detailed information about the
operations of the NMS Stock ATS, they may have been able to make more
informed--and therefore potentially different--decisions about where to
route their orders for execution.
4. NMS Stock ATS Treatment of Subscriber Confidential Trading
Information
Under current Rule 301(b)(10) of Regulation ATS,\705\ all ATSs must
establish adequate safeguards and procedures to protect subscribers'
confidential trading information, and, to ensure that those safeguards
and procedures are followed, the ATS must also establish adequate
oversight procedures.\706\ Furthermore, all ATSs are required to
preserve certain records pursuant to Rule 303(a)(1).\707\ However,
neither Rule 301(b)(10) nor Rule 303(a)(1) of Regulation ATS currently
require that an ATS have in writing and preserve their safeguards and
procedures to protect subscribers' confidential trading information, or
their related oversight procedures. Based on the experience of the
Commission and its staff from periodic examinations or investigations
of ATSs, the Commission preliminarily believes that ATSs--in
particular, ATSs whose broker-dealer operators are large, multi-service
broker-dealers--currently have and maintain in writing their safeguards
and procedures to protect subscribers' confidential trading
information, as well as the oversight procedures to ensure such
safeguards and procedures are followed. Nevertheless, under the current
regulatory environment for ATSs, absent specific questions in an
examination by the Commission or its staff, the Commission is not able
to determine the specific ATSs that currently have written safeguards
and written procedures to protect subscribers' confidential trading
information based on the disclosure requirements of current Form ATS.
---------------------------------------------------------------------------

\705\ 17 CFR 242.301(b)(10).
\706\ 17 CFR 242.301(b)(10).
\707\ See supra Section X.
---------------------------------------------------------------------------

5. Current State of Competition Between NMS Stock ATSs and Registered
National Securities Exchanges
In the market for NMS stock execution services, NMS Stock ATSs not
only compete with other NMS Stock ATSs, but they also compete with
registered national securities exchanges. As noted previously, while
registered national securities exchanges compete with NMS Stock ATSs
for order flow, NMS Stock ATSs and registered national securities
exchanges are subject to different regulatory regimes, including
different obligations to disclose information about their trading
operations and activities.\708\ For example, ATSs that operate pursuant
to the exemption from the definition of ``exchange'' under Rule 3a1-
1(a)(2) must register as broker-dealers,\709\ and provide notice of
their operations on Form ATS.\710\ This notice of operations is not
approved or disapproved by the Commission. Form ATS requires ATSs to
disclose only limited aspects of their operations, and ATSs are not
required to publicly disclose Form ATS, which is ``deemed confidential
when filed.'' \711\ In addition, ATSs need not publicly disclose
changes to their operations and trading functionality because
amendments to Form ATS are not publicly disclosed.\712\ Some market
participants therefore have limited access to information about NMS
Stock ATSs, including information related to the types of subscribers,
means of access, order types, market data, and procedures governing the
interaction and execution of orders on the NMS Stock ATS. On the other
hand, national securities exchanges, with which NMS Stock ATSs compete
for order flow, must register with the Commission on Form 1, must file
proposed rule changes with the Commission under Section 19(b) of the
Exchange Act, and are SROs. The proposed rule changes of national
securities exchanges must be made available for public comment,\713\
and in general, these proposed rule changes publicly disclose, among
other things, details relating to the exchange's operations,
procedures, and fees. National securities exchanges and other SROs also
have regulatory obligations, such as enforcing their rules and the
federal securities laws with respect to their members, which do not
apply to market participants such as ATSs.\714\
---------------------------------------------------------------------------

\708\ See supra Section I (discussing the different mix of
obligations and benefits applicable to ATSs and registered national
securities exchanges).
\709\ See 17 CFR 242.301(b)(1).
\710\ See 17 CFR 242.301(b)(2).
\711\ See 17 CFR 242.301(b)(2)(vii).
\712\ Id.
\713\ See 15 U.S.C. 78s(b)(1).
\714\ See, e.g., Section 19(b) of the Exchange Act, 15 U.S.C.
78s(b)(1), and Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

While national securities exchanges have more regulatory burdens
than NMS Stock ATSs, they also enjoy certain unique benefits that are
not afforded to NMS Stock ATSs. While national securities exchanges are
SROs, and are thus subject to surveillance and oversight by the
Commission, they can still establish norms regarding conduct, trading,
and fee structures for external access. ATSs on the other hand are
regulated as broker-dealers, and must comply with the rules of FINRA,
which is the SRO to which all ATSs currently belong. Trading venues
that elect to register as national securities exchanges may gain added
prestige by establishing

[[Page 81112]]

listing standards for their securities. Additionally, national
securities exchanges can be direct participants in the NMS plans, such
as the ITS, the CTA Plan, Consolidated Quotation System, and the OTC/
UTP Plan. Direct participation in these systems may provide a higher
degree of transparency and execution opportunity than on NMS Stock
ATSs. Furthermore, national securities exchanges are entitled to share
in market data revenue generated by the CTA \715\ and enjoy limited
immunity from private liability with respect to their regulatory
functions.
---------------------------------------------------------------------------

\715\ See Regulation ATS Adopting Release, supra note 7, at
70880, 70902-70903 (discussing generally some of the obligations and
benefits of registering as a national securities exchange).
---------------------------------------------------------------------------

Since the adoption of Regulation NMS in 2005, the market for NMS
stock execution services has become more and more fragmented and
competitive. Currently there are 11 registered national securities
exchanges that effect transactions in NMS stocks, namely, NYSE MKT LLC
(formerly NYSE AMEX and the American Stock Exchange), BATS Exchange,
Inc. (``BATS-Z Exchange''), BATS Y- Exchange, Inc. (``BATS-Y
Exchange'') (``BATS-Z Exchange and BATS-Y Exchange, collectively ``the
BATS Exchanges''), NASDAQ OMX BX, Inc. (formerly the Boston Stock
Exchange), Chicago Stock Exchange, Inc., EDGA Exchange, Inc.
(``EDGA''), EDGX Exchange, Inc. (``EDGX''), The Nasdaq Stock Market LLC
(``Nasdaq''), New York Stock Exchange LLC (``NYSE''), NYSE Arca, Inc.
(``NYSE Arca''), and NASDAQ OMX PHLX, Inc. (formerly Philadelphia Stock
Exchange).\716\
---------------------------------------------------------------------------

\716\ As noted above, National Stock Exchange, Inc. ceased
trading on its system as of the close of business on May 30, 2014.
See supra note 118.
---------------------------------------------------------------------------

Several of these national securities exchanges (NYSE Arca, Nasdaq,
BATS Z-Exchange, EDGA and EDGX) previously operated as ECNs or acquired
ECNs as part of their trading platforms.\717\ A reason why an ECN might
want to register as a national securities exchange is so that it can
participate in and earn market data fees from U.S. tape plans, reduce
clearing costs and operate a primary listings business.\718\
---------------------------------------------------------------------------

\717\ See supra note 685 and accompanying text.
\718\ See BATS Global Markets, Inc., Amendment to Form S-1
Registration Statement, https://www.sec.gov/Archives/edgar/data/1519917/000119312512125661/d179347ds1a.htm.
---------------------------------------------------------------------------

Over the past decade, with the increase in fragmentation in the
market for execution services, there has been a shift in the market
share of trading volume in NMS stocks across trading venues. For
example, there has been a decline in market share of trading volume for
exchange-listed stocks of the two traditionally dominant trading
venues, NYSE and Nasdaq. The market share of the NYSE in NYSE-listed
stocks fell dramatically from approximately 80% in 2005 to 20% in 2013,
and for Nasdaq-listed stocks, Nasdaq's market share fell by
approximately half, from 50% in 2005 to 25% in 2013.\719\ Over the same
time period, there has been an increase in market share on other newer
national securities exchanges such as NYSE Arca, BATS-Z, BATS-Y, EDGA
and EDGX, and an increase in the market share of off-exchange trading,
which includes both internalization by dealers and trading on NMS Stock
ATSs.\720\ As discussed above, there has also been an increase in the
number of NMS Stock ATSs that operate as dark pools, and the market
share for these NMS Stock ATSs has increased.\721\ Thus, greater
fragmentation in the market for NMS stock execution services over the
past decade has resulted in trading volume being executed on different
venues, some of which include NMS Stock ATSs, particularly NMS Stock
ATSs that operate as dark pools.
---------------------------------------------------------------------------

\719\ See Angel, James, Lawrence Harris, and Chester Spatt
(2013), ``Equity Trading in the 21st Century: An Update,'' working
paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1584026.
\720\ See id.
\721\ See supra Section XIII.B.1.
---------------------------------------------------------------------------

As discussed above, NMS Stock ATSs face lower regulatory burdens
than national securities exchanges. Because national securities
exchanges are SROs, they are subject to certain regulatory obligations,
such as enforcing their own rules and the federal securities laws with
respect to their members. NMS Stock ATSs do not have such oversight and
enforcement responsibilities.\722\ The Commission recognizes that the
growth in the number of NMS Stock ATSs could be driven by these less
stringent regulatory obligations.
---------------------------------------------------------------------------

\722\ See supra note 714.
---------------------------------------------------------------------------

6. Competition Among NMS Stock ATSs
NMS Stock ATSs also compete amongst each other in a niche in the
market for NMS stock execution services. The rise in the number of NMS
Stock ATSs has not only affected competition between national
securities exchanges and ATSs for order flow of NMS stocks, it has also
impacted competition among NMS Stock ATSs. Table 1 depicts the market
share of total dollar volume for NMS stocks, and the total share volume
for NMS stocks for individual ATSs, based on data collected from ATSs
pursuant to FINRA Rule 4552 for 13 weeks of trading from late March
2015 to late June 2015. Even though there are many NMS Stock ATSs, much
of the NMS stock dollar volume on ATSs is transacted by only a handful
of venues. Table 1 shows that the top eight NMS Stock ATSs ranked by
dollar volume accounted for 61.1% of total dollar volume transacted on
ATSs and 58.9% of total share volume transacted on ATSs from late March
2015 to late June 2015.
BILLING CODE 8011-01-P

[[Page 81113]]

[GRAPHIC] [TIFF OMITTED] TP28DE15.000

Table 1--NMS Stock ATSs Ranked by Dollar Trading Volume

(March 30, 2015 to June 26, 2015)

This table shows the 38 ATSs that effected transactions in NMS
stocks from March 30, 2015 to June 26, 2015, ranked in descending order
by dollar volume transacted. ATS data is reported weekly, and these
dates approximately correspond to the second quarter of 2015. Dollar
volume transacted on an ATS is calculated by multiplying the share
volume for a given NMS stock on the ATS in a given week by the average
trade price for that week. Dollar volume for each NMS stock is then
aggregated across all NMS stocks that traded on the given ATS in that
week. Also reported in this table is the number of trades, share
volume, each NMS Stock ATS's market share of all NMS Stock ATS dollar
volume and NMS Stock ATS share volume in that quarter.
Table 2, which is based on data collected from NMS Stock ATSs
pursuant to FINRA Rule 4552 for 13 weeks of trading from late March
2015 to late June 2015, shows the average trade size, which is share
volume divided by the number of trades on each of the NMS Stock ATSs.
The table reveals marked differences in the average trade size of
transactions executed on the various NMS Stock ATSs. Six NMS Stock ATSs
had average trade sizes in excess of 10,000 shares. This suggests that
some NMS Stock ATSs may receive large block orders and execute large
trades.\723\ One of the

[[Page 81114]]

advantages for market participants of trading on block crossing
networks is the ability to execute large block orders while minimizing
the movement of prices against their trading interest.\724\
---------------------------------------------------------------------------

\723\ For purposes of this analysis we considered block orders
as orders of more than 10,000 shares, which is the traditional
definition for block orders. See supra note 126.
\724\ See supra notes 124-125 and accompanying text.
---------------------------------------------------------------------------

While these NMS Stock ATSs on average execute large size trades,
the combined market share of these NMS Stock ATSs is only 7.8% when
measured in dollar volume, and 3.7% when measured in share volume. The
vast majority of NMS Stock ATSs have average trade sizes between 150
and 450 shares. The two NMS Stock ATSs with the highest market shares
(measured either in dollar volume or share volume) have average trade
sizes of 181 and 157 shares, respectively.
Though NMS Stock ATSs compete with each other in a niche in the
market for NMS stock execution services, the trade sizes in Table 2
actually suggest that this niche market may not be very different from
the market as a whole. The average trade size on NMS Stock ATSs is 214
shares, which is not significantly different from the average trade
size of 181 shares on registered national securities exchanges.\725\
Thus, on average, the trade size for executions on NMS Stock ATSs and
national securities exchanges appears similar.
---------------------------------------------------------------------------

\725\ These results are consistent with prior findings that
average trade sizes on ``lit'' national securities exchanges are
similar to those taking place on ``dark ATSs.'' See Tuttle: ATS
Trading in NMS Stocks, supra note 126. Unlike ``lit'' national
securities exchanges, dark ATSs do not publicly disseminate top of
the limit-order book information. See id. See also supra note 123
and accompanying text.
[GRAPHIC] [TIFF OMITTED] TP28DE15.001

[[Page 81115]]

Table 2: NMS Stock ATSs Ranked by Average Trade Size

(March 30, 2015 to June 26, 2015)

This table shows 38 ATSs that effected transactions in NMS stocks
from March 30, 2015 to June 26, 2015, ranked in descending order by
average trade size. ATS data is reported weekly, and these dates
correspond approximately to the second quarter of 2015. Also reported
in this table is the raw number of trades, share volume, dollar volume,
and each NMS Stock ATS's market share of all NMS Stock ATS dollar
volume and NMS Stock ATS share volume. Dollar volume transacted on an
ATS is calculated by multiplying the share volume for a given NMS stock
on the ATS in a given week by the average trade price for that week.
Dollar volume for each NMS stock is then aggregated across all NMS
stocks that traded on the given ATS in that week.
While many NMS Stock ATSs operating today are similar with respect
to the limited transparency they provide with respect to their trading
model, the Commission understands that the services offered vary
significantly across NMS Stock ATSs. Some NMS Stock ATSs offer mid-
point matching services exclusively while others may have more complex
matching algorithms. Some other NMS Stock ATSs offer preferential
treatment in execution priority to some groups of subscribers, but not
others, and some NMS Stock ATSs may allow subscribers to avoid trading
with specific counterparties. Additionally, order types and their
characteristics can also vary significantly across NMS Stock ATSs,
including with respect to how particular order types interact with
other order types, which could affect execution priorities. Even though
an NMS Stock ATS might not be privy to detailed information about the
operations of other NMS Stock ATSs, it may be able to garner general
information about the differential services offered by its competitors
through Web sites and forums,\726\ enabling it to modify its products
and services to better compete within the market for NMS stock
execution services. Thus, while an NMS Stock ATS may currently make
available certain information about its products and services in an
attempt to enable market participants to differentiate the ATS's
products and services from those of its competitors, an NMS Stock ATS
may not be incented to fully reveal how orders interact, match and
execute on its platform, because revealing such information may
adversely impact the ATS's position within the market by also informing
its competitors.
---------------------------------------------------------------------------

\726\ Furthermore, a broker-dealer that operates an ATS may also
be a subscriber to one or more ATSs that are owned or operated by
other broker-dealers, and in this capacity, may obtain information
about how such unaffiliated ATS(s) operate. For example, the broker-
dealer operator of an ATS that is a subscriber to an unaffiliated
ATS may obtain information about order types and priority rules of
the unaffiliated ATS.
---------------------------------------------------------------------------

7. Competition Between Broker-Dealers That Operate NMS Stock ATSs and
Broker-Dealers That Do Not Operate NMS Stock ATSs
Competition for NMS stock order flow not only exists between
national securities exchanges and NMS Stock ATSs and among NMS Stock
ATSs, but also exists between the broker-dealers that operate NMS Stock
ATSs and those broker-dealer operators that do not operate NMS Stock
ATSs. As discussed above, most ATSs that currently transact in NMS
stocks are operated by multi-service broker-dealers that engage in
significant brokerage and dealing activities in addition to their ATS
operations.\727\ These multi-service broker-dealers operate one or more
NMS Stock ATS as a complement to the broker-dealer's other service
lines, often using the ATS(s) as an opportunity to execute customer
orders ``in house'' before seeking contra-side interest at outside
execution venues. They may also execute orders in NMS stocks internally
on non-ATS trading centers by trading as principal against such orders,
or crossing orders as agent in a riskless principal capacity, before
routing the orders to an ATS that they operate.
---------------------------------------------------------------------------

\727\ See supra Section III.B.
---------------------------------------------------------------------------

The current competitive environment in which NMS Stock ATSs operate
suggests that broker-dealers who operate their own NMS Stock ATS(s) may
have certain trading advantages relative to broker-dealers that do not
operate their own NMS Stock ATS. Broker-dealer owned NMS Stock ATSs may
provide their business units or affiliates, that are also subscribers
to the NMS Stock ATS, access to certain services, which may result in
trading advantages, such as providing faster access to the ATS or
priority in executions over other subscribers, such as broker-dealers
that do not have their own ATS platform and may route their orders to
these ATSs.
8. Effect of NMS Stock ATSs on the Current Market for NMS Stock
Execution Services
As discussed above, the current market for NMS stock execution
services consists of competition for order flow among national
securities exchanges, NMS Stock ATSs, and broker-dealers who operate or
control non-ATS trading centers.\728\ This section specifically
discusses the impact that this current market for NMS stock execution
services has on trading costs to market participants; the process by
which the price of NMS stocks are determined in the market (``price
discovery''); and market efficiency.
---------------------------------------------------------------------------

\728\ See supra Section XIII.A. See also supra note 123
(describing dark pools that are not ATSs) and note 387 (describing
non-ATS trading centers).
---------------------------------------------------------------------------

a. Trading Costs
Since the adoption of Regulation ATS in 1998 and the implementation
of Regulation NMS in 2005, trading costs have, on average, declined
significantly in the U.S. Institutional trading costs--particularly for
large capitalization stocks--are amongst the lowest in the world.\729\
Since 1998, share and dollar trading volume, has generally increased,
and with the exception of the financial crisis, bid-ask spreads (both
quoted and effective spreads) have narrowed significantly.\730\ Some
research has suggested that these lower trading costs can, in part, be
driven by the rising fragmentation of trading volume and competition
for order flow, through the proliferation of new trading venues such as
NMS Stock ATSs.\731\
---------------------------------------------------------------------------

\729\ See ``View Point: US Equity Market Structure: An Investor
Perspective,'' BlackRock, April 2014, https://www.blackrock.com/corporate/en-us/literature/whitepaper/viewpoint-us-equity-market-structure-april-2014.pdf; and Angel, supra note 719.
\730\ See BlackRock, supra note 729; and Angel, supra note 719.
\731\ See Foucault, Thierry and A.J. Menkveld, 2008,
``Competition for Order Flow and Smart Order Routing Systems,''
Journal of Finance 63, 19-58; O'Hara, M. and M. Ye, 2011, ``Is
Market Fragmentation Harming Market Quality?'' Journal of Financial
Economics 100, 459-74; and Colliard, J.E. and Thierry Foucault
(2012), ``Trading Fees and Efficiency in Limit Order Markets,''
Review of Financial Studies 25, 3389-421.
---------------------------------------------------------------------------

NMS Stock ATSs provide an environment whereby certain market
participants can trade at low costs relative to national securities
exchanges. For instance, if market participants submit to a national
securities exchange a block order or a large ``parent'' order shredded
into smaller ``child'' orders, they may experience ``price impact''
when others observe their trading and infer the presence of a large
order. That is, the price at which these child orders execute may get
subsequently worse from the time of the initial order submission to the
time of the final execution of the order. Thus, when working these
child orders, the order originator may seek to keep their executions
``quiet'' to minimize adverse price moves that may otherwise occur as
other market participants infer that order originator is an
institutional

[[Page 81116]]

investor that is a large buyer or seller. As such, trading on NMS Stock
ATSs may provide a useful tool whereby institutional investors may be
able to reduce the extent to which their own trading signals additional
trading intentions and obtain enhanced execution quality for their
orders.
The current market for NMS stock execution services--which includes
NMS Stock ATSs--provides value to market participants. If all NMS Stock
ATSs were to cease operations, market participants may incur costs
associated with not being able to find an adequate trading venue that
offers benefits similar to those that NMS Stock ATSs provide. For
example, certain market participants may be unable to find a trading
center that adequately minimizes the revelation of their trading
interest. Therefore, some of the trades by these market participants,
which would have been executed on NMS Stock ATSs, may no longer be
executed at all if NMS Stock ATSs cease operations. Even though NMS
Stock ATSs provide value to some market participants by allowing them
to trade on a venue that mitigates the signaling of information
regarding their trading interest while keeping their trading costs at a
low level, NMS Stock ATSs are characterized by a lack of transparency
regarding their operations and the activities of their broker-dealer
operators and the broker-dealer operator's affiliates. Currently,
disclosures on Form ATS are not required to be made public, and even
when an NMS Stock ATS voluntarily discloses its Form ATS, the
information provided tends to be limited. The Commission has also
observed that NMS Stock ATSs vary with respect to the depth and extent
of their disclosures on Form ATS, including basic aspects of their
operations. This heterogeneity in terms of the level of disclosure
pertaining to NMS Stock ATS operations has resulted in certain costs
for market participants, in that currently a market participant has to
expend some effort searching for a trading venue that would serve its
investing or trading objectives. A by-product of these search costs for
some market participants is uncertainty pertaining to how their orders
will be handled. Because there is no current requirement for NMS Stock
ATSs to disclose information about their operations to the public, some
subscribers to NMS Stock ATSs--particularly subscribers to those NMS
Stock ATSs that have not made their Form ATS public--may not fully know
how their orders are handled. Furthermore, for a specific NMS Stock
ATS, some subscribers may have been provided more information regarding
how their orders will interact, match, and execute on the NMS Stock
ATS, exacerbating this uncertainty.
b. Price Discovery
The current market for NMS stock execution services has resulted in
the fragmentation of trading volume. While this fragmentation--which
has in part been due to the rise in NMS Stock ATSs--has been a factor
in currently providing low trading costs for market participants,\732\
the contributions that this current market for NMS stock execution
services provides in terms of price discovery has been mixed. Some
academic studies imply that while national securities exchanges and NMS
Stock ATSs are regulated differently, their coexistence in the current
market has had a positive contribution to price discovery, as it has
led to more aggressive competition among market participants in
providing liquidity, which in turn has improved price discovery.\733\
Other academic studies have suggested that because some NMS Stock ATSs
are crossing networks and often derive their prices from national
securities exchanges, price impact costs that result from trading on a
national securities exchange harm prices on NMS Stock ATSs, resulting
in less trading and harming price discovery.\734\
---------------------------------------------------------------------------

\732\ See supra note 731.
\733\ See Boulatov, Alex, and T.J. George, 2013, ``Hidden and
Displayed Liquidity in Securities Markets with Informed Liquidity
Providers,'' Review of Financial Studies 26, 2095-2137.
\734\ See Ye, Mao, 2011, ``A Glimpse into the Dark: Price
Formation, Transaction Cost and Market Share of the Crossing
Network,'' working paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1521494.
---------------------------------------------------------------------------

Some academic studies have also suggested that the coexistence of
national securities exchanges and NMS Stock ATSs has led to market
segmentation, i.e. to the extent that certain subscribers of NMS Stock
ATSs have information regarding how orders will interact, match, and
execute on an NMS Stock ATS, these subscribers may be able to make more
informed decisions about where to route their orders, and, therefore,
such subscribers may congregate and trade on either NMS Stock ATSs or
national securities exchanges based on that information. These academic
studies further suggest that this market segmentation, whereby certain
subscribers of NMS Stock ATSs have information regarding how orders
will interact, match and execute and, therefore, trade on NMS Stock
ATSs or national securities exchanges, can improve price
discovery.\735\
---------------------------------------------------------------------------

\735\ See Zhu, Haoxiang, 2014, ``Do Dark Pools Harm Price
Discovery?'' Review of Financial Studies 27, 747-789. This academic
study specifically examines dark pools.
---------------------------------------------------------------------------

The theory that market segmentation of market participants leads to
price discovery relies on the assumption that because trade executions
on some NMS Stock ATSs are determined by matching orders, orders of
informed market participants are more likely to cluster on one side of
the market (either the buy-side or the sell-side).\736\ For instance,
if informed market participants believe that a security is undervalued,
they will be more likely to submit a buy-order; and vice-versa if they
believe a security is overvalued. This means that if these informed
market participants trade on an NMS Stock ATS, their trading interest
will likely cluster towards one side of the market and there will not
be enough orders to take the opposite side of their trades. As a
result, some orders will not be matched and there would be low rates of
execution on NMS Stock ATSs. In contrast, orders by uninformed market
participants are less likely to be correlated with one another because
the reasons for their trading are somewhat idiosyncratic to the market
participant.\737\ These orders by uninformed market participants are,
therefore, less likely to cluster on one side of the market, because
trades by uninformed market participants are not grounded on
fundamental information about the stock. As such, the orders from
uniformed market participants will likely have higher rates of
execution on NMS Stock ATSs relative to rates of executions for
informed participants.\738\ Accordingly, this academic literature
predicts that the set of market participants entering orders on
national securities exchanges will contain a proportionately higher
level of informed market participants.\739\ This segmentation of market
participants on NMS Stock ATSs and national securities exchanges
potentially could result in informed market participants trading on
national securities exchanges, and uninformed market participants
trading on NMS Stock ATSs.\740\ Because

[[Page 81117]]

informed market participants have better knowledge about the value of a
security than uninformed market participants, this segmentation can
improve price discovery on national securities exchanges.\741\
---------------------------------------------------------------------------

\736\ See id.
\737\ Uninformed market participants trade for non-informational
reasons. In some cases, they are termed ``noise traders,'' since
their trades are based on their beliefs and sentiments, and are not
grounded on fundamental information. See Vishwanath, Ramanna. and
Chandrasekhar Krishnamurti, 2009, ``Investment Management: A Modern
Guide to Security Analysis and Stock Selection,'' Springer
Publishing.
\738\ See supra note 735.
\739\ See id.
\740\ It should be noted that this academic literature posits
one theory regarding how the coexistence of national securities
exchanges and NMS Stock ATSs results in segmented trading of
informed and uninformed market participants. See supra note 735.
Contrary to this theory regarding how market segmentation of
national securities exchanges and NMS Stock ATSs can affect price
discovery, a motivation for informed market participants to trade on
NMS Stock ATSs is to minimize the price impact of large trades.
Thus, it could be the case that the decision by informed market
participants of where to trade is reduced to whether the value of
minimizing the price impact of their trades outweighs the heightened
execution risk (due to the difficulty in finding a counterparty to
take the opposite side of the trade, perhaps because a market
participant places a large order) they might incur if they trade on
NMS Stock ATSs See supra note 734.
\741\ See Zhu, supra note 736; Comerton-Forde, Carole and T.J.
Putnins, 2015, ``Dark Trading and Price Discovery,'' working paper,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2183392. Both
these studies specifically examine dark pools.
---------------------------------------------------------------------------

Several academic studies suggest that the presence of NMS Stock
ATSs in the current trading environment deteriorates price discovery
\742\ and liquidity.\743\ When trading, informed market participants
often balance two types of costs, namely price impact costs and
execution costs. On a national securities exchange, an informed market
participant's order experiences lower execution risk, but because of
price impact, each order is subsequently executed at a worse
price.\744\ On an NMS Stock ATS, price impact costs are smaller due to
there being less informational dissemination than on national
securities exchanges, however, the probability of execution decreases
as order size increases, due to the increased difficulty in finding a
counterparty to take the opposite side of a large trade.\745\ Because
trading on a national securities exchange generates price impact, the
cost associated with this price impact also could affect a market
participant's profit on trades executed on an NMS Stock ATS. The reason
for this is that NMS Stock ATSs often match orders at prices derived
from national securities exchanges, and if trading on these national
securities exchanges generates worse prices due to price impact, this
could therefore spill over and affect a market participant's profit on
trades executed on the NMS Stock ATS. This spillover could result in
informed market participants trading less aggressively, which could in
turn reduce price discovery.\746\ Finally, while low levels of trading
on NMS Stock ATSs are not harmful, price discovery is harmed for high
levels of trading on NMS Stock ATSs (i.e., when trading on NMS Stock
ATSs in a given NMS stock exceeds approximately 10% of dollar
volume).\747\ This implies that when most orders are filled on NMS
Stock ATSs, market participants may withdraw displayed quotes because
of the reduced likelihood of those orders being filled.\748\
---------------------------------------------------------------------------

\742\ See Ye, Mao, 2011, ``A Glimpse into the Dark: Price
Formation, Transaction Cost and Market Share of the Crossing
Network,'' working paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1521494; Degryse, Hans, Frank de Jong and
Vincent van Kervel, 2015, ``The Impact of Dark Trading and Visible
Fragmentation on Market Quality,'' Review of Finance 19, 1587-1622.
Both these studies specifically examine dark pools.
\743\ See Zhu, supra note 736.
\744\ See Ye, supra note 742.
\745\ See Ye, supra note 742.
\746\ See Ye, supra note 742 (for theoretical work on this
topic). See also Comerton-Forde and Putnins, supra note 741, for
empirical work on this topic. Specifically, using Australian data,
the latter paper finds that the migration of order flow into dark
pools removes valuable information from the price formation process,
and leads to increased adverse selection, larger bid-ask spreads
(lower liquidity) and larger price impacts on the exchange (lower
market quality). Both of these studies specifically examine dark
pools.
\747\ See also Comerton-Forde and Putnins, supra note 741.
\748\ See CFA Institute, 2012, ``Dark Pools, Internalization,
and Equity Market Quality,'' https://www.cfapubs.org/doi/pdf/10.2469/ccb.v2012.n5.1. This study specifically examines dark pools.
---------------------------------------------------------------------------

Another element that may affect market quality is order
internalization by broker-dealers. Academic literature has previously
proposed theoretical models where broker-dealer operators have an
incentive to internalize uninformed orders, by trading as principal
against such orders or crossing orders as agent in a riskless principal
capacity, before routing the orders to their respective ATSs.\749\ The
literature has also argued that internalization of order flow reduces
market depth and price informativeness.\750\ According to this
literature, the internalization of order flow by broker-dealers, some
of whom operate NMS Stock ATSs, is associated with wider spreads
(quoted, effective, and realized), higher price impact per trade, and
increased volatility of trades on the registered national securities
exchanges, which translates into an increased cost for market
participants, where market participants pay approximately $3.9 million
more per security per year.\751\ In the current operational environment
of NMS Stock ATSs, based on the Commission's experience, subscribers'
orders or other trading interest could be removed from the broker-
dealer's NMS Stock ATS and routed to, among other destinations, another
trading center operated by the broker-dealer operator for
internalization. Thus, the fact that some broker-dealers operate their
own NMS Stock ATS, and yet internalize some order flow rather than
executing it on their own NMS Stock ATS, may have a deleterious effect
on market quality.
---------------------------------------------------------------------------

\749\ See Chordia, Tarun and Avanidhar Subrahmanyam, 1995,
``Market making, the tick size, and payment-for-order flow: Theory
and evidence,'' Journal of Business 68, 543-75; Easley, Kiefer and
O'Hara, 1996, ``Cream-skimming or profit-sharing? The curious role
of purchased order flow,'' Journal of Finance 51, 811-33.
\750\ See Chakravarty, Sugato and Asani Sarkar, 2002, ``A model
of broker's trading, with applications to order flow
internalization,'' Review of Financial Economics 11, 19-36.
\751\ See Weaver, Daniel G., 2014, ``The Trade-At Rule,
Internalization, and Market Quality,'' working paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1846470.
---------------------------------------------------------------------------

c. Market Efficiency
Currently, the coexistence of national securities exchanges and NMS
Stock ATSs seems to have beneficial effects on market efficiency. One
academic study suggests that while not all trades that execute on NMS
Stock ATSs are large block trades, those that are have been seen to be
beneficial to market efficiency.\752\ If NMS Stock ATSs were not a
viable trading venue for market participants, market participants might
not execute large orders at all because of the price impact costs of
executing on a national securities exchange. Therefore, the ability for
market participants to execute large trades on NMS Stock ATSs generates
liquidity. The same study also suggests that small trades that execute
on NMS Stock ATSs are beneficial in that they also generate market
efficiency.\753\
---------------------------------------------------------------------------

\752\ See Comerton-Forde and Putnins, supra note 741.
\753\ See id.
---------------------------------------------------------------------------

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

The Commission has considered the economic effects of the proposed
amendments to Rule 3a1-1(a) and Regulation ATS. This section provides
an overview of the broad economic considerations relevant to the
proposed amendments to Rule 3a1-1(a) and Regulation ATS, and the
economic effects, including the costs, benefits, and the effects on
efficiency, competition, and capital formation. Additional economic
effects, including benefits and costs related to specific requirements
of the proposed amendments to Rule 3a1-1(a) and Regulation ATS, are
also discussed.
The proposed amendments to Rule 3a1-1(a) and Regulation ATS \754\
are designed to generate greater transparency about the operations of
NMS Stock ATSs and the activities of their broker-dealer operators and
their

[[Page 81118]]

affiliates. By requiring NMS Stock ATSs to provide detailed, public
disclosures about their operations and the activities of their broker-
dealer operators and their broker-dealer operators' affiliates, the
Commission preliminarily believes that the proposal would reduce the
discrepancy in information that different market participants receive
about NMS Stock ATS operations and provide market participants--
particularly those that have access to less information about NMS Stock
ATS operations--with more information about the means by which orders
and trading interest interact, match, and execute on NMS Stock ATSs.
The Commission preliminarily believes that the proposal would help
market participants make better-informed decisions about where to route
their orders in order to achieve their trading or investment
objectives, improve the efficiency of capital allocation, and enhance
execution quality.
---------------------------------------------------------------------------

\754\ See supra Section IV.
---------------------------------------------------------------------------

The Commission further understands that the proposed amendments to
Regulation ATS may generate some uncertainty for NMS Stock ATSs in
that, under the proposal, the Commission would declare a Form ATS-N
effective or ineffective (which is not currently the case with respect
to Form ATS), and this may act as a potential deterrent for ATSs
wishing to transact NMS stocks, or legacy NMS Stock ATSs that would be
required to file Form ATS-N. Moreover, the proposed amendments to Rule
3a1-1(a) and Regulation ATS could be costly, because NMS Stock ATSs
would have to disclose detailed information about their operations and
the activities of their broker-dealer operators and their affiliates.
Together, these could harm the competitive dynamics in the market for
NMS stock execution services, which includes competition between
national securities exchanges and NMS Stock ATSs, among NMS Stock ATSs
themselves, and between broker-dealers that operate NMS Stock ATSs and
those that do not.\755\ Increased costs associated with disclosure
requirements for NMS Stock ATSs could result in some NMS Stock ATSs
exiting the market or could create a disincentive for potential NMS
Stock ATSs to enter the market. However, in spite of these costs, and
as discussed in more detail below, the Commission preliminarily
believes that the NMS Stock ATSs that remain in the market may
propagate greater interaction between buyers and sellers who trade on
these venues, fostering not only trading between one and another, but
also facilitating the price discovery process and capital formation.
The consistent set of information that is proposed to be disclosed in
Form ATS-N may impact how market participants react in terms of their
trading, which may improve market efficiency.\756\
---------------------------------------------------------------------------

\755\ See infra Section XIII.C.2.
\756\ See id.
---------------------------------------------------------------------------

Moreover, the Commission notes that increased transparency
regarding the operations of NMS Stock ATSs may impact competition
between broker-dealers that operate NMS Stock ATSs and broker-dealers
who trade NMS stocks but do not operate an NMS Stock ATS. Because
broker-dealers who transact in NMS stocks but do not operate ATSs are
not subject to the proposed operational transparency requirements,
these broker-dealers may be at a competitive advantage and attract and
internalize order flow that would otherwise be entered and executed on
NMS Stock ATSs. Furthermore, greater operational transparency of NMS
Stock ATSs could also impact competition between NMS Stock ATSs and
national securities exchanges, resulting in a larger amount of order
flow being executed on national securities exchanges.
Further, the Commission preliminarily believes that the proposed
amendments to Rule 301(b)(10) and 303(a)(1) that would require ATSs to
establish and preserve written safeguards and written procedures to
protect subscribers' confidential trading information, as well as the
oversight procedures to ensure such safeguards and procedures are
followed should strengthen the effectiveness of those safeguards and
procedures and better enable an NMS Stock ATS to protect confidential
subscriber trading information and implement and monitor the adequacy
of, and the ATS's compliance with, its safeguards and procedures.\757\
The Commission also preliminarily believes that requiring ATSs to adopt
written safeguards and written procedures will benefit the Commission
by helping it better understand, monitor, and evaluate how each ATS
protects subscribers' confidential trading information from
unauthorized disclosure and access.\758\ The Commission also expects
that this proposed requirement will help oversight by the SRO of which
the NMS Stock ATS's broker-dealer operator is a member.
---------------------------------------------------------------------------

\757\ See supra Section IX.
\758\ See id.
---------------------------------------------------------------------------

The Commission has attempted, where possible, to quantify the
benefits and costs anticipated by the proposed amendments to Rule 3a1-
1(a) and Regulation ATS. The Commission notes, however, that many of
the costs and benefits of the proposed amendments are difficult to
quantify with any degree of certainty. For instance, it is unclear how
many NMS Stock ATSs might cease operations (or, less likely, switch to
trading in a different class of securities) if they are required to
publicly disclose information about their operations on proposed Form
ATS-N. It is also unclear how many NMS Stock ATSs may decide to
register as national securities exchanges, as some ECNs have in
previous years, as a result of the proposed amendments to Rule 3a1-1(a)
and Regulation ATS.\759\ Therefore, quantifying the effects that the
expanded disclosure requirements would have on market liquidity and
capital formation is difficult. As the decision for an NMS Stock ATS to
continue operating or to exit the market depends on numerous factors,
one of which being the extent to which its competitive advantage is
driven by its matching methodology or other operational
characteristics, the Commission is unable to fully determine the extent
to which the proposal would affect this decision. Furthermore, the
decision to exit is idiosyncratic to the NMS Stock ATS and the
Commission cannot ascertain whether large or small ATSs will be more
prone to leaving the market. Additionally, the Commission cannot
estimate the fraction of order flow that would be routed to other NMS
Stock ATSs or national securities exchanges if some ATSs ceased
operations. In light of all of these limitations on available
information, the Commission is unable to make reasonable assumptions
regarding the number of NMS Stock ATSs that may cease operations and
exit the market; the number of NMS Stock ATSs that may register as
national securities exchanges; or the fraction of order flow that would
be routed to other NMS Stock ATSs or national securities exchanges if
some ATSs ceased operations. Given that the Commission is unable to
make these assumptions, it is unable to quantify the effect of the
proposed amendments to Rule 3a1-1(a) and Regulation ATS on trading
volume on the NMS Stock ATS as well as quantify the effects on price
discovery and market efficiency.
---------------------------------------------------------------------------

\759\ See supra note 685 and accompanying text.
---------------------------------------------------------------------------

1. Costs and Benefits of Proposed Enhanced Filing Requirements
As discussed above, the Commission is proposing to amend Rule 3a1-
1(a) and Regulation ATS to require ATSs that effect transactions in NMS
stocks comply with the requirements of

[[Page 81119]]

proposed Rule 304 in order to qualify for exemption from the definition
of ``exchange.'' \760\ The proposed amendments would require an NMS
Stock ATS to file reports and amendments pursuant to proposed Rule 304,
which includes the requirement to file proposed Form ATS-N, in lieu of
current Form ATS, to disclose information about its operations and the
activities of its broker-dealer operator and its affiliates.
---------------------------------------------------------------------------

\760\ See supra Section IV (discussing the proposed amendments).
See also proposed Rules 3a1-1(a)(2) and (3), 300, 301, and 304.
---------------------------------------------------------------------------

As noted above, an NMS Stock ATS may provide some subscribers
access to certain trading information or services that it does not
provide to others.\761\ For example, an NMS Stock ATS may offer certain
order types or special fees or rebates to particular subscribers, which
might result in those subscribers obtaining an advantage when trading
on the ATS. The proposed amendments would require NMS Stock ATSs to
describe any such differentiation of services or information among
subscribers, which would include certain disclosures related to the
operations of their broker-dealer operators. The Commission
preliminarily believes that those disclosures would help market
participants assess potential conflicts of interest that may adversely
impact their trading on the NMS Stock ATS.
---------------------------------------------------------------------------

\761\ See supra Section VII.B.10.
---------------------------------------------------------------------------

Proposed Rule 304 would also provide a process by which the
Commission would declare Form ATS-N filings effective or ineffective,
and a process by which the Commission would review Form ATS-N
Amendments and declare ineffective a Form ATS-N Amendment if it finds
that such action is necessary or appropriate in the public interest,
and is consistent with the protection of investors. The Commission is
also proposing a process by which the Commission could suspend, limit,
or revoke an NMS Stock ATS's exemption from the definition of an
``exchange'' under Rule 3a1-1(a)(2).\762\ An NMS Stock ATS would not
qualify for the exemption from the definition of ``exchange'' unless
the NMS Stock ATS files Form ATS-N with the Commission and the
Commission declares the Form ATS-N effective.\763\
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\762\ Pursuant to proposed Rule 304(b)(2), the Commission would
publicly post on its Web site each: order of effectiveness of a Form
ATS-N; order of ineffectiveness of a Form ATS-N; effective Form ATS-
N; filed Form ATS-N Amendment; order of ineffectiveness of a Form
ATS-N Amendment; notice of cessation; and order suspending,
limiting, or revoking the exemption from the definition of an
``exchange'' pursuant to Rule 3a1-1(a)(2). Proposed Rule 304(b)(3)
would also require an NMS Stock ATS that has a Web site to post on
its Web site a direct URL hyperlink to the Commission's Web site
that contains the documents enumerated in proposed Rule 304(b)(2).
See supra Section IV.D.
\763\ See supra Section IV.C.5.
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a. Better Regulatory Oversight and Increased Investor Protection
The Commission preliminarily believes that the proposed amendments
to Rule 3a1-1(a) and Regulation ATS would result in better regulatory
oversight of NMS Stock ATSs and increased investor protection. Form ATS
discloses only limited aspects of an ATS's operations as compared to
the information that would be provided on Form ATS-N by NMS Stock ATSs.
Form ATS requires, for example, 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 execution; and trade reporting, clearance and settlement of
trades on the ATS. On the other hand, Form ATS-N would require an NMS
Stock ATS to disclose information about the manner of operations of the
ATS, including: subscribers; hours of operation; types of orders;
connectivity, order entry, and co-location procedures; segmentation of
order flow and notice about segmentation; display of order and other
trading interest; trading services, including matching methodologies,
order interaction rules, and order handling and execution procedures;
procedures governing suspension of trading or trading during a system
disruption or malfunction; opening, closing, and after hours
procedures; outbound routing services; fees; market data; trade
reporting; clearance and settlement; order display and execution access
(if applicable); fair access (if applicable); and market quality
statistics published or provided to one or more subscribers.
In addition, current Form ATS does not require an ATS to disclose
information about the activities of the broker-dealer operator and the
broker-dealer operator's affiliates in connection with the ATS whereas
the enhanced disclosure requirements under proposed Form ATS-N would
require an NMS Stock ATS to disclose information about the activities
of its broker-dealer operator and the broker-dealer operator's
affiliates that may give rise to potential conflicts of interest,
including: their operation of non-ATS trading centers and other NMS
Stock ATSs; products and services offered to subscribers; arrangements
with unaffiliated trading centers; trading activities on the NMS Stock
ATS; smart order router (or similar functionality) and algorithms used
to send or receive orders or other trading interest to or from the ATS;
personnel and third parties used to operate the NMS Stock ATS;
differences in the availability of services, functionalities, or
procedures; and safeguards and procedures to protect subscribers'
confidential trading information. Accordingly, the Commission
preliminarily believes that the enhanced disclosure requirements under
proposed Form ATS-N would result in better regulatory oversight of NMS
Stock ATSs and increased investor protection by providing the
Commission, relevant SROs, and market participants with significantly
more information with which to analyze and evaluate how orders are
handled and executed on NMS Stock ATSs.
The Commission is proposing that Form ATS-N and Form ATS-N
Amendments be filed electronically in a text-searchable format. The
Commission preliminarily believes that requiring Form ATS-N and Form
ATS-N Amendments to be filed in a text-searchable format, coupled with
the enhanced disclosure requirements under the proposal, will
facilitate a more effective and thorough review and analysis of NMS
Stock ATSs by regulators, which should yield greater insights into the
operations of NMS Stock ATSs and the activities of their broker-dealer
operators and their affiliates. For example, under the proposal,
examiners at the Commission and the SRO of which an NMS Stock ATS is a
member would be able to run automated processes to review information
disclosed on filed Forms ATS-N and Form ATS-N Amendments in order to
select NMS Stock ATSs for examination based on certain criteria for the
examination. Additionally, examiners would be better able to assemble
and review a larger pool of data regarding NMS Stock ATSs to better
inform their examinations. Both such benefits could increase investor
protection by improving the effectiveness and efficiency of the
examination process.
Furthermore, the Commission preliminarily believes that the
proposed process of declaring a Form ATS-N effective or ineffective and
the process to review and declare, if necessary, Form ATS-N Amendments
ineffective would improve the quality of the information regulators
receive from NMS Stock ATSs and increase the

[[Page 81120]]

protection of investors. The proposed effectiveness process for a Form
ATS-N is designed to provide an opportunity for the Commission to
review Form ATS-N filings before an NMS Stock ATS commences operations
(in the case of new NMS Stock ATSs), or while it continues operations
under its Form ATS filing (in the case of legacy NMS Stock ATSs). The
Commission preliminarily believes that the proposed process would allow
the Commission to evaluate the adequacy of NMS Stock ATSs' disclosures
for compliance with the Form ATS-N requirements before declaring the
Form ATS-N effective or ineffective. As a result, once the Commission
has made an effectiveness or ineffectiveness determination, only an NMS
Stock ATS for which a Form ATS-N has been declared effective would be
allowed to transact in NMS stocks without registering as a national
securities exchange.
The Commission would make Form ATS-N Amendments public upon filing.
As a result, a publicly disclosed Form ATS-N Amendment could contain
potentially inaccurate or incomplete disclosures at the time it is
posted on the Commission's Web page. Prior to the conclusion of its
review of a Form ATS-N Amendment, the Commission would make the public
aware of the fact that, though the amendment is posted on the
Commission's Web site, it is still pending Commission review and could
still be declared ineffective. The Commission preliminarily believes
that this process would provide transparency to market participants
about the operations of these ATSs and also provide market participants
with information about forthcoming changes to the NMS Stock ATS while
the Commission's review is pending.
The Commission preliminarily believes that the proposed review and
public disclosure process for a Form ATS-N and Form ATS-N Amendments
would allow the Commission to better protect investors from potentially
inaccurate or incomplete disclosures that could misinform market
participants about the operations of an NMS Stock ATS or the activities
of its broker-dealer operator, including how their orders may be
handled and executed, and thereby impact market participants' decisions
about where they should route their orders.
If the Commission declares ineffective a Form ATS-N or Form ATS-N
Amendment of an entity, that entity would have the opportunity to
address deficiencies in the previously filed form by filing a new Form
ATS-N or Form ATS-N Amendment. However, the Commission recognizes that
an ineffectiveness declaration could impose costs on that entity--such
as costs from having to cease operations, roll back a change in
operations, or delay the start of operations--and could impose costs on
the overall market for NMS stock execution services resulting from a
potential reduction in competition or the removal of a sole provider of
a niche service within the market. Furthermore, the removal of a sole
provider of a niche service from the market could also impose costs on
individual market participants, as they may have to subscribe to
another NMS Stock ATS, or they may have to incur the cost of making
changes to their SOR (or similar functionality) or algorithm in order
to submit their orders for execution. However, NMS Stock ATSs and
market participants would not incur these costs unless the Commission
declares a Form ATS-N or a Form ATS-N Amendment ineffective. The
Commission preliminarily believes that NMS Stock ATSs would be
incentivized to comply with the requirements of Form ATS-N, as well as
federal securities laws, including the other requirements of Regulation
ATS, to avoid an ineffectiveness declaration, which produces benefits
to the market. Therefore, the Commission preliminarily believes that
there would be no undue burden imposed in connection with resubmitting
Form ATS-N for these entities or from an ineffective declaration in
general.
b. Implementation and Ongoing Costs
The Commission understands that both new and existing NMS Stock
ATSs would incur implementation costs in order to comply with the
proposed amendments to Regulation ATS. Regardless of their size and
transaction volume, all NMS Stock ATSs would need to ensure that their
disclosures meet the requirements of proposed Form ATS-N and that they
correctly file their Form ATS-N. NMS Stock ATSs may develop internal
processes to ensure correct and complete reporting on Form ATS-N, which
can be viewed as a fixed setup cost, which NMS Stock ATSs may have to
incur, regardless of the amount of trading activity that takes place on
them. As a result, these implementation costs may fall
disproportionately on lower-dollar volume NMS Stock ATSs (as opposed to
ATSs transacting greater dollar volume), since all ATSs would likely
incur these fixed implementation costs. However, 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 NMS Stock ATSs would likely incur lower implementation costs
because certain sections of proposed Form ATS-N (such as several items
of Part III) would not be applicable to these NMS Stock ATSs.
Relative to the baseline, the proposed amendments to Regulation ATS
would also impose implementation costs for all NMS Stock ATSs,
including legacy ATSs, in that they would require NMS Stock ATSs to
adhere to heightened disclosure and reporting requirements regarding
their operations. Existing NMS Stock ATSs should already comply with
the current requirements of Regulation ATS. Therefore, the compliance
costs of the proposed amendments should be incremental relative to the
costs associated with the existing requirements. Specifically, the
Commission preliminarily believes that the incremental costs would
consist largely of providing new disclosures and updating records and
retention policies necessary to comply with the proposed amendments.
Based on the analysis for purposes of the PRA, the Commission
preliminarily estimates that the proposed amendments to Regulation ATS
relating to Rules 301(b)(2)(viii) and 304 of Regulation ATS, including
Proposed Form ATS-N, could result in a one-time burden of 141.3 hours
for each NMS Stock ATS,\764\ which would result in an estimated one-
time paperwork compliance cost to an NMS Stock ATS of approximately
$42,838.50.\765\ This would result in an aggregate estimated initial
hour burden for all NMS Stock ATSs to complete Form ATS-N and comply
with proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS of
6,499.8 hours at an estimated cost of $1,970,571.00.\766\
---------------------------------------------------------------------------

\764\ See supra note 643 and accompanying text.
\765\ (Attorney at $380 x 54.8 hours) + (Compliance Manager at
$283 x 43.5 hours) + (Senior Systems Analyst at $260 x 34.5 hours) +
(Senior Marketing Manager at $254 x 1 hour) + (Compliance Clerk at
$64 x 7.5 hours) = $42,838.50. This preliminary compliance cost
estimate for a Form ATS-N includes the estimated costs associated
with completing Part III, Item 2 and Part IV, Items 14 and 15 of
proposed Form ATS-N, but as explained above, the Commission
preliminarily believes that the majority of NMS Stock ATSs would not
be required to complete those items of the proposed form. See supra
Section XII.D.2.b.
\766\ 141.3 burden hours x 46 NMS Stock ATSs = 6,499.8 burden
hours. $42,838.50 x 46 NMS Stock ATSs = $1,970,571.00. This
preliminary aggregate compliance cost estimate assumes that all NMS
Stock ATSs would be required to complete Part III, Item 2 and Part
IV, Items 14 and 15 of proposed Form ATS-N. However, as noted above,
the Commission preliminarily estimates that only 6 NMS Stock ATSs
would be required to complete Part III, Item 2, see supra note 609,
only 1 NMS Stock ATS would be required to complete Part IV, Item 14,
see supra note 641 and accompanying text, and only 2 NMS Stock ATSs
would be required to complete Part IV, Item 15, see id.

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[[Page 81121]]

Furthermore, the Commission preliminarily believes that there would
be implementation costs for ATSs that have not reduced to writing their
safeguards and procedures to protect subscribers' confidential trading
information and their oversight procedures to ensure that those
safeguards and procedures are followed, which are required under Rule
301(b)(10) of Regulation ATS.\767\ Based on the analysis for purposes
of the PRA, the Commission preliminarily estimates that, in order to
comply with the proposed amendments to Rules 301(b)(10) and
303(a)(1)(v) of Regulation ATS,\768\ it could take approximately 15
ATSs an estimated one-time burden of up to 10 hours each,\769\
resulting in an estimated one-time paperwork cost for each of those 15
ATSs of $3,484.00 and an aggregate estimated hour burden of 150 hours
at an estimated cost of $52,260.00.\770\
---------------------------------------------------------------------------

\767\ See 17 CFR 242.301(b)(10).
\768\ See supra Section IX.
\769\ See supra notes 583-585.
\770\ (Attorney at $380 x 9 hours) + (Compliance Clerk at $64 x
1 hour) = $3,484.00. $3,484.00 x 15 ATSs = $52,260.00.
---------------------------------------------------------------------------

In addition to the implementation costs mentioned above, there are
also expected ongoing costs for NMS Stock ATSs to comply with the
proposed amendments to Rule 3a1-1(a) and Regulation ATS. For instance,
NMS Stock ATSs would incur ongoing costs associated with amending their
Forms ATS-N prior to material changes in their operations, or to
correct any information that has become inaccurate. Regardless of the
reason for filing a Form ATS-N Amendment, the Commission preliminarily
estimates for the purposes of the PRA that it could take an NMS Stock
ATS approximately 28.5 hours annually \771\ to prepare and file its
Form ATS-N Amendments at an estimated annual cost of $8,352.00.\772\
This would result in an estimated aggregate ongoing hour burden for all
NMS Stock ATSs to amend their Forms ATS-N and comply with proposed
Rules 301(b)(2)(viii) and 304 of Regulation ATS of 1,311 hours at an
estimated cost of $384,192.00 annually.\773\
---------------------------------------------------------------------------

\771\ See supra notes 644-651 and accompanying text. As
explained above, the Commission preliminarily estimates that each
NMS Stock ATS would file 3 Form ATS-N Amendments per year, and the
hourly burden per amendment would be 9.5 hours.
\772\ (Attorney at $380 x 16.5 hours) + (Compliance Manager at
$283 x 6 hours) + (Compliance Clerk at $64 x 6 hours) = $8,352.00.
\773\ 28.5 hours x 46 NMS Stock ATSs = 1,311 hours. $8,352.00 x
46 NMS Stock ATSs = $384,192.00.
---------------------------------------------------------------------------

Furthermore, the proposed amendments to Rules 301(b)(10) and
303(a)(1)(v) relating to written safeguards and written procedures to
protect subscribers' confidential trading information would impose
ongoing costs for all ATSs. For the purposes of the PRA, the Commission
preliminarily estimates it could take approximately 4 hours annually
for each ATS to update and maintain these safeguards and
procedures,\774\ resulting in an estimated annual paperwork cost for
each ATS of $888.00.\775\ This would result in an estimated aggregate
ongoing hour burden for all ATSs to maintain and update their
safeguards and procedures pursuant to proposed Rules 301(b)(10) and
303(a)(1)(v) of 336 hours at an estimated cost of $74,592.00
annually.\776\
---------------------------------------------------------------------------

\774\ See supra notes 586-587 and accompanying text.
\775\ (Attorney at $380 x 2 hours) + (Compliance Clerk at $64 x
2 hours) = $888.00 annual paperwork cost per ATS.
\776\ 4 annual burden hours x 84 ATSs = 336 annual burden hours.
$888.00 annual paperwork cost per ATS x 84 NMS Stock ATSs =
$74,592.00 aggregate annual paperwork cost.
---------------------------------------------------------------------------

Some existing NMS Stock ATSs that also transact in non-NMS stocks
might incur additional costs due to the proposed amendments. As
discussed above,\777\ pursuant to the proposed amendments to Regulation
ATS, an ATS that effects transactions in both NMS stocks and non-NMS
stocks would be subject to the requirements of Rule 304 with respect to
its NMS stock trading operations and Rule 301(b)(2) with respect to its
non-NMS stock trading operations. Accordingly, NMS Stock ATSs that also
transact in non-NMS stocks would incur additional implementation costs
when compared to ATSs that only trade NMS stocks because the former
group would be required to file both Form ATS-N and a revised Form ATS
that removes discussion of those aspects of the ATS related to the
trading of NMS stocks. Those NMS Stock ATSs would also be required to
file a pair of Forms ATS-R four times annually. For the purposes of the
PRA, the Commission preliminarily estimates that the aggregate initial
burden for those ATSs to file a Form ATS-N in regard to their NMS stock
trading activity and a current Form ATS in regard to their non-NMS
stock trading activity would be 1,774.3 hours \778\ at an aggregate
estimated cost of $530,491.50.\779\ The Commission also preliminarily
estimates that that the aggregate annual burden to file separate Forms
ATS-R for those ATSs that effect transactions in both NMS stocks and
non-NMS stocks would be 198 hours \780\ at an aggregate estimated cost
of $1,394.\781\ Furthermore, the Commission preliminarily estimates
that these ATSs that facilitate transactions in both NMS stocks and
non-NMS stocks would incur an additional estimated recordkeeping burden
of 3 hours annually per ATS, resulting in an estimated cost of $312.60
per ATS \782\ and an aggregate estimated hour burden of 33 hours at an
estimated cost of $3,438.60, due to the proposed amendments to Rule
303(a)(2)(ii).\783\
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\777\ See supra Section IV.C.2.
\778\ See supra notes 659-663 and accompanying text.
\779\ ((Attorney for Form ATS at $380 x 13 hours) + (Attorney
for Form ATS-N at $380 x 54.8 hours) + (Compliance Manager for Form
ATS-N at $283 x 43.5 hours) + (Senior Systems Analyst for Form ATS-N
at $260 x 34.5 hours) + (Senior Marketing Manager for Form ATS-N at
$254 x 1 hour) + (Compliance Clerk for Form ATS at $64 x 7 hours) +
(Compliance Clerk for Form ATS-N at $64 x 7.5 hours)) x 11 ATSs =
$530,491.50 This preliminary aggregate compliance cost estimate
includes the estimated costs associated with completing Part III,
Item 2 and Part IV, Items 14 and 15 of proposed Form ATS-N, but as
explained above, the Commission preliminarily believes that the
majority of NMS Stock ATSs would not be required to complete those
items of the proposed form. See supra Section XII.D.2.b.
\780\ See supra notes 663 and accompanying text.
\781\ (Attorney at $380 x 3.5 hours) + (Compliance Clerk at $64
x 1 hours) = $1,394.
\782\ At an average cost per burden hour of $104.20, see Rule
303 PRA Update, supra note 580, 78 FR 43943, the resultant total
related cost of compliance for each ATS would be $312.60 ((3 burden
hours) x $104.20/hour).
\783\ 3 hours x 11 ATSs = 33 burden hours. $312.60 x 11 ATSs =
$3,438.60. See supra Section XII.D.2.b.vi.
---------------------------------------------------------------------------

Currently, ATSs that transact in NMS stocks do not have the ability
to access and file the Form ATS electronically. The Commission proposes
that proposed Form ATS-N would be filed electronically in a structured
format and would require an electronic signature. These proposed
amendments to Regulation ATS would require that every NMS Stock ATS
have the ability to file forms electronically with an electronic
signature. The Commission's proposal contemplates the use of an online
filing system, the EFFS. Based on the widespread use and availability
of the Internet, the Commission preliminarily believes that filing Form
ATS-N in an electronic format would be less burdensome and a more
efficient filing process than the current paper process for NMS Stock
ATSs and the Commission, as it is likely to be less expensive and
cumbersome than mailing and filing paper forms to the Commission.
To access EFFS, an NMS Stock ATS would need to submit to the
Commission an EAUA to register each individual at the NMS Stock ATS who
will access the EFFS system on behalf of the NMS Stock ATS. The

[[Page 81122]]

Commission is including in its estimates the burden for completing the
EAUA for each individual at an NMS Stock ATS that will request access
to EFFS.\784\ For the purposes of the PRA, the Commission preliminarily
estimates that initially, on average, two individuals at each NMS Stock
ATS will request access to EFFS through the EAUA, and each EAUA would
require 0.15 hours to complete and submit.\785\ Therefore, each NMS
Stock ATS would require 0.3 hours to complete the requisite EAUAs \786\
at a cost of $114.00,\787\ and the aggregate initial burden would be
approximately 13.8 hours for all NMS Stock ATSs \788\ at a cost of
$5,244.00.\789\ The Commission also preliminarily estimates that
annually, on average, one individual at each NMS Stock ATS will request
access to EFFS through the EAUA.\790\ Therefore, the ongoing burden to
complete the EAUA would be 0.15 hours annually for each NMS Stock ATS
\791\ at a cost of $57.00,\792\ and the aggregate ongoing burden would
be approximately 6.9 hours for all NMS Stock ATSs \793\ at a cost of
$2,622.00.\794\
---------------------------------------------------------------------------

\784\ For the purpose of completeness, the Commission has also
included the initial estimated burden and costs related to
completing the EAUA in its burden and cost estimates for the initial
ATS-N filings by NMS Stock ATSs. See supra note 643.
\785\ See supra note 665 and accompanying text.
\786\ 0.15 hours per EAUA x 2 individuals = 0.3 burden hours per
NMS Stock ATS. These preliminary estimates are based on the
Commission and its staff's experience with EFFS and EAUAs pursuant
to Rule 19b-4 under the Exchange Act. The 0.3 hours represents the
time spent by two attorneys. The Commission believes it is
appropriate to estimate that, on average, each NMS Stock ATS will
submit two EAUAs initially.
\787\ Attorney at $380 x 0.3 hours per EAUA = $114.00.
\788\ 0.30 hours per EAUA x 46 NMS Stock ATSs = 13.8 burden
hours.
\789\ $114 cost per NMS Stock ATS x 46 NMS Stock ATSs =
$5,244.00.
\790\ The Commission estimates that annually, on average, one
individual at each NMS Stock ATS will request access to EFFS through
EAUA to account for the possibility that an individual who
previously had access to EFFS may no longer be designated as needing
such access.
\791\ 0.15 hours per EAUA x 1 individual = 0.15 hours.
\792\ Attorney at $380 x 0.15 hours per EAUA = $57.00.
\793\ 0.15 hours x 46 NMS Stock ATSs = 6.9 hours.
\794\ $57 cost per NMS Stock ATS x 46 NMS Stock ATSs =
$2,622.00.
---------------------------------------------------------------------------

In addition, the Commission preliminarily estimates that each NMS
Stock ATS will designate two individuals to sign Form ATS-N each year.
An individual signing a Form ATS-N must obtain a digital ID, at the
cost of approximately $25.00 each year. Therefore, each NMS Stock ATS
would require approximately $50.00 annually to obtain digital IDs for
the individuals with access to EFFS for purposes of signing Form ATS-
N,\795\ and the aggregate initial burden would be approximately
$2,300.00 for all NMS Stock ATSs.\796\
---------------------------------------------------------------------------

\795\ $25 per digital ID x 2 individuals = $50.00 per NMS Stock
ATS.
\796\ $50 cost per NMS Stock ATS x 46 NMS Stock ATSs = $2,300.
---------------------------------------------------------------------------

The Commission also preliminarily estimates that NMS Stock ATSs
would incur a one-time cost to make public via posting on their Web
sites a direct URL hyperlink to the Commission's Web site that contains
their Form ATS-N filings.\797\ For the purposes of the PRA, the
Commission preliminarily estimates that this initial, one-time burden
would be approximately 2 hours per NMS Stock ATS at an estimated cost
of $520.00,\798\ and the aggregate estimated burden for all NMS Stock
ATSs would be approximately 92 hours \799\ at an estimated cost of
$23,920.00.\800\
---------------------------------------------------------------------------

\797\ See supra Section XII.D.2.b.v.
\798\ Senior Systems Analyst at $260 x 2 hours = $520.00.
\799\ 2 hours per NMS Stock ATS x 46 NMS Stock ATSs = 92 burden
hours.
\800\ $520 per NMS Stock ATS x 46 NMS Stock ATSs = $23,920.00.
---------------------------------------------------------------------------

2. Costs and Benefits of Public Disclosures of Proposed Form ATS-N
The Commission is proposing Rule 304(b) to mandate greater public
disclosure of NMS Stock ATS operations by making Form ATS-N and Form
ATS-N Amendments publicly available on the Commission's Web site,
requiring each NMS Stock ATS that has a Web site to post a direct URL
hyperlink to the Commission's Web site that contains the documents
enumerated in proposed Rule 304(b)(2), and providing for the posting of
Commission orders related to the effectiveness of Form ATS-N on the
Commission's Web site.\801\ The Commission's proposal to require such
public disclosure is designed, in part, to increase the operational
transparency requirements of NMS Stock ATSs in order to bring those
requirements more in line with the operational transparency
requirements of national securities exchanges.\802\ The Commission
preliminarily believes the proposal should assist market participants
in evaluating and choosing the NMS Stock ATSs to which they may route
orders or become a subscriber due to the proposed enhanced disclosure
requirements.
---------------------------------------------------------------------------

\801\ See supra Section IV.D.
\802\ See id.
---------------------------------------------------------------------------

As mentioned above, the proposed amendments to Regulation ATS would
make Form ATS-N publicly available, thereby improving the information
available to market participants and making that information
consistent. The Commission is proposing to amend Regulation ATS to
require NMS Stock ATSs to file proposed Form ATS-N in lieu of Form
ATS.\803\ Furthermore, the Commission is proposing to require NMS Stock
ATSs to disclose on Form ATS-N detailed information about the
activities of the broker-dealer operator of the NMS Stock ATS and the
broker-dealer operator's affiliates, including: The operation of non-
ATS trading centers and other NMS Stock ATSs; products and services
offered to subscribers; arrangements with unaffiliated trading centers;
trading activities on the NMS Stock ATS by the broker-dealer operator
or any of its affiliates; a SOR(s) (or similar functionality) or
algorithm(s) used to send or receive orders or other trading interest
to or from the ATS; personnel and third parties used to operate the NMS
Stock ATS; differences in the availability of services,
functionalities, or procedures between the broker-dealer operator or
its affiliates and subscribers to the NMS Stock ATS; and safeguards and
procedures to protect subscribers' confidential trading information.
Proposed Form ATS-N would also require NMS Stock ATSs to provide
detailed information about the manner of operations of the ATS,
including: Subscribers; hours of operation; types of orders;
connectivity, order entry, and co-location procedures; segmentation of
order flow and notice about segmentation; display of order and other
trading interest; trading services, including matching methodologies,
order interaction rules, and order handling and execution procedures;
procedures governing suspension of trading and trading during a system
disruption or malfunction; opening, closing, and after-hours
procedures; outbound routing services; market data; fees; trade
reporting; clearance and settlement; order display and execution access
(if applicable); fair access (if applicable); and market quality
statistics published or provided to one or more subscribers. The
Commission is proposing to make certain Form ATS-N filings available to
the public on the Commission's Web site and to require an NMS Stock ATS
that has a Web site to post on the NMS Stock ATS's Web site a direct
URL hyperlink to the Commission's Web site that contains the

[[Page 81123]]

documents enumerated in proposed Rule 304(b)(2).
---------------------------------------------------------------------------

\803\ As discussed above, to the extent an ATS trades both NMS
stocks and non-NMS stocks, it would be required to file both a Form
ATS and a Form ATS-N. See supra Section IV.C.2.
---------------------------------------------------------------------------

Despite NMS Stock ATSs' increasing operational complexities and
importance as a source of liquidity for NMS stocks, the Commission
preliminarily believes that many market participants have limited
information about NMS Stock ATSs' order handling and execution
practices. As noted above, while the current disclosures on Form ATS
are ``deemed confidential when filed,'' some ATSs voluntarily disclose
their Form ATS filings.\804\ Accordingly, there is disparate publicly
available information regarding the current operations of NMS Stock
ATSs. Furthermore, even if an NMS Stock ATS publicly discloses its Form
ATS, some subscribers of that ATS may be privy to more detailed
information about how their orders are executed, routed and/or
prioritized than other subscribers. Accordingly, the Commission
preliminarily believes that, often, some subscribers are able to obtain
a more complete picture of the operations of an NMS Stock ATS than
other subscribers, and as a result, the latter group of subscribers may
not be selecting the venue that most suits their investing or trading
objectives. In addition, based on Commission experience, the
confidentiality of Form ATS has not always resulted in NMS Stock ATSs
disclosing significant details regarding their operations, services,
and functions. Therefore, the status quo, as discussed above in Section
XIII.B, is characterized by variable levels of public and confidential
disclosure by NMS Stock ATSs, which makes it more difficult for both
market participants to evaluate NMS Stock ATSs as potential trading
venues and regulators to oversee NMS Stock ATSs.
---------------------------------------------------------------------------

\804\ See supra notes 155-156.
---------------------------------------------------------------------------

a. Effects on Market Participants' Trading Decisions
The Commission preliminarily believes that the public disclosure of
Form ATS-N would produce economic benefits for market participants.
Specifically, the Commission preliminarily believes that requiring
detailed, public disclosures about the operations of NMS Stock ATSs
would, among other things, better standardize the type of information
market participants receive about those operations. As a result, search
costs for market participants would be lower relative to the baseline,
as homogenous disclosure requirements for all NMS Stock ATSs as part of
the proposed amendments to Regulation ATS should facilitate market
participants' comparison of NMS Stock ATSs when deciding which venue
most suits their trading purposes. Accordingly, the Commission
preliminarily believes the enhanced operational transparency resulting
from the public disclosures on Form ATS-N should aid market
participants when evaluating potential trading venues.
The market for NMS stock execution services has also evolved such
that national securities exchanges and NMS Stock ATSs have increasingly
become direct competitors. However, as explained above, Form ATS
filings continue to be ``deemed confidential when filed,'' while
national securities exchanges must publicly file proposed rule changes
and publicly disclose their entire rulebooks.\805\ The Commission
preliminarily believes that replacing the current Form ATS with
proposed Form ATS-N and making Form ATS-N public would reduce the
discrepancy in information that different market participants receive
about NMS Stock ATSs relative to the information they receive about
national securities exchanges, which would better enable market
participants to compare the stock execution services of NMS Stock ATSs
against those of national securities exchanges. For instance, having
information allowing a more complete comparison between the trading
operations of NMS Stock ATSs and national securities exchanges could
reveal to a market participant certain order handling and preferencing
differences that might result in superior or inferior treatment of
orders handled by an NMS Stock ATS. It could also reveal differences in
fee structures among subscribers that may result in costlier or less
costly execution on a particular trading platform.
---------------------------------------------------------------------------

\805\ See supra notes 155-162 and accompanying text.
---------------------------------------------------------------------------

The Commission preliminarily believes that the proposed amendments
would appropriately calibrate the level of transparency between NMS
Stock ATSs and national securities exchanges, fostering even greater
competition for order flow of NMS stocks between those trading
platforms. As noted above, the Commission also preliminarily believes
that the proposed enhanced disclosure requirements for NMS Stock ATSs
would calibrate the level of transparency among different NMS Stock
ATSs. Moreover, requiring Form ATS-N to be made public upon being
declared effective should lead to additional scrutiny of NMS Stock ATSs
by market participants. Therefore, the Commission preliminarily
believes that the proposal could foster even greater competition for
order flow of NMS stocks among NMS Stock ATSs and between NMS Stock
ATSs and national securities exchanges, which could lead to lower
spreads and thereby foster greater capital formation and increased
market liquidity relative to the baseline. This in turn could enhance
execution quality and lower information opaqueness surrounding an NMS
Stock ATS's operations.
The Commission also preliminarily believes that the proposed
requirement for NMS Stock ATSs to disclose whether and how they segment
their order flow, any criteria used to assign order flow, and their fee
structures should provide market participants with a better
understanding of the operating environment for NMS Stock ATSs. Search
costs to identify which NMS Stock ATSs better serve a market
participant's trading interests should be reduced relative to the
baseline, as market participants may be more able to predict how their
orders will be executed. Broker-dealers might also make better routing
decisions for their particular interests, and the interests of their
customers, which might therefore lead to better execution quality.
Also, the proposed enhanced disclosure requirements for NMS Stock ATSs
could better enable market participants to review trading decisions
made by their broker-dealers. This in turn could lower the level of
uncertainty that was present in the baseline regarding how orders would
be executed on NMS Stock ATSs. As such, the Commission preliminarily
believes that the proposed amendments to Regulation ATS could help
market participants understand how their orders will be executed on an
NMS Stock ATS and evaluate any potential conflicts of interest
involving the broker-dealer operator and its affiliates when handling
such orders.
At the same time, the proposed enhanced disclosure requirements for
NMS Stock ATSs could benefit certain ATSs or national securities
exchanges. For example, market participants would be aware of which NMS
Stock ATSs may offer better execution services or better protection
against the dissemination of their non-public trading information, and
as a result, these ATSs might attract even more order flow. By
attracting greater order flow, NMS Stock ATSs might, in turn, provide
benefits to market participants by offering them a trading platform
that is more liquid and, possibly, has lower trading costs.
In the adopting release for Regulation ATS, the Commission
explained that it believed that the regulatory framework established by
Regulation ATS would

[[Page 81124]]

encourage innovation and encourage the growing role of technology in
the securities markets.\806\ Since the establishment of Regulation ATS,
the market for order execution services for trading NMS stocks--
particularly on ATSs--has flourished. The number of ATSs that trade NMS
stocks has increased substantially since the inception of Regulation
ATS, and as of the end of the second quarter of 2015, trading volume of
NMS stocks on ATSs accounted for 15% of total share volume.\807\ As it
is expected to calibrate the level of transparency between NMS Stock
ATSs and national securities exchanges, the proposal may foster greater
competition for order flow of NMS stocks between these trading
platforms. This greater competition for order flow may in turn
incentivize NMS Stock ATSs to innovate--particularly in terms of their
technology--so that they can attract more trading volume to their
venue.
---------------------------------------------------------------------------

\806\ See Regulation ATS Adopting Release, supra note 7, at
70910.
\807\ See supra Section III.A.
---------------------------------------------------------------------------

The proposed requirement under Part IV, Item 16 of proposed Form
ATS-N to explain and provide aggregate platform-wide order flow and
execution statistics regarding the NMS Stock ATS, which are not
otherwise required disclosures under Exchange Act Rule 605 of
Regulation NMS but still published or otherwise provided to one or more
subscribers by the NMS Stock ATS, could have several potential economic
effects. The economic effects would depend not only on the extent to
which ATSs currently provide or publish such information and the
content of the information which the Commission currently does not have
(such as what order flow and execution statistics NMS Stock ATSs
produce, how they are calculated and whether they are standardized
across ATSs, and which subscribers currently receive these
statistics),\808\ but also on how NMS Stock ATSs choose to comply with
the proposed amendments. Some NMS Stock ATSs may not currently disclose
market quality statistics not otherwise required under Exchange Act
Rule 605, and these ATSs would not incur costs to comply with the
proposed disclosure requirements under Part IV, Item 16 of proposed
Form ATS-N; therefore, the proposed disclosure requirements would
provide no benefits to market participants in such cases. Additionally,
there may be some NMS Stock ATSs that currently provide these aggregate
platform-wide order flow and execution statistics not just to their
subscribers, but also to the broader public. In such cases, the
proposed disclosure requirements under Part IV, Item 16 of proposed
Form ATS-N may not provide any additional benefit to market
participants because the information required under Item 16 would
already be publicly available.
---------------------------------------------------------------------------

\808\ See supra Section XIII.B.3.
---------------------------------------------------------------------------

Furthermore, NMS Stock ATSs that currently provide these aggregate
platform-wide order flow and execution statistics to one or more
subscribers could continue to provide its subscribers with these market
quality statistics, in which case, under the proposal, the NMS Stock
ATS would publicly disclose these statistics and how they are
calculated in proposed Form ATS-N. Another possibility is that these
NMS Stock ATSs may choose to stop providing market quality statistics
to subscribers so as not to have to publicly disclose information about
those statistics and/or the statistics themselves in Form ATS-N. To the
extent that an NMS Stock ATS continues to provide aggregate platform-
wide order flow and execution statistics to subscribers only, it would
publicly disclose and describe how those statistics are calculated in
Form ATS-N, and all market participants, not just subscribers would
have access to the information, which the Commission preliminarily
believes would improve the opportunity for more market participants to
benefit from this information. In addition, to the extent that
subscribers that receive those market quality statistics currently do
not know how the NMS Stock ATS calculates the market quality
statistics, the proposal would help these subscribers better understand
the statistics, and such information may be useful when evaluating an
NMS Stock ATS as a possible venue to which to route orders in order to
accomplish their investing or trading objectives.
However, NMS Stock ATSs that choose to publicly disclose aggregate
platform-wide order flow and execution statistics regarding the NMS
Stock ATS, which are not otherwise required disclosures under Exchange
Act Rule 605 of Regulation NMS but still published or otherwise
provided to one or more subscribers by the NMS Stock ATS would incur
costs to do so. Therefore, some NMS Stock ATSs may choose to comply
with the proposal by ceasing to disclose these market quality
statistics to subscribers. As a result, the proposal could reduce
transparency to the detriment of the subscribers who currently benefit
from the receipt of certain market quality statistics regarding an NMS
Stock ATS, which could in turn result in spill-over effects on the
market. Furthermore, the decision of whether to continue to disclose
such statistics could depend, in part, on how favorable the statistics
make the ATS appear. As such, if some NMS Stock ATSs choose to stop
disclosing order flow and execution statistics due to the proposed
requirements of Item 16 while others decide to make those statistics
public through their Form ATS-N filings, market participants may
perceive the latter group of NMS Stock ATSs as having better execution
quality, and these trading venues may therefore benefit by attracting
even more order flow as a result of such perceptions.
As most NMS Stock ATSs are operated by broker-dealers that also
engage in other brokerage and dealing activities, a broker-dealer
operator of an NMS Stock ATS, or its affiliates, may have business
interests that compete with the ATS's subscribers, or customers of its
subscribers, which in turn may give rise to potential conflicts of
interest.\809\ For instance, multi-service broker-dealers may execute
orders in NMS stocks internally on non-ATS trading centers by trading
as principal against such orders, or by crossing orders as agent in a
riskless principal capacity. The Commission preliminarily expects that
the proposal could discourage broker-dealer operators from trading
internally as principal in their NMS Stock ATS under circumstances
where such might raise conflict of interest concerns because those
operations would be subject to public scrutiny by market participants
seeking to trade on the ATS.
---------------------------------------------------------------------------

\809\ The Commission notes that, based on information provided
on Form ATS, a small number of ATSs solely limit their broker-dealer
business to the operation of an ATS.
---------------------------------------------------------------------------

In addition to the possible conflicts of interest that may arise
from internalization, broker-dealer operators that control and operate
multiple NMS Stock ATSs may also face conflicts of interest. This is
because such broker-dealers might operate competing trading venues for
the execution of orders in NMS stocks without having fully separated
the functions of these competing trading centers. As a result of these
overlapping functionalities, broker-dealers operating multiple NMS
Stock ATSs may provide subscribers of one ATS--which could include
business units of the broker-dealer or its affiliates--with access to
services or information about the other ATS that it does not provide to
other subscribers. The Commission preliminarily believes that the
proposed enhanced disclosure requirements should provide market

[[Page 81125]]

participants with information to better evaluate potential conflicts of
interest when making trading decisions; any resultant change in order
flow to an NMS Stock ATS with such potential conflicts might cause that
ATS to alter its operations to reduce such conflicts.
b. Structuring of Proposed Form ATS-N
The Commission is proposing that proposed Form ATS-N be filed
electronically through the EFFS system in a structured data format. The
Commission is proposing to make public on the Commission's Web site,
among other things, an effective Form ATS-N, and each properly filed
Form ATS-N Amendment upon filing with the Commission. The Commission
would post the Form ATS-N or Form ATS-N Amendment in the same format
that the Commission received the data.
The Commission preliminarily believes that by having NMS Stock ATSs
file the proposed Form ATS-N in a structured data format, the
information's usability for market participants would be enhanced. Once
the data is structured, it is not only human-readable, but also becomes
machine-readable such that market participants could download the
information directly into databases and analyze it using various
software. With structured data, what was static, text-based information
that had to be manually and individually reviewed, can be searched and
analyzed, facilitating the comparison and aggregation across NMS Stock
ATSs.
The Commission understands that there are varying costs associated
with varying degrees of structuring. The Commission preliminarily
believes that its proposed structuring of proposed Form ATS-N has
minimal costs and enhanced benefits for market participants' use of
proposed Form ATS-N information. The Commission is proposing that Parts
I (Name) and II (Broker-Dealer Operator Registration and Contact
Information) of proposed Form ATS-N would be provided as fillable forms
on the Commission's EFFS system. The Commission is proposing that Part
III (Activities of the Broker-Dealer Operator and Affiliates) of
proposed Form ATS-N would be filed in a structured format whereby the
filer would provide checkbox responses to certain questions and
narrative responses that are block-text tagged by Item. The Commission
is proposing that Part IV (The NMS Stock ATS Manner of Operations) of
proposed Form ATS-N would also be filed in a structured format in that
the filer would block-text tag narrative responses by Item. The
Commission is proposing that Part V (Contact Information, Signature
Block, and Consent to Service) of proposed Form ATS-N would be provided
as fillable forms on the Commission's EFFS system. The Commission also
preliminarily believes that requiring NMS Stock ATSs to file proposed
Form ATS-N in a structured format could allow market participants to
avoid additional costs associated with third party sources who might
otherwise extract and structure all the narrative disclosures, and then
charge for access to that structured data. The Commission notes that
the structuring of Form ATS-N can be in a variety of manners. For
example, some or all of the information provided on Form ATS-N could be
structured according to a particular standard that already exists, or a
new taxonomy that the Commission creates, or as a single machine-
readable PDF. The Commission seeks comment on the manner in which
proposed Form ATS-N could be structured to enable the Commission and
market participants to better collect and analyze the data.
c. Effects on Entry and Exit of NMS Stock ATSs
From an NMS Stock ATS's perspective, the proposed amendments to
Regulation ATS may beget uncertainty as to whether its proposed Form
ATS-N will be deemed effective or ineffective. Greater uncertainty
surrounding this proposed process may act as a deterrent for potential
ATSs wishing to effect transactions in NMS stocks. The disclosures
required by proposed Form ATS-N would be more comprehensive and require
significantly more detail than those required on current Form ATS,
which in turn could delay the start of operations for new NMS Stock
ATSs. Therefore, the proposed amendments could raise the entry barrier
for new entrants to the market for NMS stock execution services.
The Commission is proposing that a legacy NMS Stock ATS would be
able to continue its operations pursuant to a previously filed initial
operation report on Form ATS pending the Commission's review of its
initial Form ATS-N. However, if after notice and opportunity for
hearing, the Commission declares the Form ATS-N filed by a legacy NMS
Stock ATS ineffective, the ATS would be required to cease operations.
The NMS Stock ATS would then have the opportunity to address
deficiencies in the previously filed form by filing a new Form ATS-
N.\810\ The Commission is also proposing to make Form ATS-N Amendments
public upon filing and also to make the public aware of which Form ATS-
N Amendments filed by NMS Stock ATSs posted on the Commission's Web
site are pending Commission review and could still be declared
ineffective. The Commission preliminarily believes that this process
would provide immediate transparency to market participants about an
NMS Stock ATS's current operations while also notifying market
participants that the disclosures in a filed Form ATS-N Amendment are
still subject to Commission review. If the Commission declares a Form
ATS-N Amendment ineffective, the NMS Stock ATS shall be prohibited from
operating pursuant to the ineffective Form ATS-N Amendment. The NMS
Stock ATS could, however, continue to operate pursuant to a Form ATS-N
that was previously declared effective.\811\ Given the uncertainty that
may surround the process to declare Form ATS-N effective or ineffective
or Form ATS-N Amendments ineffective, coupled with the number and
complexity of the new disclosures that would be required under proposed
Form ATS-N, some broker-dealer operators of legacy NMS Stock ATSs may
find that the costs of compliance with this proposal outweigh the
benefits of continuing to operate their NMS Stock ATS, particularly if
the operation of the ATS does not constitute a significant source of
profit for a broker-dealer operator. As such, the NMS Stock ATS may
exit the market.
---------------------------------------------------------------------------

\810\ See supra Section IV.C.
\811\ Nothing would preclude the NMS Stock ATS from later
submitting a new or revised Form ATS-N Amendment for consideration
by the Commission.
---------------------------------------------------------------------------

As explained above, NMS Stock ATSs would incur both implementation
and ongoing costs to meet the regulatory requirements under proposed
Rule 304. In particular, the proposed rules would require an NMS Stock
ATS to file amendments on proposed Form ATS-N to notice a material
change to its operations at least 30 days prior to implementing that
material change. Under the proposal, if the Commission declares a
material amendment ineffective after this advance notice period has
expired, the NMS Stock ATS would be required to unwind the material
change if it has already been implemented on the ATS or be precluded
from proceeding to implement the change if it was not already
implemented. This uncertainty regarding an NMS Stock ATS's ability to
implement material changes may also result in some NMS Stock ATSs
exiting the market.

[[Page 81126]]

Once an NMS Stock ATS's initial Form ATS-N is declared effective by
the Commission, the information disclosed on Form ATS-N would be made
available to the broader investing public. Proposed Form ATS-N
Amendments would be made public upon filing, and in the case the
amendments are not declared ineffective by the Commission, the
Commission would no longer indicate that the Form ATS-N Amendment is
under Commission review.\812\ Examples of the operational information
that could be disclosed to a given NMS Stock ATS's competitors and the
public on proposed Form ATS-N would include: Characteristics and use of
order types (including indications of interest and conditional orders);
order handling and priority distinctions among types of orders and/or
subscribers; order entry and display procedures; the allocation and
matching of orders, quotes, indications of interest and conditional
orders; execution and trade reporting procedures, and aggregate
platform-wide market quality statistics regarding the NMS Stock ATS
that the NMS Stock ATS currently only provides to subscribers.
---------------------------------------------------------------------------

\812\ See supra Section IV.D. See also proposed Rule 304(b)(2).
---------------------------------------------------------------------------

While the information elicited on proposed Form ATS-N would be
similar to the information that national securities exchanges are
required to publicly disclose, the Commission preliminarily believes
that the disclosure of this previously non-public information could
have some impact on the direction of order flow in the market. For
instance, to the extent that an NMS Stock ATS's competitive advantage
in the market is driven by its matching methodology, other operational
characteristics that are currently confidential, or the non-public
disclosure of certain aggregate platform-wide market quality statistics
provided to subscribers, the disclosure of this information could
result in other NMS Stock ATSs implementing similar methodologies,
which might cause market participants to direct more order flow to
those other NMS Stock ATSs. In addition, some order flow may be
directed away from NMS Stock ATSs and towards national securities
exchanges or broker-dealers that operate non-ATS trading centers if
market participants discover that their orders could receive lower
execution quality on an NMS Stock ATS relative to these other trading
centers. As such, the proposal may result in lower revenues for some
NMS Stock ATSs, and those ATSs may then find it unprofitable to stay in
the market. The Commission preliminarily believes that fewer trading
venues in the market will affect competition between existing NMS Stock
ATSs and national securities exchanges as well as among existing NMS
Stock ATSs, which would in turn affect market participants.
Not only could an NMS Stock ATS's competitive advantage be driven
by its current matching methodology or other operational
characteristics, it could also be driven by the NMS Stock ATS's ability
to improve these methodologies through technological innovation or
enhancements. Under the proposal, the Commission preliminarily believes
that the disclosure of an NMS Stock ATS's innovations in proposed Form
ATS-N Amendments could potentially result in certain NMS Stock ATSs
losing their technological advantage. If NMS Stock ATSs cannot innovate
fast enough to regain their competitive advantage in the market, orders
may also flow away from those NMS Stock ATSs, and as a result, these
trading venues may choose to exit the market if operating the ATS
becomes unprofitable for the broker-dealer operator.
Both large and small NMS Stock ATSs may be affected by the detailed
disclosures required under proposed Rule 304 and Form ATS-N, though,
the proposal may affect the ability of each type of ATS to stay in the
market differently. As noted above, to the extent that an ATS's
dominance in the market--in terms of being able to attract substantial
NMS stock trading volume--is driven by its matching methodology or
other operational characteristics that are currently confidential, the
public disclosure of this information may result in lower revenue for
the NMS Stock ATS. If this is the case for a small NMS Stock ATS, or a
large ATS without a substantial profit margin, the broker-dealer
operator may no longer view the ATS as being profitable and may
potentially exit the market altogether. Alternatively, if this is the
case for a large NMS Stock ATS or a smaller NMS Stock ATS with large
profit margins, while the NMS Stock ATS may not exit the market, such
an ATS may need to engage in costly research in order to develop new
matching methodologies to stay profitable in the market. Further, if
revenue and earnings margins for operating an NMS Stock ATS are below
the average for the entire market, the NMS Stock ATS risks being
squeezed out by its competitors and would potentially exit the
market.\813\ The result of this may be that there would be fewer
trading venues in the market for NMS stock execution services. This
could affect the competition between existing NMS Stock ATSs and
national securities exchanges as well as among existing NMS Stock ATSs,
which would in turn affect market participants. The Commission notes,
however, that many smaller NMS Stock ATSs may not engage in other
brokerage or dealing activities in addition to the operation of their
NMS Stock ATS. Therefore, certain aspects of proposed Form ATS-N (such
as several items of Part III) may not be applicable to smaller NMS
Stock ATSs, which would reduce the burdens and mitigate the effects of
the proposed disclosure requirements on these smaller NMS Stock ATSs.
---------------------------------------------------------------------------

\813\ See Singhvi, Surrendra S. and Harsha B. Desai, 1971, ``An
Empirical Analysis of the Quality of Corporate Financial
Disclosure,'' Accounting Review 46, 129-138.
---------------------------------------------------------------------------

The Commission expects that the implementation and ongoing costs
associated with filing proposed Form ATS-N could also affect the nature
of competition. As Table 1 shows, there is a significant degree of
difference in the size of NMS Stock ATSs, when measured by dollar or
share volume. If the costs associated with filing proposed Form ATS-N
become disproportionately greater for smaller volume NMS Stock ATSs,
some of these legacy NMS Stock ATSs might cease operations, and exit
the market for NMS stock execution services. As explained above, based
on analysis for purposes of the PRA, the Commission has calculated
preliminary estimates of the implementation and ongoing costs for the
proposed amendments to Regulation ATS. The Commission preliminarily
believes that the estimated implementation cost is a fixed cost that
would be roughly similar across NMS Stock ATSs, regardless of their
dollar volume size; this implies that implementation costs will
represent a larger fraction of revenue generated on a small NMS Stock
ATS relative to that percentage on a large NMS Stock ATS, which could
cause some smaller NMS Stock ATSs to exit the market. However, it could
be the case that if the NMS Stock ATSs that decide to exit due to this
fixed implementation cost only transact small dollar (or share) volume,
the Commission may not expect to see a large impact on the overall
competitive structure of the NMS Stock ATSs that would remain in the
market. More so, the order flow that was being traded on these small
NMS Stock ATSs might in fact be absorbed and redistributed amongst
these larger surviving NMS Stock ATSs.

[[Page 81127]]

Another effect that the proposal could have on competition is that
the greater disclosure requirements of NMS Stock ATSs, particular the
disclosures related to the other business activities of the broker-
dealer operator and its affiliates, may influence a broker-dealer
operator's decisions with respect to its operations of the NMS Stock
ATS. Given the proposed disclosure requirements regarding the
activities of broker-dealer operators and their affiliates, a multi-
service broker-dealer operator of an NMS Stock ATS may cease operating
its NMS Stock ATS and send its order flow, which would have gone to the
broker-dealer operator's NMS Stock ATS, to other trading centers. For
example, a multi-service broker-dealer operator could internalize the
order flow that it would typically send to its ATS or send that order
flow to a broker-dealer that, does not operate an NMS Stock ATS, to
internalize. Alternatively, the broker-dealer operator might send the
order flow to a non-affiliated NMS Stock ATS that is operated by a non-
multi-service broker-dealer, who would likely not encounter the same
potential conflicts of interest as a multi-service broker-dealer that
operates an NMS Stock ATS. Finally, the broker-dealer operator could
also send its order flow to national securities exchanges for
execution.
Overall, the Commission preliminarily believes that the possible
exit of NMS Stock ATSs from the market, or the reduced entry of new NMS
Stock ATSs, due to the requirements under proposed Rule 304 and Form
ATS-N might be potentially harmful to competition in the market for NMS
stock execution services. The potential exit by existing NMS Stock ATSs
and the reduced entry into the market by prospective NMS Stock ATSs may
impact market participants by reducing the number of NMS stock trading
venues and thus, reducing a market participant's opportunities to
minimize its trading costs by sending orders to different trading
platforms. As such, the possible exit of NMS Stock ATSs from the market
for NMS stock execution services and lower rate of entry for new NMS
Stock ATSs may result in greater costs relative to the baseline cost
savings that NMS Stock ATSs currently afford market participants.\814\
The Commission, however, is unable to predict whether legacy NMS Stock
ATSs will exit the market and therefore, cannot quantify the ultimate
effect that this will have on competition.
---------------------------------------------------------------------------

\814\ See supra Section XIII.B.7.
---------------------------------------------------------------------------

d. Effects on Trading Costs, Price Discovery and Market Efficiency
As discussed above, the proposed heightened disclosure requirements
for NMS Stock ATSs might cause some NMS Stock ATSs to cease operations,
which could result in reduced competition among and between NMS Stock
ATSs. If it is the case that the NMS Stock ATSs that face the highest
cost of disclosure are the ones that have worse execution quality, the
surviving NMS Stock ATSs might enhance execution quality and may allow
market participants to transact at lower prices. If order flow is
directed towards these surviving NMS Stock ATSs after the trading
venues that face the highest cost of disclosure cease operations, then
a smaller number of surviving trading venues might mean that there
would be a higher likelihood that the orders of buyers and sellers on
an NMS Stock ATS would interact and execute, which could improve
liquidity. Even if some of the order flow from NMS Stock ATSs that
cease operations does not migrate to the surviving NMS Stock ATSs, but
migrates towards national securities exchanges, greater order
interaction between buyers and sellers on a national securities
exchange might be fostered, thereby improving price discovery.
Moreover, because some NMS Stock ATSs operate as crossing networks and
derive their prices from national securities exchanges, greater price
discovery on a national securities exchange could spill over to affect
the execution prices on the surviving NMS Stock ATSs and thereby
potentially reduce market participants' trading costs. Additionally,
given the fairly standardized set of information that would be publicly
disclosed on proposed Form ATS-N and that trading in the market by NMS
Stock ATSs may in fact be concentrated on fewer NMS Stock ATSs as a
result of this proposal, market participants may process, and react
more quickly to, information pertaining to changes in an NMS Stock
ATS's operations when evaluating potential trading venues. As such, the
proposed amendments to Regulation ATS might improve market efficiency.
Alternatively, heightened disclosure requirements pertaining to the
public disclosure of proposed Form ATS-N could have a contrary effect,
by increasing market participants' trading costs relative to the
baseline. Institutional investors may use NMS Stock ATSs in an attempt
to minimize the price impact of their trades. Even though the size of
the average order on NMS Stock ATSs has been shown to be roughly
equivalent to that on national securities exchanges, smaller orders on
NMS Stock ATSs can be the result of shredding larger orders.\815\
Preventing information regarding those orders from becoming public can
minimize adverse price moves that may occur when proprietary traders
learn that there may be large buyers or sellers in the market. Thus,
NMS Stock ATSs represent a tool for institutional investors to help
control information leakage. If some NMS Stock ATSs exit the market as
a result of the proposed amendments, there could be a reduction in the
number of trading platforms that allow institutional investors to
control their price impact costs. Institutional investors, who would
have traded on these NMS Stock ATSs if they did not exit the market,
may now have to trade on other trading venues, such as other NMS Stock
ATSs or national securities exchanges. If institutional investors
execute their orders on a national securities exchange, they may have
to absorb price impact costs, because national securities exchanges may
not offer a means for reducing these costs. Insofar that an NMS Stock
ATS's competitive advantage is driven by its matching methodology or
other operational characteristics that are currently confidential, the
Commission understands such disclosure could impact this competitive
advantage. However, the Commission does not know the extent to which
the proposal would affect an NMS Stock ATS's decision to continue
operations or exit the market, and, therefore, cannot estimate the
number of ATSs that may exit. Furthermore, the Commission does not have
information in order for it to make reasonable assumptions about the
fraction of displaced volume--from NMS Stock ATSs that would cease
operations--that would be directed towards national securities
exchanges, NMS Stock ATSs, or non-ATS OTC trading centers. Therefore,
the Commission cannot estimate the impact that the proposal would have
on an NMS Stock ATS's price impact costs.
---------------------------------------------------------------------------

\815\ See Tuttle: ATS Trading in NMS Stocks, supra note 126.
---------------------------------------------------------------------------

The price impact cost institutional investors face on a national
securities exchange is related to the depth of the market, and the
depth of the market is often related to the market capitalization of a
stock and its liquidity.\816\ For instance, if an institutional
investor were to trade a large capitalization stock on a national
securities exchange as opposed to on an NMS Stock ATS,

[[Page 81128]]

given that the large capitalization stock might be more liquid than a
small capitalization stock, and thereby have greater market depth
outside the inside quote, the institutional investor may suffer little
difference in price impact costs by executing the order on a national
securities exchange. On the other hand, a small capitalization, low
priced stock might have much lower market depth outside the inside
quote, and, therefore, the difference in price impact costs for
executing orders of these stocks on an exchange might be
substantial.\817\ Furthermore, because NMS Stock ATSs trade larger
dollar volume in small capitalization, low priced stocks, the price
impact costs for institutional investors that trade in such stocks may
in fact be severe if many NMS Stock ATSs decided to exit the
market.\818\ As mentioned above, while the Commission is unable to
estimate the number of NMS Stock ATSs that may potentially exit the
market, the Commission also does not know whether firms will send their
small capitalization stock orders to other surviving NMS Stock ATSs,
national securities exchanges, or non-ATS trading centers. Therefore,
the Commission cannot estimate what price market participants would
receive for the small capitalization stock orders and thus, the
Commission cannot estimate the price impact costs associated with these
small capitalization stock orders.
---------------------------------------------------------------------------

\816\ A deep market is one in which larger orders do not have a
much greater impact on prices than smaller orders. See Foucault,
Pagano and Roell, 2013, ``Market Liquidity,'' Oxford University
Press.
\817\ See Collver, Charles, 2014, ``A Characterization of Market
Quality for Small Capitalization US Equities,'' SEC Division of
Trading and Markets Working Paper, https://www.sec.gov/marketstructure/research/small_cap_liquidity.pdf.
\818\ The Commission notes that it is difficult to quantify the
increase in price impact costs faced by institutional traders
because it is unclear how many NMS Stock ATSs may cease operations,
and more so, it is unclear whether these institutional traders who
would like to execute large orders will route them to other ATSs
that may continue to operate.
---------------------------------------------------------------------------

3. Written Safeguards and Written Procedures To Protect Subscribers'
Confidential Trading Information, and Proposed Recordkeeping
Requirements
The Commission is also proposing to amend existing Rules 301(b)(10)
\819\ and 303(a)(1) \820\ of Regulation ATS to require all ATSs to
adopt and preserve written safeguards and written procedures to protect
subscribers' confidential trading information, as well as written
oversight procedures to ensure those safeguards and procedures are
followed. As explained above, the Commission preliminarily believes
that these proposed amendments should both strengthen the effectiveness
of ATS' safeguards and procedures and improve those ATSs' ability to
implement and monitor the adequacy of, and the ATSs' compliance with,
their safeguards and procedures.\821\ Furthermore, the Commission
preliminarily believes that requiring ATSs to adopt written safeguards
and written procedures will benefit the Commission by helping it better
understand, monitor, and evaluate how each ATS protects subscribers'
confidential trading information from unauthorized disclosure and
access.\822\ The Commission also expects that this proposed requirement
will help oversight by the SRO of which the NMS Stock ATS's broker-
dealer operator is a member.
---------------------------------------------------------------------------

\819\ See 17 CFR 242.301(b)(10).
\820\ See 17 CFR 242.303(a).
\821\ See supra Section IX.
\822\ See id.
---------------------------------------------------------------------------

Under Rule 301(b)(10), all ATSs must establish adequate safeguards
and procedures to protect subscribers' confidential trading information
and adequate oversight procedures to ensure that the safeguards and
procedures established to protect such trading information are
followed. However, neither Rule 301(b)(10) nor the recordkeeping
requirements under Rule 303(a)(1) of Regulation ATS require that an ATS
have and preserve those safeguards and procedures in writing. As
explained above, the Commission preliminarily believes that the
proposal to require written safeguards and written procedures would
better enable ATSs--in particular, those ATSs that do not currently
maintain written safeguards and procedures--to protect confidential
subscriber trading information and implement and monitor the adequacy
of, and the ATS's compliance with, its safeguards and procedures.\823\
---------------------------------------------------------------------------

\823\ See id.
---------------------------------------------------------------------------

The Commission is also proposing to amend the recordkeeping rules
relevant to the proposed amendments to Rule 301 and proposed Rule 304.
The Commission is proposing that NMS Stock ATSs shall preserve Form
ATS-N, Form ATS-N Amendments, and a Form ATS-N notice of cessation for
the life of the enterprise and any successor enterprise pursuant to
Rule 303(a)(2) \824\ of Regulation ATS.\825\ The Commission is also
proposing to amend Rule 303(a)(1)\826\ so that ATSs must preserve for a
period of not less than three years, the first two in an easily
accessible place, the written safeguards and procedures that would be
required under the proposed amendments to Rule 301(b)(10). The
Commission understands that these proposed amendments regarding
recordkeeping requirements may require NMS Stock ATSs to set up systems
and procedures, and these are expected to account for a portion of the
implementation costs under this proposal.\827\
---------------------------------------------------------------------------

\824\ See 17 CFR 242.303(a)(2).
\825\ The Commission notes that an NMS Stock ATS that had
previously made filings on Form ATS would be required to preserve
those filings for the life of the enterprise, as well as filings
made going forward on Form ATS-N.
\826\ See 17 CFR 242.303(a)(1).
\827\ See supra Section XIII.C.1.
---------------------------------------------------------------------------

D. Alternatives

1. Require NMS Stock ATSs To Publicly Disclose Current Form ATS
One alternative would be to allow NMS Stock ATSs to continue to
describe their operations on current Form ATS, but either make Form ATS
public by posting on the Commission's Web site or require NMS Stock
ATSs to publicly disclose their initial operation reports, amendments,
and cessation of operations on Form ATS. Non-NMS Stock ATSs' Form ATS
filings would continue to remain confidential.
Use of current Form ATS would lower the cost of compliance for
current and future NMS Stock ATSs compared to compliance costs under
the proposal. However, because the content of Form ATS would not change
under this alternative, market participants would continue to receive
limited information regarding how orders interact, match, and execute
on NMS Stock ATSs and the activities of NMS Stock ATSs' broker-dealer
operators and their affiliates. Relative to the proposal, market
participants' search costs in identifying which NMS Stock ATS may
better serve their trading interests would increase. As a result, their
trading costs may increase and the execution quality related to their
orders may be reduced. The Commission expects public disclosure of Form
ATS could have some harmful effects on the competitive dynamics of NMS
Stock ATSs and result in some exiting the market. However, such effects
would likely be smaller than those expected under the proposal because,
under this alternative, Form ATS would require disclosure of less
information about the operations of NMS Stock ATSs than the more
expansive and granular information that NMS Stock ATSs would be
required to disclose in Form ATS-N.
Requiring NMS Stock ATSs to publicly disclose initial operation
reports, amendments, and cessation of operations on Form ATS would
place NMS Stock ATSs under greater public scrutiny, which could improve
the quality of the filings compared to the

[[Page 81129]]

current baseline. Regulators' oversight of NMS Stock ATSs under this
alternative would be similar to that under current Regulation ATS, so
they would not be able to offer the same level of protection to market
participants as under the proposal.
2. Require Proposed Form ATS-N But Deem Information Confidential
Another alternative would be to require NMS Stock ATSs to file
proposed Form ATS-N with the Commission but not make Form ATS-N
publicly available. Proposed Form ATS-N would include detailed
disclosures about the NMS Stock ATS's operations and the activities of
its broker-dealer operator and its affiliates, and the Commission would
declare filings on Form ATS-N either effective or ineffective.
This alternative would improve the quality of NMS Stock ATSs'
disclosures to the Commission because proposed Form ATS-N would require
more information about the operations of NMS Stock ATSs than is
currently solicited on Form ATS. In addition, proposed Form ATS-N would
require information about the activities of the broker-dealer operator
and its affiliates, whereas current Form ATS does not require such
information. This alternative, which would include a process for the
Commission to determine whether an NMS Stock ATS qualifies for the
exemption from the definition of ``exchange,'' and declare a proposed
Form ATS-N effective or ineffective, would strengthen the Commission's
oversight of NMS Stock ATSs.
However, this alternative would not make NMS Stock ATSs' operations
more transparent for market participants. The lack of public disclosure
of the means of order interaction, display and routing practices by NMS
Stock ATSs could result in market participants making less informed
decisions regarding where to route their orders and therefore result in
lower execution quality than they would obtain under the proposal.
Additionally, this alternative would not reduce the search costs for
subscribers to identify potential routing destinations for their
orders. Because proposed Form ATS-N would not be publicly disclosed
under this alternative, the level of competition between NMS Stock ATSs
would stay the same, and the lack of transparency about an NMS Stock
ATS's operations and activities of the broker-dealer operator and its
affiliates would be expected to persist.
3. Require NMS Stock ATSs To Publicly Disclose Proposed Form ATS-N But
Not Declare Proposed Form ATS-N Effective or Ineffective
Under this alternative, the Commission would require NMS Stock ATSs
to file proposed Form ATS-N and would make it public, but the
Commission would continue to use the current notice regime instead of
declaring Form ATS-N effective or ineffective. The Commission would not
determine whether an NMS Stock ATS qualifies for the exemption from the
definition of ``exchange,'' and would not declare proposed Form ATS-N
filings effective or ineffective.
Benefits of maintaining the current notice regime would include a
lower demand for Commission and its staff resources to determine
whether an NMS Stock ATS qualifies for the exemption from the
definition of ``exchange'' and whether the Commission should declare a
proposed Form ATS-N effective or ineffective, and to assess whether the
Commission should suspend, limit, or revoke the effectiveness of an NMS
Stock ATS's Form ATS-N. In addition, maintaining the current notice
regime as opposed to declaring the proposed Form ATS-N effective or
ineffective could be cost-effective to NMS Stock ATSs and could lower
the barriers to entry for new NMS Stock ATSs compared to such barriers
under the proposal.
Without a process to declare proposed Form ATS-N effective or
ineffective, there would be less assurance that disclosures by NMS
Stock ATSs would be accurate, current, and complete. Under this
alternative, it would be more difficult for the Commission to exercise
its oversight responsibilities with respect to the accuracy, currency,
completeness and fair presentation of disclosures on proposed Form ATS-
N than under the proposal, which would provide a process for the
Commission to declare a proposed Form ATS-N effective or ineffective.
Moreover, continued use of a notice regime could lessen the benefit of
enhanced transparency relative to such benefit under the proposal and
as a result, this alternative might not provide the same level of
protection to market participants as the proposal.
4. Initiate Differing Levels of Public Disclosure Depending on NMS
Stock ATS Characteristics
Under this alternative, the Commission would require different
levels of disclosure among NMS Stock ATSs based on dollar trading
volume. For instance, NMS Stock ATSs with lower transaction volumes
would be subject to lower levels of disclosure on proposed Form ATS-N.
As a result, their compliance costs would be lower, which could lower
their entry barriers relative to such barriers under the proposal.
Because these small NMS Stock ATSs would not have to disclose as much
information pertaining to their operations, they could have more time
to innovate without disclosing such innovation to competitors. This
could allow these small NMS Stock ATSs to better compete with more
established NMS Stock ATSs, national securities exchanges, and broker-
dealers and put more competitive pressure on the market. Furthermore,
reduced regulatory burdens for small NMS Stock ATSs may result in
greater innovation relative to the proposal because these small NMS
Stock ATSs would not have to be concerned about disclosing proprietary
information. Greater innovation for small NMS Stock ATSs could give
them a greater competitive advantage in attracting order flow relative
to large NMS Stock ATSs. This competitive advantage for small NMS Stock
ATSs could spill over to market participants who execute on these ATSs,
by increasing the execution quality of their trades.
However, under this alternative, broker-dealer operators of NMS
Stock ATSs could seek to allocate order flow to multiple NMS Stock ATSs
operated by either the broker-dealer or its affiliates to avoid
reaching threshold volumes that would trigger additional disclosure
requirements. This could create some information opaqueness in the
market, which could lead to lower execution quality for market
participants relative to that under the proposal. The Commission notes,
however, that although Regulation ATS currently has volume thresholds
for fair access and quote transparency requirements, the Commission has
not observed any ATSs using such tactics to avoid crossing thresholds.
5. Require NMS Stock ATSs To Register as National Securities Exchanges
and Become SROs
Under this alternative, the Commission would eliminate the
exemption from the definition of ``exchange'' for NMS Stock ATSs under
Exchange Act Rule 3a1-1(a) so that an NMS Stock ATS would be required
to register as a national securities exchange and become an SRO. This
alternative would provide market participants with the same protections
that accompany the regulatory regime that applies to national
securities exchanges. Without the benefit of the exemption from the
definition of ``exchange,'' an NMS Stock

[[Page 81130]]

ATS would be required, among other things, to file proposed rule
changes publicly on Form 19b-4 and make publicly available its entire
rule book. Moreover, as a national securities exchange, an NMS Stock
ATS would not be allowed to have conflicts of interest that it can as
an NMS Stock ATS. More information about the priority, order
interaction, display, and execution procedures would help market
participants make better informed decisions about where to route their
orders for best execution. If most NMS Stock ATSs decided to register
as national securities exchanges and some NMS Stock ATSs withdrew from
the market and stopped operating, competition among and between these
trading venues could increase, leading to greater market liquidity and
market efficiency. Further, this alternative could strengthen
Commission oversight, thus benefitting market participants.
While NMS Stock ATSs would no longer need to register as broker-
dealers or comply with Regulation ATS, registration as national
securities exchanges would create high startup costs and high ongoing
operational costs compared to what they would incur under the
proposal.\828\ Under this alternative, these new national securities
exchanges, which would be SROs, would, among other things, be required
to comply with Section 6 of the Exchange Act. Because national
securities exchange are SROs, a new national securities exchange would
bear certain regulatory costs that are higher than those associated
with registering as a broker-dealer. For example, a national securities
exchange would bear expenses associated with joining the national
market system plans and surveilling trading activity and member conduct
on the exchange.\829\
---------------------------------------------------------------------------

\828\ Newly registered national securities exchanges must
establish appropriate surveillance and disciplinary mechanisms, and
as a result incur start-up costs associated with such obligations,
such as writing a rule book. See Regulation ATS Adopting Release,
supra note 7, at 70897. Furthermore, the cost of acquiring the
necessary assets and the operating funds to carry out the day-to-day
functions of a national securities exchange are significant. See id.
\829\ See Regulation NMS Adopting Release, supra note 7, at
70903.
---------------------------------------------------------------------------

6. Discontinue Quarterly Volume Reports on Form ATS-R
Another alternative would be to amend Regulation ATS so that NMS
Stock ATSs would no longer be required to file quarterly volume reports
on Form ATS-R because, as noted above, FINRA rules currently require
ATSs that transact in NMS stocks to report aggregate weekly volume
information and the number of trades to FINRA in certain equity
securities, including NMS stocks.\830\
---------------------------------------------------------------------------

\830\ See supra note 122. Each ATS is also 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.
---------------------------------------------------------------------------

Instead, NMS Stock ATSs would be required to disclose, in quarterly
amendments to Form ATS-N, the information that is currently captured by
Form ATS-R that is not captured by FINRA reporting requirements. The
Commission notes that, in addition to requiring unit volume of
transactions, Form ATS-R, which is ``deemed confidential when filed,''
\831\ requires ATSs to report dollar volume of transactions during the
quarter, a list of all subscribers that were participants on the ATS
during the quarter, a list of all securities that were traded on the
ATS during the quarter, and, if the ATS is subject to fair access
requirements under Rule 301(b)(5), information about all persons that
were granted, denied or limited access during the quarter.
---------------------------------------------------------------------------

\831\ See 17 CFR 242.301(b)(2)(vii).
---------------------------------------------------------------------------

The benefit of this alternative would be that NMS Stock ATSs would
no longer be required to report quarterly on Form ATS-R information
that is otherwise available. In addition, information that is currently
deemed confidential on Form ATS-R would be made publicly available in
quarterly amendments to Form ATS-N. NMS Stock ATSs would, however, be
required to submit such quarterly amendments, which an NMS Stock ATS
would not otherwise be required to do if the NMS Stock ATS did not have
any other material changes to report during the quarter.
The Commission does not believe that this alternative would create
significant new costs in preparing a quarterly Form ATS-N because the
costs would be comparable to the costs of preparing Form ATS-R.
However, as a result of the effective merging of proposed Form ATS-N
and current Form ATS-R under this alternative, some of the information
that would be made public on proposed Form ATS-N, such as the ATS's
subscriber list and the list of persons granted, denied, or limited
access during the reporting period (which is not being solicited under
the proposed Form ATS-N) could be proprietary. Making such information
public could harm the NMS Stock ATS as well as persons denied access.
7. Require NMS Stock ATSs To Operate as Limited Purpose Entities
Another alternative would be to amend Regulation ATS to require an
NMS Stock ATS to operate as a ``stand-alone'' entity, which would exist
only to operate the ATS and have no affiliation with any broker-dealer
that seeks to execute proprietary or agency orders on the NMS Stock
ATS. Under this alternative, NMS Stock ATSs would be required to
publicly disclose proposed Form ATS-N, proposed Form ATS-N Amendments,
and notices of cessation on proposed Form ATS-N, and would be limited
purpose entities that could not engage in any activities other than
operation of the ATS. This alternative would prohibit the broker-dealer
operator of the NMS Stock ATS from engaging in any other broker-dealer
activity, and would consequently prohibit the operation of an NMS Stock
ATS by a multi-service broker-dealer.
The benefit of this alternative would be to eliminate potential
conflicts of interest by requiring a broker-dealer that operates an NMS
Stock ATS to have only a single business function, namely, operating
the ATS. The broker-dealer would be required to eliminate any other
functions, such as trading on a proprietary basis or routing customer
orders.
However, this alternative may discourage broker-dealers from
creating and operating innovative NMS Stock ATS platforms, and instead
drive them to execute their own proprietary trades internally on their
other broker-dealer systems. In addition, if they were no longer able
to trade on a proprietary basis or route customer orders to their own
NMS Stock ATS, many broker-dealers may choose to file a cessation of
operations report and shut down the operations of their NMS Stock
ATS.\832\ Shutting down their NMS Stock ATS operations could result in
similar (though potentially more severe) effects on the competitive
dynamics of the ATS market as under the proposal. This could push more
liquidity to less transparent venues (i.e., non-ATS OTC trading
centers) or could result in more liquidity moving to national
securities exchanges. The remaining NMS Stock ATSs, which would likely
be fewer in number as some broker-dealer operators choose to cease
operations of the ATSs, could become popular trading destinations
because the absence of conflicts of interest could encourage market
participants to route orders to those trading centers. Market

[[Page 81131]]

participants would likely still have a need for anonymous trading,
which could further contribute to liquidity still flowing to the stand-
alone NMS Stock ATSs. Thus, if multi-service broker-dealers that
operate their own NMS Stock ATS cease operating the ATSs, liquidity
might move to other trading venues, including both transparent venues,
such as national securities exchanges, and less transparent venues,
such as non-ATS OTC trading centers. On the other hand, cessation of
operations of NMS Stock ATSs owned by multi-service broker dealers
could also result in stand-alone NMS Stock ATSs, which would not have
the potential conflicts of interest discussed above, attracting more
liquidity.
---------------------------------------------------------------------------

\832\ Alternatively, current broker-dealer operators of ATSs
that trade NMS stocks may choose to spin-off or sell their ATS
rather than cease operations. The expected number of broker-dealer
operators selling their ATSs at once could affect the value the
broker-dealer operator could receive from the sale and, as such,
could factor into the decision of whether to spin-off, sell, or fold
their ATS.
---------------------------------------------------------------------------

8. Lower the Fair Access Threshold for NMS Stock ATSs
As discussed above, NMS Stock ATSs are not required to provide fair
access to the services of the NMS Stock ATS unless the ATS reaches the
5% trading volume threshold in a stock under Rule 301(b)(5) of
Regulation ATS.\833\ As an alternative to the proposed enhancements to
the conditions to the exemption from the definition of ``exchange''
pursuant to Rule 3a1-1(a) for NMS Stock ATSs, which would include NMS
Stock ATSs making the disclosures required by Form ATS-N so that market
participants could make more informed decisions about an NMS Stock ATS
as a potential trading venue,\834\ the Commission considered lowering
the fair access threshold under Rule 301(b)(5) of Regulation ATS \835\
for NMS Stock ATSs to a level sufficiently low such that most NMS Stock
ATSs would be prohibited from engaging in many discriminatory
practices.\836\
---------------------------------------------------------------------------

\833\ See supra notes 92-95 and accompanying text.
\834\ As discussed above in Sections VII and VIII, the
information that would be disclosed on Form ATS-N would include,
among other things, whether different classes of subscribers or
persons have differing access to the services of the ATS.
\835\ 17 CFR 242.301(b)(5).
\836\ As discussed above in Section VII.B, the requirements of
Rule 301(b)(5) that prohibit or limit discriminatory practices of
ATSs only apply to NMS Stock ATSs that cross the fair access
threshold, and then, apply only with respect to the NMS stocks in
which an ATS crosses the threshold.
---------------------------------------------------------------------------

One of the principal aims of this proposed rulemaking is to provide
market participants with more information about the activities of the
broker-dealer operator, its affiliates, and the operations of the NMS
Stock ATS, so they may better assess NMS Stock ATSs as potential
trading venue for their orders. For example, as discussed above, the
Commission is concerned that market participants have limited or
different levels of information about how the NMS Stock ATSs operate,
and the activities of broker-dealer operators and their
affiliates.\837\ The Commission could propose new rules that would
expressly prohibit or limit organizational structures that might raise
conflicts of interest, or could expressly prohibit or limit the manner
by which an ATS discriminates among or between subscribers. Lowering
the threshold that triggers the fair access requirements would be one
of the means of prohibiting or limiting certain discriminatory
practices.
---------------------------------------------------------------------------

\837\ See supra Section III.C.
---------------------------------------------------------------------------

The Commission preliminarily believes that lowering the fair access
threshold for NMS Stock ATSs would require the Commission to consider
lowering the fair access threshold to zero, or to some threshold
between zero and 5%. If the fair access threshold remained at a
threshold above zero, the benefit of this approach, as compared to the
proposed disclosure requirements that would apply to all NMS Stock
ATSs, could be further limited by the fact that the fair access
requirements would apply only to the NMS stocks for which the NMS Stock
ATS had crossed the fair access threshold. The Commission could address
that situation by proposing further amendments to the fair access
requirements that would extend an ATS's fair access duties to all NMS
stocks once the fair access threshold had been crossed by an ATS in a
certain number of NMS stocks, to revise the duties incurred when the
threshold is crossed, or to simply lower the threshold to zero, which
would have the effect of requiring all NMS Stock ATSs to immediately
comply with the fair access requirements for all NMS stocks. However,
the Commission preliminarily believes that the disclosures that would
be required by proposed Form ATS-N requirements would be a cost
effective and simpler approach than proposing fundamental revisions to
the fair access requirements that would achieve the aim of providing
market participants with information to better assess NMS Stock ATSs as
potential trading venues.
9. Apply Proposed Rule 304 to ATSs That Trade Fixed Income Securities
and ATSs That Solely Trade Government Securities
Another alternative would be to amend Regulation ATS to require
ATSs that trade fixed income securities and ATSs that solely trade
government securities to also report information about their operations
and activities of the broker-dealer operator and affiliates on Form
ATS-N. Under this alternative, NMS Stock ATSs, as well as ATSs that
trade fixed income securities and ATSs that solely trade government
securities, would be required to publicly disclose proposed Form ATS-N,
proposed Form ATS-N Amendments, and notices of cessation on proposed
Form ATS-N.
The benefit of this alternative is that it may provide market
participants with clearer transparency regarding the operations and
activities of all types of ATSs, not just NMS stock ATSs. To the extent
that there may be market participants who predominately trade orders of
NMS stock, fixed income securities, and government securities on ATSs,
these market participants would benefit from the added transparency
regarding how these venues operate and the activities of their broker-
dealer operators and affiliates.
ATSs that effect trades in fixed income securities primarily
compete against other trading venues with limited or no operational
transparency requirements or standards. This is not the case with NMS
Stock ATSs, which provide limited information to market participants
about their operations and compete directly with national securities
exchanges, which are required to publicly disclose information about
their operations in the form of proposed rule changes and a public rule
book.\838\ With government securities, trading occurs in bilateral
transactions or on centralized electronic trading platforms that
generally operate with limited transparency.\839\ Because the market
structure for and transparency requirements related to trading each of
these types of securities (NMS Stock ATSs, fixed income, government
securities) differ, Form ATS-N under this alternative would need to
include different or additional disclosure requirements related to the
operations and activities of each of these types of ATSs, so as to
capture the nuances in each particular market. As a result, Form ATS-N
under this alternative would need to be much more complex than the
proposed Form ATS-N, increasing the costs for investors to efficiently
use Form ATS-N for a given type of security trading and for NMS Stock
ATSs, reducing the benefits from Form ATS-N in NMS stocks. In addition,
fixed income ATSs would incur costs to comply with the additional
disclosures, which could result in an exit of existing fixed income
ATSs, discourage innovation in surviving fixed income ATSs, and
increase barriers to entry for new fixed income ATSs. Because the
corporate

[[Page 81132]]

and municipal fixed income markets lack much of the automation present
for venues that trade NMS stocks, such costs could be more critical in
the development of the fixed income market than in the markets for NMS
stocks. Furthermore, as discussed above, ATSs that solely trade
government securities are exempt from compliance with Regulation
ATS.\840\ To the extent that this exemption is removed and such ATSs
were required to comply with Regulation ATS, including proposed Rule
304, these ATSs would incur costs associated with the public reporting
and recordkeeping requirements of Regulation ATS.
---------------------------------------------------------------------------

\838\ See supra Section IV.B.
\839\ See id.
\840\ See supra note 64.
---------------------------------------------------------------------------

Request for Comment on the Economic Analysis
The Commission is sensitive to the potential economic effects,
including the costs and benefits, of the proposed amendments to
Regulation ATS. The Commission has identified above certain costs and
benefits associated with the proposal and requests comment on all
aspects of its preliminary economic analysis. The Commission encourages
commenters to identify, discuss, analyze, and supply relevant data,
information, or statistics regarding any such costs or benefits. In
particular, the Commission seeks comment on the following:
506. Do you believe the Commission's analysis of the potential
effects of the proposed amendments to Regulation ATS is reasonable? Why
or why not? Please explain in detail.
507. Do you believe the Commission's assessment of the baseline for
the economic analysis is reasonable? Why or why not? Please explain in
detail.
508. Do you believe that the proposing release provides a fair
representation of current practices and how those current practices
would change under the proposed amendments to Regulation ATS? Why or
why not? Please explain in detail.
509. Do you believe that the Commission has reasonably described
how the competitive landscape for the market for NMS stock execution
services would be affected under the proposed amendments to Regulation
ATS? Why or why not? Please explain in detail. Does the release discuss
all relevant forms of competition and whether the proposal could alter
them? If not, which additional forms of competition could the proposal
impact and how? Please explain in detail.
510. Do you believe that the Commission has reasonably identified
all market participants that would be affected by the proposed
amendments to Regulation ATS? If so, why? If not, why not, and which
market participants do you believe are not reasonably excluded or would
be affected by the proposed amendments? Please explain in detail.
511. Do you believe that the Commission has reasonably described
how market participants would be affected by the proposed amendments to
Regulation ATS? Why or why not? Please explain in detail.
512. Do you believe that the Commission has reasonably described
the information market participants currently receive? If so, why? If
not, why not? Please explain in detail.
513. Do you believe that the Commission has reasonably described
the benefits market participants would receive from the information
that would be required to be disclosed by the proposed amendments to
Regulation ATS? Why or why not? Please explain in detail.
514. Do you believe that market participants currently have all
relevant information concerning the activities of the broker-dealer
operator of the NMS Stock ATS and its affiliates as such activities
relate to the NMS Stock ATS? Why or why not? Do you believe there is
information that is not required in the proposed amendments to
Regulation ATS that would be beneficial to market participants? If so,
please describe that information and its benefits in detail. If not,
why not? Please support your arguments.
515. Do you believe that market participants currently have all
relevant information concerning the subscribers to the NMS Stock ATS
where their orders are executed? Why or why not? Do you believe there
is information that is not required in the proposed amendments to
Regulation ATS that would be beneficial to market participants? If so,
please describe that information and its benefits in detail. If not,
why not? Please support your arguments.
516. Do you believe that market participants currently have all
relevant information concerning the trading operations of the NMS Stock
ATS where their orders are executed? Why or why not? Do you believe
there is information that is not required in the proposed amendments to
Regulation ATS that would be beneficial to market participants? If so,
please describe that information and its benefits in detail. If not,
why not? Please support your arguments.
517. Do you believe that market participants currently have all
relevant information concerning the services offered by the NMS Stock
ATS where their orders are executed and their fee structures? Why or
why not? Do you believe there is information that is not required in
the proposed amendments to Regulation ATS that would be beneficial to
market participants? If so, please describe that information and its
benefits in detail. If not, why not? Please support your arguments.
518. Do you believe that market participants currently have all
relevant information concerning the safeguards and procedures that NMS
Stock ATSs have instituted to protect their confidential trading
information? Why or why not? Is there information that is not required
in the proposed amendments to Regulation ATS that would be beneficial
to market participants? If so, please describe that information and its
benefits in detail. If not, why not? Please support your arguments.
519. Do you believe that the Commission has reasonably described
its analysis of the costs and benefits of each proposed amendment to
Regulation ATS? Why or why not? Please explain in detail.
520. Do you believe that there are additional benefits or costs
that could be quantified or otherwise monetized? Why or why not? If so,
please identify these categories and, if possible, provide specific
estimates or data.
521. Do you believe there are there any additional benefits that
may arise from the proposed amendments to Regulation ATS? If so, what
are such benefits? Please explain in detail.
522. Do you believe there are benefits described above that would
not likely result from the proposed amendments to Regulation ATS? If
so, please explain these benefits or lack of benefits in detail.
523. Do you believe there are any additional costs that may arise
from the proposed amendments to Regulation ATS? If so, do you believe
there are methods by which the Commission could reduce the costs
imposed by the proposed amendments to Regulation ATS while still
achieving the goals? Please explain in detail.
524. Do you believe there are any potential unintended consequences
of the proposed amendments to Regulation ATS? If so, what are they? If
not, why not?
525. Do you believe there are costs described above that would not
likely result from the proposed amendments to Regulation ATS? Why or
why not? Please support your arguments.
526. Do you believe that the proposing release appropriately
describes the potential effects of the proposed amendments to
Regulation

[[Page 81133]]

ATS on the promotion of efficiency, competition, and capital formation?
Why or why not? If possible, please provide analysis and empirical data
to support your arguments on the competitive or anticompetitive
effects, as well as the efficiency and capital formation effects, of
the proposed amendments.
527. Do you believe that there are alternative mechanisms for
achieving the Commission's goal of improving transparency of NMS Stock
ATS's trading operations and regulatory oversight while promoting
competition and capital formation? If so, what are such mechanisms?
Please explain in detail.
528. Do you believe that market participants would change their
behavior in response to the proposed amendments to Regulation ATS in
any way? Why or why not? If so, which market participants would change
their behavior and how? If not, why not? What would be the benefits and
costs of these changes? How would these changes affect efficiency,
competition, and capital formation? How would these changes affect
market quality and market efficiency? Please support your arguments.
529. Do you believe there are benefits that may arise if the
Commission were to apply proposed Rule 304, in whole or in part, to
fixed income ATSs? If so, what are such benefits? Please explain in
detail.
530. Do you believe there are costs that may arise if the
Commission were to apply proposed Rule 304, in whole or in part, to
fixed income ATSs? If so, what are such costs? Please explain in
detail.
531. Do you believe that the proposed amendments could result in
NMS Stock ATSs selecting to trade fixed income securities instead of
NMS stocks, because, under the proposed amendments, Rule 304 would not
apply to fixed income securities? Please explain in detail.
532. Do you believe that if the Commission were to apply proposed
Rule 304 to fixed income ATSs, this could alter the nature of
competition in the market for order execution services for fixed income
securities? Why or why not? Please support your arguments.
533. Do you believe that if the Commission were to apply proposed
Rule 304 to fixed income ATSs, this could promote greater efficiency,
competition, and capital formation relative to the current proposal? If
so, please explain in detail.
534. Do you believe there are benefits that may arise if the
Commission should adopt amendments to Regulation ATS to remove the
exemption under Rule 301(a)(4)(ii)(A) of Regulation ATS for ATSs whose
trading activity is solely in government securities? If so, what are
such benefits? Please explain in detail.
535. Do you believe that there are benefits that may arise if the
Commission enhances the transparency requirements applicable to ATSs
that effect transactions solely in government securities? If so, what
are such benefits? Please explain in detail.
536. Do you believe there are costs that may arise if the
Commission adopted amendments to Regulation ATS to remove the exemption
under Rule 301(a)(4)(ii)(A) of Regulation ATS for ATSs whose trading
activity is solely in government securities? If so, what are such
costs? Please explain in detail.
537. Do you believe that there are costs that may arise if the
Commission were to apply Rule 304 to ATSs that effect transactions
solely in government securities? If so, what are such costs? Please
explain in detail.
538. Do you believe that the proposed amendments could result in
ATSs selecting to solely trade government securities instead of NMS
stocks, because, under the proposal, Rule 304 would not apply to
government securities? Please explain in detail.
539. Do you believe that if the Commission were to apply Rule 304
to ATSs that solely trade government securities, this could alter the
nature of competition in the market for order execution services for
government securities? Why or why not? Please support your arguments.
540. Do you believe that if the Commission were to apply proposed
Rule 304 to ATSs that solely trade government securities, this could
promote greater efficiency, competition, and capital formation relative
to the current proposal? If so, please explain in detail.
541. Do you believe that requiring NMS Stock ATSs to do something
more to ensure compliance with proposed Rule 304 than the certification
required under FINRA Rule 3130 would have effects on regulatory
oversight and investor protection? If so, please explain in detail.
542. Do some NMS Stock ATSs currently disclose aggregate platform-
wide order flow and execution statistics regarding the NMS Stock ATS
that are not otherwise required disclosures under Exchange Act Rule 605
of Regulation NMS to one or more subscribers by the NMS Stock ATS? If
so, what order flow and execution statistics are provided? How widely
disseminated is the information? To what extent do the NMS Stock ATSs
disclose how they calculate the statistics? Please explain in detail.
543. Do you believe that there are benefits to market participants
from having NMS Stock ATSs publicly disclose aggregate platform-wide
order flow and execution statistics regarding the NMS Stock ATS that
are not otherwise required disclosures under Exchange Act Rule 605 of
Regulation NMS but still published or otherwise provided to one or more
subscribers by the NMS Stock ATS, and from having NMS Stock ATSs
describe how those statistics are calculated? If so, please explain in
detail. Do you believe that there are costs to NMS Stock ATSs from
having them publicly disclose those market quality statistics and
describe how those statistics are calculated? If so, please explain in
detail.
544. Do you believe that there are benefits to market participants
if the Commission were to require NMS Stock ATSs to provide disclosure
about their governance structure, compliance programs and controls to
comply with Regulation ATS? If so, please explain in detail.
545. Do you believe that there are costs to NMS Stock ATSs if the
Commission were to require them to provide disclosure about their
governance structure, compliance programs and controls to comply with
Regulation ATS? If so, please explain in detail.
546. Should proposed Form ATS-N be submitted or made publicly
available on EDGAR instead of through the EFFS system and the
Commission's Web site? What would be the advantages to the public or to
NMS Stock ATSs of access through EDGAR instead of the Commission's
proposed process?
547. Should some or all of the information in proposed Form ATS-N
be submitted in a particular financial reporting language such as the
FIX Protocol, eXtensible Business Reporting Language (XBRL), or some
other open standard that is widely available to the public and at no
cost? Should the Commission create a new taxonomy for submitting the
information in proposed Form ATS-N?
548. Should the Commission require that some or all of the
information in proposed Form ATS-N be tagged using standard electronic
definitions of a particular taxonomy, and what would be the additional
compliance costs associated with tagging the information?
549. Would requiring any of the information in the narrative
responses to be submitted in a tagged format enhance the public's use
of the data beyond the Commission's proposal? If so, how?

[[Page 81134]]

550. Could a format other than the one proposed to be accepted by
the EFFS system reduce the burden on NMS Stock ATSs in filing the
required disclosures with the Commission? For example, could a single
machine-readable PDF reduce the filing burden on NMS Stock ATSs? If so,
please identify the alternative format and the reduced filing burdens
associated with it.
551. Should proposed Form ATS-N be structured in a more granular
detail, and if so, how? In addition, how would the more granular detail
enhance the public's use of the data beyond the Commission's proposal?
What would be the costs of providing more granular detail?
552. Would the public's usability of the data be enhanced if it
were structured in another format? If so, please identify the other
format and describe how the public's use of the data would be enhanced
by the other format. If possible, discuss factors about the other
format such as how commonly available it is, whether it is viewer-
independent, whether it is an open standard, how it has been adopted
internationally and in other regulatory contexts, and how it supports
document attachments or references as well as narrative and numeric
data.
553. Do you believe that the Commission articulated all reasonable
alternatives for the proposed amendments to Regulation ATS? If not,
please provide additional alternatives and how their costs and
benefits, as well as their potential impacts on the promotion of
efficiency, competition, and capital formation, would compare to the
proposed amendments.
554. Do you believe that the Commission has reasonably described
the costs and benefits for the alternatives described above? If not,
please provide more accurate descriptions of costs and benefits,
including any data or statistics that support those costs and benefits.
555. Do you believe that the Commission has reasonably described
the potential impacts on the promotion of efficiency, competition, and
capital formation of the alternatives described above relative to the
proposed amendments? If not, please explain in detail which impacts for
which alternatives the Commission has not reasonably described, and
support your arguments with any applicable data or statistics.
556. The Commission generally requests comment on the competitive
or anticompetitive effects, as well as the efficiency and capital
formation effects, of the proposed amendments to Regulation ATS on
market participants if the proposed rules are adopted as proposed.
Commenters should provide analysis and empirical data to support their
views on the competitive or anticompetitive effects, as well as the
efficiency and capital formation effects, of the proposed amendments to
Regulation ATS.
557. The Commission generally requests comment on whether the
benefits of the proposed amendments to Regulation ATS justify the
costs. Please be specific and provide details. Commenters should
provide analysis and empirical data to support their views on the
benefits and costs of the proposed amendments to Regulation ATS.
558. Do you believe that the Commission has solicited the right set
of information on proposed Form ATS-N, which will be made available to
the public? Is there any other information the Commission should ask
NMS Stock ATSs to provide on Form ATS-N? If so, please provide details.

XIV. Consideration of Impact on the Economy

For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\841\ the Commission requests comment on the potential
effect of the proposed amendments and Form ATS-N on the United States
economy on an annual basis. The Commission also requests comment on any
potential increases in costs or prices for consumers or individual
industries, and any potential effect on competition, investment, or
innovation. Commenters are requested to provide empirical data and
other factual support for their views to the extent possible.
---------------------------------------------------------------------------

\841\ 5 U.S.C. 603.
---------------------------------------------------------------------------

XV. Regulatory Flexibility Act Certification

Section 3(a) of the Regulatory Flexibility Act of 1980 \842\
(``RFA'') requires the Commission to undertake an initial regulatory
flexibility analysis of the impact of the proposed rule amendments on
small entities unless the Commission certifies that the rule, if
adopted, would not have a significant economic impact on a substantial
number of small entities.\843\ For purposes of Commission rulemaking in
connection with the RFA,\844\ a small entity includes a broker or
dealer that: (1) had total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to
Rule 17a-5(d) under the Exchange Act,\845\ or, if not required to file
such statements, a broker-dealer with total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last day of the
preceding fiscal year (or in the time that it has been in business, if
shorter); and (2) is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\846\ With regard to national securities exchanges, a
small entity is an exchange that has been exempt from the reporting
requirements of Rule 601 under Regulation NMS, and is not affiliated
with any person (other than a natural person) that is not a small
business or small organization.\847\
---------------------------------------------------------------------------

\842\ 5 U.S.C. 603(a).
\843\ 5 U.S.C. 605(b).
\844\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the Exchange
Act, 17 CFR 240.0-10. See Exchange Act Release No. 18451 (January
28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).
\845\ 17 CFR 240.17a-5(d).
\846\ See 17 CFR 240.0-10(c). See also 17 CFR 240.0-10(i)
(providing that a broker or dealer is affiliated with another person
if: such broker or dealer controls, is controlled by, or is under
common control with such other person; a person shall be deemed to
control another person if that person has the right to vote 25
percent or more of the voting securities of such other person or is
entitled to receive 25 percent or more of the net profits of such
other person or is otherwise able to direct or cause the direction
of the management or policies of such other person; or such broker
or dealer introduces transactions in securities, other than
registered investment company securities or interests or
participations in insurance company separate accounts, to such other
person, or introduces accounts of customers or other brokers or
dealers, other than accounts that hold only registered investment
company securities or interests or participations in insurance
company separate accounts, to such other person that carries such
accounts on a fully disclosed basis).
\847\ See 17 CFR 240.0-10(e). The Commission notes that while
national securities exchanges can operate an ATS, subject to certain
conditions, such an ATS would have to be registered as a broker-
dealer. See Regulation ATS Adopting Release, supra note 7, at 70891.
Currently, no national securities exchange operates an ATS that
trades NMS stocks.
---------------------------------------------------------------------------

All ATSs, including NMS Stock ATSs, would continue to have to
register as broker-dealers.\848\ The Commission examined recent FOCUS
data for the 46 broker-dealers that currently operate ATSs that trade
NMS stocks and concluded that 1 of the broker-dealer operators of ATSs
that currently trade NMS stock had total capital of less than $500,000
on the last day of the preceding fiscal year (or in the time that it
has been in business, if shorter).\849\ The Commission notes that this
broker-dealer operator has never

[[Page 81135]]

reported any transaction volume in any security, including NMS stock,
to the Commission on Form ATS-R. Given that this particular ATS has
never reported any transaction volume to the Commission over the six
years since it first submitted its Form ATS to the Commission, the
Commission preliminarily believes that this ATS would likely not submit
a Form ATS-N if the proposed amendments to Regulation ATS are adopted.
Consequently, the Commission certifies that the proposed amendments to
Regulation ATS would not, if adopted, have a significant economic
impact on a substantial number of small entities.
---------------------------------------------------------------------------

\848\ 17 CFR 242.301(b)(1).
---------------------------------------------------------------------------

The Commission encourages written comments regarding this
certification. The Commission solicits comment as to whether the
proposed amendments could have impacts on small entities that have not
been considered. The Commission requests that commenters describe the
nature of any impacts on small entities and provide empirical data to
support the extent of such effect. Such comments will be placed in the
same public file as comments on the proposed amendments to Regulation
ATS. Persons wishing to submit written comments should refer to the
instructions for submitting comments in the front of this release.

XVI. Statutory Authority

Pursuant to Exchange Act, 15 U.S.C. 78a et seq., and particularly
Sections [3(b), 5, 6, 11A, 15, 17(a), 17(b), 19, 23(a), and 36 thereof
(15 U.S.C. 78c, 78k-1, 78o, 78q(a), 78q(b), 78w(a), and 78mm)], the
Commission proposes to adopt Form ATS-N under the Exchange Act, to
amend Rule 3a1-1 and Regulation ATS under the Exchange Act, and to
amend 17 CFR 200.30-33.

List of Subjects in 17 CFR Parts 240, 242 and 249

Brokers, Confidential business information, Fraud, Reporting and
recordkeeping requirements, Securities.

For the reasons stated in the preamble, title 17, chapter II of the
Code of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1934

0
1. The authority citation for part 240 continues to read as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.,
and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010), unless otherwise
noted.
* * * * *
0
2. Amend Sec. 240.3a1-1 by removing ``242.303'' from paragraphs (a)(2)
and (3) wherever it occurs and adding in its place ``242.304''.

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
3. The authority citation for part 242 continues to read as follows:

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37.

0
4. Amend Sec. 242.300 by:
0
a. In paragraph (f) adding the phrase ``the broker-dealer of'' before
the phrase ``an alternative trading system'' wherever it occurs; and
0
b. Adding paragraph (k) to read as follows:

Sec. 242.300 Definitions.

* * * * *
(k) NMS Stock ATS means an alternative trading system, as defined
in Sec. 242.300(a), that facilitates transactions in NMS stocks, as
defined in Sec. 242.300(g).
0
5. Amend Sec. 242.301 by:
0
a. In paragraph (b)(2)(i), removing the phrase ``, or if the
alternative trading system is operating as of April 21, 1999, no later
than May 11, 1999'';
0
b. In paragraph (b)(2)(vii), removing the phrase ``Market Regulation,
Stop 10-2'' and in its place adding ``Trading and Markets'' after the
words ``Division of'';
0
c. Adding paragraph (b)(2)(viii);
0
d. In paragraph (b)(9)(i), adding the word ``Separately'' before the
word ``File'' and changing the first letter of the word ``File'' to
lower case and adding the phrase ``for transactions in NMS stocks, as
defined in Sec. 242.300(g), and transactions in securities other than
NMS stocks'' after the phrase ``(Sec. 249.638 of this chapter)'';
0
e. In paragraph (b)(9)(ii), adding the word ``Separately'' before the
word ``File'' and changing the first letter of the word ``File'' to
lower case and adding the phrase ``for transactions in NMS stocks and
transactions in securities other than NMS stocks'' after the phrase
``required by Form ATS-R'';
0
f. In paragraph (b)(10), adding the word ``Written'' before the phrase
``Procedures to ensure the confidential treatment of trading
information'' and changing the first letter of the word ``Procedures''
to lower case;
0
g. In paragraph (b)(10)(i), adding the word ``written'' before the word
``safeguards'' in both instances and adding the word ``written'' before
the word ``procedures'' in both instances; and
0
h. In paragraph (b)(10)(ii), adding the word ``written'' before the
word ``oversight'' and adding the word ``written'' before the word
``safeguards''.
The addition reads as follows:

Sec. 242.301 Requirements for alternative trading systems.

* * * * *
(b) * * *
(2) * * *
(viii) An alternative trading system that is an NMS Stock ATS shall
file the reports and amendments required by Sec. 242.304, and shall
not be subject to the requirements of paragraph (b)(2) of this section.
An alternative trading system that effects transactions in both NMS
stocks and non-NMS stocks shall be subject to the requirements of Sec.
242.304 of this chapter with respect to NMS stocks and paragraph (b)(2)
of this section with respect to non-NMS stocks.
* * * * *
0
6. Amend Sec. 242.303 by:
0
a. In paragraph (a) introductory text, removing ``(b)(9)'' and add in
its place ``(b)(8)'';
0
b. Adding paragraph (a)(1)(v); and
0
c. In paragraph (a)(2)(ii), adding the phrase ``or Sec. 242.304''
after the phrase ``paragraph (b)(2) of Sec. 242.301''.
The addition reads as follows:

Sec. 242.303 Record preservation requirements for alternative trading
systems.

* * * * *
(a) * * *
(1) * * *
(v) At least one copy of the written safeguards and written
procedures to protect subscribers' confidential trading information and
the written oversight procedures created in the course of complying
with paragraph (b)(10) of Sec. 242.301.
0
7. Add Sec. 242.304 to the undesignated center heading Regulation
ATS--Alternative Trading Systems to read as follows:

Sec. 242.304 NMS Stock ATSs.

(a) Conditions to the exemption. Unless not required to comply with
Regulation ATS pursuant to Sec. 242.301(a), an NMS Stock ATS must
comply with Sec. Sec. 242.300 through 242.304 (except Sec.
242.301(b)(2)) to be exempt from the definition of an exchange pursuant
to Sec. 240.3a1-1(a)(2).

[[Page 81136]]

(1) Form ATS-N--(i) Filing. No exemption from the definition of
``exchange'' is available to an NMS Stock ATS pursuant to Sec.
240.3a1-1(a)(2) unless the NMS Stock ATS files with the Commission a
Form ATS-N, in accordance with the instructions therein, and the
Commission declares the Form ATS-N effective. If the NMS Stock ATS is
operating pursuant to a previously filed initial operation report on
Form ATS as of [effective date of the final rule], such NMS Stock ATS
shall file with the Commission a Form ATS-N, in accordance with the
instructions therein, no later than 120 calendar days after [effective
date of the final rule]. An NMS Stock ATS operating as of [effective
date of the final rule] may continue to operate pursuant to a
previously filed initial operation report on Form ATS pending the
Commission's review of the filed Form ATS-N.
(ii) Review period and extension of the 120-day review period. (A)
The Commission will declare a Form ATS-N filed by an NMS Stock ATS
operating as of [effective date of the final rule] effective or
ineffective no later than 120 calendar days from filing with the
Commission. The Commission may extend the Form ATS-N review period for
an NMS Stock ATS operating as of [effective date of the final rule]
for:
(1) An additional 120 calendar days if the Form ATS-N is unusually
lengthy or raises novel or complex issues that require additional time
for review, in which case the Commission will notify the NMS Stock ATS
in writing within the initial 120-day review period and will briefly
describe the reason for the determination for which additional time for
review is required; or
(2) Any extended review period to which a duly-authorized
representative of the NMS Stock ATS agrees in writing.
(B) The Commission will declare a Form ATS-N filed by an NMS Stock
ATS that was not operating as of [effective date of the final rule]
effective or ineffective no later than 120 calendar days from filing
with the Commission. The Commission may extend the Form ATS-N review
period for:
(1) An additional 90 days, if the Form ATS-N is unusually lengthy
or raises novel or complex issues that require additional time for
review, in which case the Commission will notify the NMS Stock ATS in
writing within the initial 120-day review period and will briefly
describe the reason for the determination for which additional time for
review is required; or
(2) Any extended review period to which a duly-authorized
representative of the NMS Stock ATS agrees in writing.
(iii) Effectiveness. The Commission will declare effective a Form
ATS-N if the NMS Stock ATS qualifies for the Rule 3a1-1(a)(2)
exemption. The Commission will declare ineffective a Form ATS-N if it
finds, after notice and opportunity for hearing, that such action is
necessary or appropriate in the public interest, and is consistent with
the protection of investors.
(iv) Order regarding effectiveness. The Commission will issue an
order to declare a Form ATS-N effective or ineffective. Upon the
effectiveness of the Form ATS-N, the NMS Stock ATS may operate pursuant
to the conditions of this section. If the Commission declares a Form
ATS-N ineffective, the NMS Stock ATS shall be prohibited from operating
as an NMS Stock ATS. A Form ATS-N declared ineffective would not
prevent the NMS Stock ATS from subsequently filing a new Form ATS-N.
(2) Form ATS-N amendment--(i) Form ATS-N amendment filing
requirements. An NMS Stock ATS shall amend an effective Form ATS-N, in
accordance with the instructions therein:
(A) At least 30 calendar days prior to the date of implementation
of a material change to the operations of the NMS Stock ATS or to the
activities of the broker-dealer operator or its affiliates that are
subject to disclosure on Form ATS-N;
(B) Within 30 calendar days after the end of each calendar quarter
to correct any other information that has become inaccurate for any
reason and has not been previously reported to the Commission as a Form
ATS-N Amendment; or
(C) Promptly, to correct information in any previous disclosure on
Form ATS-N, after discovery that any information filed under paragraphs
(a)(1)(i) or (a)(2)(i)(A) or (B) of this section was inaccurate or
incomplete when filed.
(ii) Commission review. The Commission will, by order, if it finds
that such action is necessary or appropriate in the public interest,
and is consistent with the protection of investors, declare ineffective
any Form ATS-N Amendment filed pursuant to paragraphs (a)(2)(i)(A)
through (C) of this section no later than 30 calendar days from filing
with the Commission. If the Commission declares a Form ATS-N Amendment
ineffective, the NMS Stock ATS shall be prohibited from operating
pursuant to the ineffective Form ATS-N Amendment. A Form ATS-N
Amendment declared ineffective would not prevent the NMS Stock ATS from
subsequently filing a new Form ATS-N Amendment.
(3) Notice of cessation. An NMS Stock ATS shall notice its
cessation of operations on Form ATS-N at least 10 business days before
the date the NMS Stock ATS ceases to operate as an NMS Stock ATS. The
notice of cessation shall cause the Form ATS-N to become ineffective on
the date designated by the NMS Stock ATS.
(4) Suspension, limitation, and revocation of the exemption from
the definition of exchange. (i) The Commission will, by order, if it
finds, after notice and opportunity for hearing, that such action is
necessary or appropriate in the public interest, and is consistent with
the protection of investors, suspend for a period not exceeding twelve
months, limit, or revoke an NMS Stock ATS's exemption from the
definition of ``exchange'' pursuant to Sec. 240.3a1-1(a)(2) of this
chapter.
(ii) If an NMS Stock ATS's exemption is suspended or revoked
pursuant to paragraph (a)(4)(i) of this section, the NMS Stock ATS
shall be prohibited from operating pursuant to the exemption from the
definition an ``exchange'' pursuant to Sec. 240.3a1-1(a)(2) of this
chapter. If an NMS Stock ATS's exemption is limited pursuant to
paragraph (a)(4)(i) of this section, the NMS Stock ATS shall be
prohibited from operating in a manner otherwise inconsistent with the
terms and conditions of the Commission order.
(b) Public disclosures. (1) Every Form ATS-N filed pursuant to this
section shall constitute a ``report'' within the meaning of sections
11A, 17(a), 18(a), and 32(a) (15 U.S.C. 78k-1, 78q(a), 78r(a), and
78ff(a)), and any other applicable provisions of the Act.
(2) The Commission would make public via posting on the
Commission's Web site, each:
(i) Order of effectiveness of a Form ATS-N;
(ii) Order of ineffectiveness of a Form ATS-N;
(iii) Effective Form ATS-N;
(iv) Filed Form ATS-N Amendment;
(v) Order of ineffectiveness of a Form ATS-N Amendment;
(vi) Notice of cessation; and
(vii) Order suspending, limiting, or revoking the exemption from
the definition of an ``exchange'' pursuant to Sec. 240.3a1-1(a)(2) of
this chapter.
(3) Each NMS Stock ATS shall make public via posting on its Web
site a direct URL hyperlink to the Commission's Web site that contains
the documents enumerated in paragraph (b)(2) of this section.

[[Page 81137]]

(c) Form ATS-N filing requirements. (1) A filed Form ATS-N must
respond to each item, as applicable, in detail and disclose information
that is accurate, current, and complete.
(2) Any report required to be filed with the Commission under this
section shall be filed electronically on Form ATS-N, and include all
information as prescribed in Form ATS-N and the instructions thereto
and contain an electronic signature. The signatory to an electronically
filed Form ATS-N shall manually sign a signature page or document, in
the manner prescribed by Form ATS-N, authenticating, acknowledging, or
otherwise adopting his or her signature that appears in typed form
within the electronic filing. Such document shall be executed before or
at the time Form ATS-N is electronically filed and shall be retained by
the NMS Stock ATS in accordance with Sec. 242.303.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
8. The general authority citation for part 249 continues to read in
part as follows:

Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; and Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309,
unless otherwise noted.
* * * * *
0
9. Add Sec. 249.640 to subpart G to read as follows:

Sec. 249.640 Form ATS-N, information required of NMS Stock ATSs
pursuant to Sec. 242.304(a) of this chapter.

This form shall be used by every NMS Stock ATS to file required
reports under Sec. 242.304(a) of this chapter.

Note: The text of Form ATS-N will not appear in the Code of
Federal Regulations.

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FORM ATS-N INSTRUCTIONS

A. GENERAL INSTRUCTIONS:

Form ATS-N is a public reporting form that is designed to
provide the public and the Commission with information about the
operations of the NMS Stock ATS and the activities of its broker-dealer
operator and its affiliates. Form ATS-N is to be used by an NMS Stock
ATS to qualify for the exemption from the definition of an ``exchange''
pursuant to Exchange Act Rule 3a1-1(a)(2), for which no other form is
authorized or prescribed.
An NMS Stock ATS must respond to each item, as applicable,
in detail and disclose information that is accurate, current, and
complete. An NMS Stock ATS must provide all the information required by
the form, including the exhibits, and must present the information in a
clear and comprehensible manner. A filing that is incomplete or
similarly deficient may be returned to the NMS Stock ATS. Any filing so
returned shall for all purposes be deemed not to have been filed with
the Commission. See also Rule 0-3 under the Exchange Act (17 CFR 240.0-
3).
A separate Form ATS-N is required for each NMS Stock ATS
operated by the same broker-dealer operator.

B. WHEN TO FILE FORM ATS-N

Form ATS-N: Prior to commencing operations, an NMS Stock
ATS shall file a Form ATS-N and the Form ATS-N must be declared
effective by the Commission. If the NMS Stock ATS is operating pursuant
to a previously filed initial operation report on Form ATS as of the
effective date of proposed Rule 304, such NMS Stock ATS shall file with
the Commission a Form ATS-N no later than 120 calendar days after such
effective date.
Form ATS-N Amendment: An NMS Stock ATS shall amend an
effective Form ATS-N: (1) at least 30 calendar days prior to the date
of implementation of a material change to the operations of the NMS
Stock ATS or to the activities of the broker-dealer operator or its
affiliates that are subject to disclosure on Form ATS-N; (2) within 30
calendar days after the end of each calendar quarter to correct any
other information that has become inaccurate for any reason and has not
been previously reported to the Commission as a Form ATS-N Amendment;
or (3) promptly, to correct information in any previous disclosure on
Form ATS-N, after discovery that any information filed under paragraphs
(a)(1)(i) or (a)(2)(i)(A) or (B) of proposed Rule 304 was inaccurate or
incomplete when filed.
Notice of Cessation: An NMS Stock ATS shall notice its
cessation of operations on Form ATS-N at least 10 business days before
the date the NMS Stock ATS will cease to operate as an NMS Stock ATS.
Withdrawal: If an NMS Stock ATS determines to withdraw a
Form ATS-N, it must select the appropriate check box and provide the
correct file number to withdraw the submission.

C. HOW TO FILE A FORM ATS-N

Any report required to be submitted pursuant to Rule 304
of Regulation ATS shall be filed in an electronic format through the
electronic form filing system (``EFFS''), a secure Web site operated by
the Securities and Exchange Commission (``Commission''). Documents
filed through the EFFS system must be in a text-searchable format
without the use of optical character recognition.
A duly authorized individual of the NMS Stock ATS shall
electronically sign the completed Form ATS-N. In addition, a duly
authorized individual of the NMS Stock ATS shall manually sign one copy
of the completed Form ATS-N, and the manually signed signature page
shall be preserved pursuant to the requirements of proposed Rule 303 of
Regulation ATS.

D. CONTACT INFORMATION

The individual listed on the NMS Stock ATS's response to
Part V of Form ATS-N as the contact representative must be authorized
to receive all incoming communications and be responsible for
disseminating that information, as necessary, within the NMS Stock ATS.

E. RECORDKEEPING

A copy of this Form ATS-N must be retained by the NMS
Stock ATS and made available for inspection upon request of the SEC.

F. PAPERWORK REDUCTION ACT DISCLOSURE

Form ATS-N requires an NMS Stock ATS to provide the
Commission with certain information regarding: (1) the operation of the
NMS Stock ATS and the activities of the broker-dealer operator and its
affiliates; (2) material and other changes to the operation of the NMS
Stock ATS; and (3) notice upon ceasing operation of the alternative
trading system. Form ATS-N is intended to provide the public with
information about the operations of the NMS Stock ATS and the
activities of the broker-dealer operator and its affiliates so that
they may make an informed decision as to whether to participate on the
NMS Stock ATS. In addition, the Form ATS-N is intended to provide the
Commission with information to permit it to carry out its market
oversight and investor protection functions.
The information provided on Form ATS-N will help enable
the Commission to determine whether an NMS Stock ATS is in compliance
with the federal securities laws and the rules or regulations
thereunder, including Regulation ATS. An NMS Stock ATS must: (1) file
Form ATS-N prior to commencing operations; (2) file a Form ATS-N
Amendment at least 30 calendar days prior to the date of implementation
of a material change to the operations of the NMS Stock ATS or to the
activities of the broker-dealer operator or its affiliates that are
subject to disclosure on Form ATS-N; (3) file a Form ATS-N Amendment
within 30 calendar days after the end of each calendar quarter to
correct any other information that has become inaccurate for any reason
and has not been previously reported to the Commission on Form ATS-N;
(4) file a Form ATS-N Amendment promptly to correct information in any
previous disclosure on a Form ATS-N or a Form ATS-N Amendment after
discovery that any information filed was inaccurate or incomplete when
filed; and (5) notice its cessation of operations at least 10 business
days before the date the NMS Stock ATS ceases to operate as an NMS
Stock ATS.
This collection of information will be reviewed by the
Office of Management and Budget in accordance with the clearance
requirements of 44 U.S.C. 3507. An agency may not conduct or sponsor,
and a person is not required to respond to, a collection of information
unless it displays a currently valid control number. The Commission
estimates that that an NMS Stock ATS will spend approximately 141.3
hours completing the Form ATS-N, approximately 9.5 hours preparing each
amendment to Form ATS-N, and approximately 2 hours preparing a notice
of cessation on Form ATS-N. Any member of the public may direct to the
Commission any comments concerning the accuracy of this burden estimate
and any suggestions for reducing this burden.

G. EXPLANATION OF TERMS

The following terms are defined for purposes of Form ATS-N.
AFFILIATE: Shall mean, with respect to a specified person,
any person that, directly or indirectly, controls, is under common
control with, or is controlled by, the specified person.
ALTERNATIVE TRADING SYSTEM: Shall mean any organization,

[[Page 81154]]

association, person, group of persons, or system: (1) that 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 under the Exchange
Act; and (2) that does not (i) set 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)
discipline subscribers other than by exclusion from trading. 17 CFR
242.300(a).
BROKER-DEALER OPERATOR: Shall mean the registered broker-
dealer of the NMS Stock ATS pursuant to 17 CFR 242.301(b)(1).
CONTROL: Shall mean the power, directly or indirectly, to
direct the management or policies of the broker-dealer of an
alternative trading system, whether through ownership of securities, by
contract, or otherwise. A person is presumed to control the broker-
dealer of an alternative trading system if that person: (1) is a
director, general partner, or officer exercising executive
responsibility (or having similar status or performing similar
functions); (2) directly or indirectly has the right to vote 25 percent
or more of a class of voting securities or has the power to sell or
direct the sale of 25 percent or more of a class of voting securities
of the broker-dealer of the alternative trading system; or (3) in the
case of a partnership, has contributed, or has the right to receive
upon dissolution, 25 percent or more of the capital of the broker-
dealer of the alternative trading system.
NMS SECURITY: Shall mean any security or class of
securities for which transaction reports are collected, processed, and
made available pursuant to an effective transaction reporting plan, or
an effective national market system plan for reporting transactions in
listed options. 17 CFR 242.600(b)(46).
NMS STOCK: Shall mean any NMS security other than an
option. 17 CFR 242.600(b)(47).
NMS STOCK ATS: Shall mean an alternative trading system,
as defined in Rule 300(a) under the Exchange Act, that facilitates
transactions in NMS stocks, as defined in Rule 300(g) under the
Exchange Act. [Proposed] 17 CFR 242.300(k).
ORDER: Shall mean any firm indication of a willingness to
buy or sell a security as either principal or agent, including any bid
or offer quotation, market order, limit order or other priced order. 17
CFR 242.300(e).
PERSON: Shall mean a natural person or a company. 15
U.S.C. 80a-2(a)(28).
SUBSCRIBER: Shall mean any person that has entered into a
contractual agreement with an alternative trading system to access an
alternative trading system for the purpose of effecting transactions in
securities, or for submitting, disseminating or displaying orders on
such alternative trading system, including a customer, member, user, or
participant in an alternative trading system. A subscriber, however,
shall not include a national securities exchange or association. 17 CFR
242.300(b).

By the Commission.

Dated: November 18, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-29890 Filed 12-24-15; 8:45 am]
BILLING CODE 8011-01-P

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