Regulation of NMS Stock Alternative Trading Systems, 38768-38936 [2018-15896]

Download as PDF 38768 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 232, 240, 242, and 249 [Release No. 34–83663; File No. S7–23–15] RIN 3235–AL66 Regulation of NMS Stock Alternative Trading Systems Securities and Exchange Commission. ACTION: Final rule. AGENCY: The Securities and Exchange Commission is adopting amendments to regulatory requirements in Regulation ATS under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) applicable to alternative trading systems (‘‘ATSs’’) that trade National Market System (‘‘NMS’’) stocks (hereinafter referred to as ‘‘NMS Stock ATSs’’), including so called ‘‘dark pools.’’ First, we are adopting new Form ATS–N, which will require NMS Stock ATSs to disclose information about their manner of operations, the broker-dealer that operates the ATS (‘‘broker-dealer operator’’), and the ATS-related activities of the broker-dealer operator and its affiliates. Second, as amended, the regulations will require public posting of certain Form ATS–N filings on the Commission’s website, which will be accomplished through the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (‘‘EDGAR’’) and require each NMS Stock ATS that has a website to post on its website a direct URL hyperlink to the Commission’s website. Third, the amendments that we are adopting today provide a process for the Commission to review Form ATS–N filings and, after notice and opportunity for hearing, declare an NMS Stock ATS’s Form ATS–N ineffective. Fourth, the regulations, as amended, will require all ATSs subject to the regulations to place in writing its safeguards and procedures to protect subscribers’ confidential trading information. We are also adopting conforming amendments. DATES: Effective Date: October 9, 2018. Compliance Dates: The applicable compliance dates are discussed in the section of the release titled ‘‘VIII. Effective Date and Compliance Date.’’ FOR FURTHER INFORMATION CONTACT: Tyler Raimo, Senior Special Counsel, at (202) 551–6227; Matthew Cursio, Special Counsel, at (202) 551–5748; Marsha Dixon, Special Counsel, at (202) 551–5782; Jennifer Dodd, Special Counsel, at (202) 551–5653; David daltland on DSKBBV9HB2PROD with RULES2 SUMMARY: VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Garcia, Special Counsel, at (202) 551– 5681; or Megan Mitchell, Special Counsel, at (202) 551–4887; Office of Market Supervision, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–7010. SUPPLEMENTARY INFORMATION: We are adopting: (1) Amendments to 17 CFR 242.300 through 242.303 (‘‘Regulation ATS’’) to add new 17 CFR 242.304 (‘‘Rule 304’’) under the Exchange Act to provide new conditions for NMS Stock ATSs seeking to rely on the exemption from the definition of ‘‘exchange’’ provided by 17 CFR 240.3a1–1(a) (‘‘Rule 3a1–1(a)’’) of the Exchange Act; (2) new Form ATS–N 1 under the Exchange Act, which NMS Stock ATSs will file to comply with the new conditions provided under Rule 304; and (3) related amendments to 17 CFR 242.300; 17 CFR 242.301, 17 CFR 242.303, and 17 CFR 240.3a1–1 under the Exchange Act (respectively, ‘‘Rule 300,’’ ‘‘Rule 301,’’ and ‘‘Rule 303’’ of Regulation ATS, and ‘‘Rule 3a1–1’’). We are also adopting amendments to 17 CFR 242.301(b)(10) and 17 CFR 242.303 (‘‘Rules 301(b)(10) and 303 of Regulation ATS’’) under the Exchange Act to require all ATSs to make and keep written safeguards and written procedures to protect subscribers’ confidential trading information. Table of Contents I. Introduction II. Background A. Role of ATSs in the Current Equity Market Structure 1. Significant Source of Liquidity for NMS Stocks 2. Operational Complexity; Conflict of Interests B. Exemption for Alternative Trading Systems C. Conditions to the ATS Exemption; Confidential Notice Regime D. Concerns Regarding the Lack of Operational Transparency III. Heightened Regulatory Requirements for NMS Stock ATSs A. Exchange Act Rule 3a1–1(a) Exemption: New Conditions for NMS Stock ATSs 1. Comments on the Rule 304 Requirements; Effectiveness a. Comments on Form ATS–N Requirement b. Comments on Effects on ATSs Relative to National Securities Exchanges c. Comments on Effectiveness Requirement 2. Comments on Extending Rule 304 to Non-NMS Stock ATSs B. Amendments to Existing Regulation ATS Rules for NMS Stock ATSs 1. Rule 300(k): Definition of NMS Stock ATS 2. Rule 301(a): Exemption From Compliance With Regulation ATS 1 17 PO 00000 CFR 249.640. Frm 00002 Fmt 4701 Sfmt 4700 3. Rule 301(a)(5): Exemptions From Certain Requirements of Regulation ATS Pursuant to Application to the Commission 4. Rule 301(b)(2): Form ATS Reporting Requirements No Longer Apply to NMS Stock ATSs 5. Rule 301(b)(9): Form ATS–R Quarterly Reports 6. Rule 303: Recordkeeping Requirements for Form ATS–N 7. Comments Recommending Changes To Other Existing Regulation ATS Rules IV. Form ATS–N Filing Process; Effectiveness Review A. Initial Form ATS–N 1. Rule 304(a)(1)(i): Filing and Effectiveness Requirement 2. Rule 304(a)(1)(ii): Commission Review Period 3. Rule 304(a)(1)(iii): Effectiveness; Ineffectiveness Determination a. Comments on the Standard of Review To Accept Filings on Form ATS–N b. Comments on the Review for Declarations of Ineffectiveness c. Effectiveness, Ineffectiveness Process d. Effectiveness; Ineffectiveness Determinations Under Rule 301(a)(1)(iii) 4. Rule 304(a)(1)(iv): Transition for Legacy NMS Stock ATSs a. Rule 304(a)(1)(iv)(A): Initial Filing Requirements b. Rule 304(a)(1)(iv)(B): Commission Review Period; Ineffectiveness Determination c. Rule 304(a)(1)(iv)(C): Amendments to Initial Form ATS–N B. Rule 304(a)(2): Form ATS–N Amendments 1. Rule 304(a)(2)(i): Filing Requirements a. Material Changes (i) Comments on Advance Notice (ii) Comments on Materiality (iii) Order Display and Fair Access Amendments b. Updating Amendments c. Correcting Amendments 2. Rule 304(a)(2)(ii): Commission Review Period; Ineffectiveness Determination C. Rule 304(a)(3): Notice of Cessation D. Rule 304(a)(4): Suspension, Limitation, or Revocation of the Exemption From the Definition of Exchange E. Rule 304(b): Public Disclosure of Form ATS–N and Related Commission Orders 1. Rule 304(b)(1): Form ATS–N ‘‘Report’’ 2. Rule 304(b)(2): Making Public Form ATS–N Filings and Commission Orders a. Public Disclosure of Effective Initial Form ATS–N, As Amended b. Public Disclosure of Orders of an Ineffective Initial Form ATS–N c. Public Disclosure of Form ATS–N Amendments d. Public Disclosure of Ineffective Form ATS–N Amendment e. Public Disclosure of Notices of Cessation f. Public Disclosure of Each Order Suspending, Limiting, or Revoking the Rule 3a1–1(a)(2) Exemption 3. Rule 304(b)(3): Disclosure of Form ATS– N on the NMS Stock ATS’s Website V. Form ATS–N Disclosures A. Form ATS–N Disclosure Requirements and Definitions E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 1. Rule 304(c): Disclosure Requirements 2. Terminology a. Definitions for Form ATS–N (i) Proposed Defined Terms (ii) New Defined Terms b. Comments on the Definition of ‘‘Subscriber’’ B. Cover Page and Part I of Form ATS–N: Identifying Information 1. Cover Page 2. Part I of Form ATS–N: Identifying Information a. Part I: Identifying Information b. Comments on Proposed Exhibit 1 c. ATS Governance Structure and Compliance Programs and Controls C. Part II of Form ATS–N: ATS-Related Activities of the Broker-Dealer Operator and Affiliates 1. Broker-Dealer Operator and its Affiliate Trading Activities on the NMS Stock ATS a. Proposed Requests and Response to Comments b. Adopted Part II, Item 1 and 2 of Form ATS–N; ATS-Related Trading Activities of the Broker-Dealer Operator and its Affiliates 2. Order Interaction with Broker-Dealer Operator; Affiliates 3. Arrangements with Trading Centers 4. Other Products and Services 5. Activities of Service Providers a. Shared Employees b. Third-Party Service Providers 6. Protection of Confidential Trading Information 7. Differences in Availability of Services, Functionalities, or Procedures 8. Other Recommendations From Commenters D. Part III Form ATS–N: Manner of ATS Operations 1. Types of ATS Subscribers 2. Eligibility for ATS Services 3. Exclusion From ATS Services 4. Hours of Operations 5. Means of Entry 6. Connectivity and Co-Location 7. Order Types and Attributes 8. Order Sizes 9. Conditional Order and Indications of Interest 10. Opening and Reopening 11. Trading Services, Facilities and Rules 12. Liquidity Providers 13. Segmentation; Notice 14. Counter-Party Selection 15. Display 16. Routing 17. Closing 18. Trading Outside of Regular Trading Hours 19. Fees 20. Suspension of Trading 21. Trade Reporting 22. Clearance and Settlement 23. Market Data 24. Order Display and Execution Access 25. Fair Access 26. Aggregate Platform-Wide Data; Trading Statistics a. Disseminated Aggregated Platform-Wide Data b. Other Standardized Statistical Disclosures VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 VI. Amendments to Rule 301(b)(10) and Rule 303(a)(1) for Written Safeguards and Written Procedures To Protect Confidential Trading Information VII. EDGAR Filing Requirements; Structured Data VIII. Effective Date and Compliance Date IX. Paperwork Reduction Act A. Summary of Collection of Information 1. Requirements Relating to Rule 301(b)(10) and 303(a)(1) of Regulation ATS 2. Requirements Relating to Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Form ATS–N B. Proposed Use of Information 1. Amendments to Rule 301(b)(10) and 303(a)(1) of Regulation ATS 2. Rules 301(b)(2)(viii), 304 of Regulation ATS, Including Form ATS–N, and 301(b)(9) C. Respondents D. Total Initial and Annual Reporting and Recordkeeping Burdens 1. Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS a. Baseline Measurements b. Burdens 2. Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Form ATS–N a. Baseline Measurements b. Burdens (i) Analysis of Estimated Additional Burden for Form ATS–N (a) Part I (b) Part II (c) Part III (ii) Estimated Burden Above the Current Baseline for an Initial Form ATS–N, Form ATS–N Amendment, and Notice of Cessation on Form ATS–N (a) Initial Form ATS–N (b) Form ATS–N Amendments (c) Notice of Cessation on Form ATS–N (iii) ATSs That Trade Both NMS and NonNMS Stocks (iv) Access to EDGAR (v) Recordkeeping Requirements E. Collection of Information Is Mandatory F. Confidentiality of Responses to Collection of Information G. Retention Period for Recordkeeping Requirements X. Economic Analysis A. Background B. Baseline 1. Current NMS Stock ATSs 2. Current Reporting Requirements for NMS Stock ATSs 3. Lack of Standardized Public Disclosure 4. NMS Stock ATS Treatment of Subscriber Confidential Trading Information 5. Competition a. Competition Between NMS Stock ATSs and Registered National Securities Exchanges b. Competition Among NMS Stock ATSs c. Competition Between Broker-Dealers That Operate NMS Stock ATSs and Broker-Dealers That Do Not Operate NMS Stock ATSs 6. Effect of NMS Stock ATSs on the Current Market for NMS Stock Execution Services a. Trading Costs b. Price Discovery c. Market Efficiency PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 38769 C. Economic Effects and Effects on Efficiency, Competition, and Capital Formation 1. Economic Effects of Enhanced Filing Requirements of Form ATS–N a. Benefits b. Costs 2. Economic Effects of Public Disclosure of Form ATS–N a. Benefits (i) Benefits of Public Disclosure of Standardized Information of Operations of NMS Stock ATSs (ii) Benefits of Public Disclosure of the ATS-Related Activities of the BrokerDealer Operator and Its Affiliates (iii) Benefits of Public Disclosure of Aggregate Platform-Wide Order Flow and Execution Statistics (iv) Benefits of Filing Form ATS–N in a Structured Format b. Costs (i) Costs to NMS Stock ATSs (ii) Price Impact Costs (iii) Filing in Structured Format 3. Economic Effects of Written Safeguards and Written Procedures To Protect Subscribers’ Confidential Trading Information a. Benefits b. Costs 4. Impact on Efficiency, Competition, and Capital Formation a. Competition (i) Entry of New and Continuation of Legacy NMS Stock ATSs (a) Enhance Filing Requirements of Form ATS–N (b) Implementation and Ongoing Compliance Costs (c) Public Disclosure of Form ATS–N (ii) Effects on Changes in Number of NMS Stock ATSs on Market Participant Trading Costs (iii) Innovation b. Efficiency c. Capital Formation D. Reasonable Alternatives 1. Require NMS Stock ATSs To Publicly Disclose Current Form ATS 2. Require Form ATS–N but Deem Information Confidential 3. Require NMS Stock ATSs To Publicly Disclose Form ATS–N but not Declare Form ATS–N Ineffective 4. Initiate Differing Levels of Public Disclosure Depending on NMS Stock ATS Characteristics 5. Require NMS Stock ATSs To Register as National Securities Exchanges and Become SROs 6. Discontinue Quarterly Volume Reports on Form ATS–R 7. Require NMS Stock ATSs To Operate as Limited Purpose Entities 8. Prohibit Broker-Dealer Operators and Affiliates From Trading on the NMS Stock ATS 9. Lower the Fair Access Threshold for NMS Stock ATSs 10. Requirements To Disclose Aggregate Platform-Wide Order Flow and Execution Statistics to All Subscribers 11. Specify Alternative Structured Formats for Form ATS–N 12. Specify Other Filings Methods for Form ATS–N E:\FR\FM\07AUR2.SGM 07AUR2 38770 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations XI. Regulatory Flexibility Act Certification daltland on DSKBBV9HB2PROD with RULES2 I. Introduction NMS Stock ATSs, including trading centers commonly referred to as dark pools,2 have become an integral part of the national market system. Since the adoption of Regulation ATS in 1998,3 the number of these ATSs, and the volume of NMS stocks traded on them, has significantly increased. NMS Stock ATSs, which meet the definition of an exchange but are not required to register as national securities exchanges, compete with, and operate with complexity akin to, national securities exchanges. Many NMS Stock ATSs are operated by multi-service brokerdealers, whose business activities have become increasingly intertwined with those of the ATS, adding further complexity to their operations of NMS Stock ATSs and creating the potential for conflicts between the interests of the broker-dealer operator and the ATS’s subscribers. Despite their role in the equity markets, little information is widely available to market participants about NMS Stock ATSs, which restricts their ability to adequately assess these ATSs as potential routing destinations. On November 18, 2015, we proposed to amend Regulation ATS with the stated goals of enhancing operational transparency for NMS Stock ATSs to enable market participants to make more informed order routing decisions, and to facilitate better Commission oversight of these trading venues.4 To 2 The term ‘‘dark pool’’ is not used or defined in the Exchange Act or Commission rules. For purposes of this release, the term refers to NMS Stock ATSs that do not publicly display quotations in the consolidated quotation data. See Securities Exchange Act Release No. 76474 (Nov. 18, 2015), 80 FR 80998, 81008 n.123 (Dec. 28, 2015) (‘‘Proposal’’). Currently, NMS Stock ATSs operate predominantly as dark pools. See infra Section II.A.1. A ‘‘trading center’’ means a national securities exchange or national securities association that operates an SRO trading facility, an ATS, an exchange market maker, an OTC market maker, or any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent. 17 CFR 242.600(b)(78). Some trading centers, such as OTC market makers, also offer dark liquidity, primarily in a principal capacity, and do not operate as ATSs. For purposes of this adopting release, these trading centers are not defined as dark pools because they are not ATSs. 3 Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844, 70863 (December 22, 1998) (Regulation of Exchanges and Alternative Trading Systems) (‘‘Regulation ATS Adopting Release’’). 4 See Proposal, supra note 2. Section 11A(a)(2) of the Exchange Act (15 U.S.C. 78k–1(a)(2)) enacted as part of the Securities Acts Amendments of 1975 (‘‘1975 Amendments’’) (Pub. L. 94–29, 89 Stat. 97 (1975)) directs the Commission, having due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets, to VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 achieve these goals, we proposed to require NMS Stock ATSs to publicly report on new Form ATS–N information about how the ATS operates and activities of the broker-dealer operator and its affiliates that relate to the ATS; and provide a process for the Commission to determine whether an NMS Stock ATS qualifies for the exemption from the definition of ‘‘exchange,’’ in which the Commission would, by order, declare a Form ATS– N effective or, after notice and opportunity for hearing, ineffective. We received 32 comment letters on the Proposal from a variety of interested persons, including ATSs, a national securities exchange, broker-dealers, institutional investors, industry trade groups, the Commission’s Investor Advocate, and the Attorney General of the State of New York.5 Commenters generally support the goals of the Proposal, although some commenters express concern about various specific elements, and recommend certain modifications or clarifications. We are adopting Form ATS–N and amendments to Regulation ATS and Exchange Act Rule 3a1–1(a) with modifications from the Proposal, as discussed below.6 II. Background A. Role of ATSs in the Current Equity Market Structure 1. Significant Source of Liquidity for NMS Stocks At the time Regulation ATS was proposed, there were 8 registered national securities exchanges,7 and the Commission estimated that there were approximately 43 systems that would be eligible to operate as ATSs.8 As of March 31, 2018, there were 21 registered national securities exchanges and 87 ATSs with a Form ATS on file with the Commission. Of these, there were 12 use its authority under the Exchange Act to facilitate the establishment of a national market system for securities in accordance with the Congressional findings and objectives set forth in Section 11A(a)(1) of the Exchange Act. See 15 U.S.C. 78k–1(a)(1). See also Regulation ATS Adopting Release, supra note 3, at 70858; Proposal, supra note 2, at 80999–81000. 5 Comments received on the Proposal are available on the Commission’s website, available at: https://www.sec.gov/comments/s7-23-15/ s72315.shtml. See Appendix A for a citation key to comment letters cited in this release. 6 If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. 7 See Securities Exchange Act Release No. 39884 (April 21, 1998), 63 FR 23504, 23523 (April 29, 1998) (‘‘Regulation ATS Proposing Release’’) at 23543 n.341. 8 See id. at 23540 n.313 and accompanying text. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 national securities exchanges that trade NMS stocks and 41 ATSs that had noticed on Form ATS that they expect to trade NMS stocks.9 Approximately 502.8 billion shares ($25.4 trillion) were traded in NMS stocks during the first quarter of 2018.10 During this period, the 33 ATSs that reported transactions in NMS stocks 11 accounted for 57.3 billion shares (approximately $2.9 trillion in dollar volume), representing 11.4% of the combined total share trading volume (11.5% of the total dollar volume) in NMS stocks on all national securities exchanges, ATSs, and non-ATS OTC trading centers.12 By comparison, the number of active dark pools trading NMS stocks in 2002 was approximately 10,13 and in 2009, dark 9 Data compiled from Forms ATS submitted to the Commission as of March 31, 2018. NYSE National, Inc. (f.k.a. National Stock Exchange, Inc.) was not trading as of March 31, 2018 but filed a proposed rule change with the Commission for its proposed relaunch. See Securities Exchange Act Release No. 82819 (March 7, 2018) 83 FR 11098 (March 13, 2018) (NYSENAT– 2018–02) (notice of proposed ruled change). The Commission has approved the proposed rule change. See Securities Exchange Act Release No. 83289 (May 17, 2018) 83 FR 23968 (May 23, 2018) (NYSENAT–2018–02) (order approving proposed ruled change). In contrast to dark pools, an ATS could be an Electronic Communication Network (‘‘ECN’’), which are ATSs that provide their best-priced orders for inclusion in the consolidated quotation data, whether voluntarily or as required by Rule 301(b)(3) of Regulation ATS. See Rule 600(b)(23) of Regulation NMS, 17 CFR 242.600(b)(23) (definition of ‘‘electronic communications network’’); see also 2010 Equity Market Structure Release, supra note 13, at 3599. In general, ECNs offer trading services (such as displayed or non-displayed order types, maker-taker pricing, and data feeds) that are analogous to national securities exchanges. See id. Currently, however, based on Form ATS filings, there are no NMS Stock ATSs operating as ECNs. 10 See infra Table 1—‘‘NMS Stock ATSs Ranked by Dollar Trading Volume—January 1, 2018 to March 30, 2018’’ (citing Trade and Quote (TAQ) Data). 11 Data compiled from Forms ATS and Forms ATS–R filed with the Commission as of the end of, and for the first quarter of 2018. 12 See infra Table 1—‘‘NMS Stock ATSs Ranked by Dollar Trading Volume—January 1, 2018 to March 30, 2018.’’ See id. (citing Trade and Quote (TAQ) Data). During the second quarter of 2015, there were 38 ATSs that reported transactions in NMS stocks, accounting for 59 billion shares traded in NMS stocks ($2.5 trillion), which represented approximately 15.0% of total share trading volume (15.4% of total dollar trading volume) on all national securities exchanges, ATSs, and non-ATS OTC trading venues combined. See Proposal, supra note 2, at 81008 n.121 and accompanying text. Competitors for listed-equity (NMS) trading services also include several hundred OTC market makers and broker-dealers. 13 See Regulation of Non-Public Trading Interest, Securities Exchange Act Release No. 60997 (November 13, 2009) 74 FR 61208, 61209 n.9 (November 23, 2009) (‘‘Regulation of Non-Public Trading Interest’’). In 2009, there were 32 active dark pools trading in NMS stocks. See Securities Exchange Act Release E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations pools accounted for 7.9% of NMS share volume.14 Additionally, no individual ATS executed more than 20.1% of the total share volume on NMS Stock ATSs or more than 2.3% of total NMS stock share volume during the first quarter of 2018.15 Given this dispersal of trading volume in NMS stocks among an increasing number of trading centers, NMS Stock ATSs, with their approximately 11.4% market share, represent a significant source of liquidity in NMS stocks. daltland on DSKBBV9HB2PROD with RULES2 2. Operational Complexity; Conflict of Interests NMS Stock ATSs have grown increasingly complex in terms of the services and functionalities that they offer subscribers, and they have used advances in technology to improve the speed, capacity, and efficiency of the trading functionalities that they offer to execute orders in NMS stocks.16 Additionally, NMS Stock ATSs today offer a wide range of order types, matching systems to bring together orders and counterparties in NMS stocks, order interaction protocols, or opportunities to customize trading parameters, such as parameters that allow subscribers to preference interaction of their order flow with that of certain other specific subscribers or types of subscribers.17 A variety of market participants use these ATSs to display or execute orders and trading No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (‘‘2010 Equity Market Structure Release’’)), at 3598 n.22 and accompanying text. 14 See id. at 3598. 15 The NMS Stock ATS with the greatest volume executed approximately 20.1% of NMS Stock ATS share volume and 2.3% of the total consolidated NMS stock share trading volume. The market share percentages were calculated by Commission staff using aggregate trade data reported by ATSs to the FINRA equity trade reporting facilities and made available on FINRA’s website and TAQ Data. See infra Table 1—‘‘NMS Stock ATSs Ranked by Dollar Trading Volume— January 1, 2018 to March 30, 2018.’’ Pursuant to FINRA rules, each ATS is required to use a unique MPID in its reporting to FINRA, such that its volume reporting is distinguishable from other transaction volume reported by the broker-dealer operator of the ATS, including volume reported for other ATSs operated by the same broker-dealer. See FINRA Rules 6160, 6170, 6480, and 6720. FINRA aggregates on a weekly basis ATS data reported by ATSs to the FINRA equity trade reporting facilities. The data can be viewed on a security-by-security basis or by ATS. See FINRA Rules 6110 and 6610. See also Securities Exchange Act Release No. 76931 (January 19, 2016), 81 FR 4076 (January 25, 2016) (SR–FINRA–2016–002) (notice of filing and immediate effectiveness of a proposed rule change relating to ATS volume and trading information) (‘‘FINRA ATS Reporting Notice’’). 16 ATSs that traded NMS stocks prior to the adoption of Regulation ATS did not offer the same services and functionalities that they do today. See Proposal, supra note 2, at 81009. 17 See id. at 81009–81010. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 interest in NMS stocks, including broker-dealers that route customer orders to ATSs for execution and potential price improvement, and asset managers that seek to execute large size orders without suffering adverse price impact.18 The relationships between brokerdealer operators 19 and the ATSs they operate have also become more complex and intertwined since the adoption of Regulation ATS.20 The broker-dealer operator of an NMS Stock ATS controls all aspects of the operation of the ATS, including, among other things: the means of access to the ATS; who may trade on the ATS; how orders are matched and executed; and any differences in access to services among subscribers.21 The broker-dealer operator, or its affiliate, may also own, and control access to, the technology and systems that support the trading facilities of the NMS Stock ATS, or provide and control the personnel servicing the ATS’s trading facilities.22 Additionally, the broker-dealer operator, or in some cases, its affiliates, determines the means by which orders are entered on the ATS, in many cases, through the use of a smart order router that is owned and operated by the broker-dealer operator or one of its affiliates.23 The broker-dealer operator, or in some cases, its affiliates, also controls the market data that the ATS uses to match, and execute orders and the transmission of, and access to, confidential order and execution information sent to and from the ATS.24 The operations of the NMS Stock ATS and the other operations of the brokerdealer operator are usually closely intertwined, and the broker-dealer operator may leverage its information technology, systems, personnel, and market data, and those of its affiliates, to operate the ATS. Furthermore, ATSs that trade NMS stocks are increasingly operated by multi-service broker-dealers that engage 18 Market participants may include many different types of persons seeking to transact in NMS stocks, including broker-dealers and institutional or retail investors. See id. at 81001 n.28 and accompanying text. 19 See Proposal, supra note 2, at 81010, 81041– 81043. 20 See id. 21 See id. at 81010. 22 See id. Some technology or functions of an ATS may be licensed from a third party. The brokerdealer operator of the ATS is nonetheless legally responsible for ensuring that all aspects of the ATS comply with applicable laws. See id. at 81041 n.362. 23 See id. at 81041. 24 See id. For example, the broker-dealer operator determines the source of market data that the NMS Stock ATS uses to calculate the NBBO and how the NBBO will be calculated. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 38771 in significant brokerage and dealing activities in addition to operation of their ATS.25 These other business activities may include, among others, providing algorithmic trading software, agency sales desk support, and automated smart order routing services, often with, or through, their affiliates. As indicated by commenters, the fees charged to subscribers for their use of an NMS Stock ATS operated by a multiservice broker-dealer are generally bundled with other services offered by the broker-dealer operator to subscribers.26 Multi-service brokerdealers that also operate NMS Stock ATSs may use the ATS as a complement to the broker-dealer’s other service lines. For instance, the broker-dealer operator of an NMS Stock ATS, or its affiliate, may also operate an OTC market making desk or principal trading desk,27 or may have other business units that actively trade NMS stocks on a principal or agency basis in the ATS or at other trading centers.28 Some of these brokerdealer operators that operate multiple NMS Stock ATSs may use their ATSs as an opportunity to execute orders ‘‘in house’’ before seeking contra-side interest at other execution venues. A multi-service broker-dealer may also execute orders in NMS stocks internally (and not within its ATS) by trading as principal against such orders or crossing orders as agent in a riskless principal capacity, before routing the orders to its NMS Stock ATS or another external trading center. Consequently, the nonATS trading centers operated by the broker-dealer operator of an NMS Stock ATS, or its affiliates, may compete with the ATS for the execution of transactions in NMS stocks. B. Exemption for Alternative Trading Systems Exchange Act Rule 3b–16(a) 29 provides a functional test to assess 25 Throughout the Proposal and this release, broker-dealer operators of NMS Stock ATSs that provide brokerage or dealing services in addition to operating an ATS are referred to as ‘‘multi-service broker-dealers.’’ See id. at 81001 n.30. 26 See infra Section V.D.19. 27 These non-ATS, OTC activities in NMS stocks may include operating as an OTC market maker or block positioner or operating an internal brokerdealer system. See 2010 Equity Market Structure Release, supra note 13, at 3599–3600. Additionally, an affiliate of the broker-dealer operator of an NMS Stock ATS may also operate non-ATS trading centers. 28 See id. See also infra Section V.C (discussing comments on the proposed disclosure requirements of Form ATS–N). 29 See 17 CFR 240.3b-16. See generally Regulation ATS Adopting Release, supra note 3. See also Proposal, supra note 2, at 81004 (discussing the current exemption from the definition of exchange available to ATSs). E:\FR\FM\07AUR2.SGM 07AUR2 38772 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations whether a trading platform meets the definition of exchange, and if so, triggers the requirement to register as a national securities exchange pursuant to Section 5 of the Exchange Act 30 and comply with the requirements applicable to exchanges. Under Rule 3b–16(a), ‘‘an organization, association, or group of persons shall be considered to constitute, maintain, or provide ‘a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange,’ if such organization, association, or group of persons: (1) Brings together the orders for securities of multiple buyers and sellers; and (2) uses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade.’’ 31 Exchange Act Rule 3b– 16(b) explicitly excluded certain systems that the Commission believed were not exchanges.32 Accordingly, a system is not included in the Commission’s interpretation of ‘‘exchange’’ if: (1) The system fails to meet the two-part test in paragraph (a) of Rule 3b–16; (2) the system falls within one of the exclusions in paragraph (b) of Rule 3b–16; or (3) the Commission otherwise conditionally or unconditionally exempts 33 the system from the definition. Section 5 of the Exchange Act 34 requires an organization, association, or group of persons that meets the definition of ‘‘exchange’’ under Section 3(a)(1) of the Exchange Act,35 unless otherwise exempt, to register with the Commission as a national securities exchange pursuant to Section 6 of the 30 See 15 U.S.C. 78f. 17 CFR 240.3b–16(a). 32 See Regulation ATS Adopting Release, supra note 3, at 70852. Specifically, Rule 3b–16(b) excludes from the definition of exchange systems that perform only traditional broker-dealer activities, including: (1) systems that route orders to a national securities exchange, a market operated by a national securities association, or a brokerdealer for execution, or (2) systems that allow persons to enter orders for execution against the bids and offers of a single dealer if certain additional conditions are met. 33 See 17 CFR 240.3b–16(e). 34 15 U.S.C. 78e. 35 Pursuant to Section 3(a)(1) of the Exchange Act, the statutory definition of ‘‘exchange’’ means ‘‘any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange. . . .’’ 15 U.S.C. 78c(a)(1). daltland on DSKBBV9HB2PROD with RULES2 31 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Exchange Act.36 Registered national securities exchanges are also SROs,37 and must comply with regulatory requirements applicable to both national securities exchanges and SROs.38 Before a national securities exchange may commence operations, the Commission must approve the national securities exchange’s application for registration filed on Form 1. Section 6(b) of the Exchange Act requires, among other things, that the national securities exchange be so organized and have the capacity to carry out the purposes of the Exchange Act and to comply, and enforce compliance by its members and persons associated with its members, with the federal securities laws and the rules of the exchange.39 Both a national securities exchange’s registration application and the Commission’s order 36 15 U.S.C. 78f. A ‘‘national securities exchange’’ is an exchange registered as such under Section 6 of the Exchange Act. A trading platform that meets the definition of ‘‘exchange’’ under Section 3(a)(1) of the Exchange and fails to register with the Commission as a national securities exchange pursuant to Section 6 of the Exchange Act, unless exempt, risks operating as an unregistered exchange in violation of Section 5 of the Exchange Act. See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Securities Exchange Act Release No. 81207 (July 25, 2017) https://www.sec.gov/litigation/investreport/ 34-81207.pdf (‘‘DAO Report’’) (finding that certain tokens offered and sold by a ‘‘virtual’’ organization were securities, and confirming that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies, and that securities exchanges providing for trading in these securities must register unless they are exempt). Specifically, we confirmed that a system that meets the criteria of Rule 3b–16(a), and is not excluded under Rule 3b-16(b), must register as a national securities exchange pursuant to Sections 5 and 6 of the Exchange Act or operate pursuant to an appropriate exemption. See id. at Section III.D. See also In the Matter of BTC Trading, Corp. and Ethan Burnside, Respondents, Securities Exchange Act Release No. 73783 (December 8, 2014), https:// www.sec.gov/litigation/admin/2014/33-9685.pdf (order instituting administrative and cease-anddesist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order and alleging, among other things, that an operator of two online venues through which account holders could trade securities using virtual currencies violated Section 5 of the Exchange Act by failing to register the trading venues as exchanges). 37 Section 3(a)(26) of the Exchange Act defines a self-regulatory organization as any national securities exchange, registered securities association, registered clearing agency, or (with limitations) the Municipal Securities Rulemaking Board. See 15 U.S.C. 78c(a)(26). See also Proposal, supra note 2, at 81000–81001 nn. 20–26 and accompanying text (discussing certain differences between certain obligations and benefits applicable to national securities exchanges and those applicable to ATSs). 38 See, e.g., 15 U.S.C. 78f and 78s. 39 See Section 6(b)(1) of the Exchange Act, 15 U.S.C. 78f(b)(1). The Commission must also find that the national securities exchange has rules that meet certain criteria. See generally Exchange Act Section 6(b)(2) through (10), 15 U.S.C. 78f(b)(2) through (10). PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 approving the application are public. After registering, a national securities exchange must file with the Commission any proposed changes to its rules.40 The initial application on Form 1, amendments thereto, and filings for proposed rule changes, in combination, publicly disclose important information about national securities exchanges, such as the trading services they offer and fees they charge for those services. Exchange Act Rule 3a1–1(a)(2) 41 exempts from the Exchange Act Section 3(a)(1) definition of ‘‘exchange’’ an organization, association, or group of persons that complies with Regulation ATS,42 which requires, among other things, meeting the definition of an ATS and registering as a broker-dealer.43 As a result of the exemption, an organization, association, or group of persons that meets the definition of an exchange and complies with Regulation ATS is not required by Section 5 of the Exchange Act to register as a national securities exchange pursuant to Section 6 of the Exchange Act, is not an SRO, and, therefore, is not required to comply with regulatory requirements applicable to national securities exchanges and SROs.44 An ATS that fails to comply with the requirements of Regulation ATS would no longer qualify for the exemption provided under Rule 3a1– 1(a)(2), and thus, risks operating as an unregistered exchange in violation of Section 5 of the Exchange Act.45 C. Conditions to the ATS Exemption; Confidential Notice Regime Rule 300(a) of Regulation ATS defines an ATS as: ‘‘any organization, association, person, group of persons, or 40 See generally Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), and Exchange Act Rule 19b– 4, 17 CFR 240.19b–4. 41 See 17 CFR 240.3a1–1(a)(2). 42 See id. Rule 3a1–1 also provides two other exemptions from the definition of ‘‘exchange’’ for any ATS operated by a national securities association and any ATS not required to comply with Regulation ATS pursuant to Rule 301(a) of Regulation ATS. See 17 CFR 240.3a1–1(a)(1) and (3). Rule 3a1–1(b) provides an exception to the Rule 3a1–1(a) exemptions pursuant to which the Commission may require a trading system that is a substantial market to register as a national securities exchange, if the Commission finds doing so is necessary or appropriate in the public interest or consistent with the protection of investors. See 17 CFR 240.3a1–1(b). See also Regulation ATS Adopting Release, supra note 3, at 70857–70858. 43 See 17 CFR 242.300(a); 17 CFR 242.301(a); and 242.301(b)(1). In addition to the other requirements of Regulation ATS, to qualify for the Rule 3a1–1(a) exemption, an organization, association, or group of persons must otherwise meet the definition of ‘‘exchange.’’ 44 See generally Sections 5, 6, and 19 of the Exchange Act, 15 U.S.C. 78e, 78f, and 78s. 45 See 15 U.S.C. 78e. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations system: (1) [t]hat constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of [Rule 3b–16]; and (2) [t]hat does not: (i) [s]et rules governing the conduct of subscribers other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, or system; or (ii) [d]iscipline subscribers other than by exclusion from trading.’’ 46 Governing the conduct of or disciplining subscribers are functions performed by an SRO that we believe should be regulated as such.47 Accordingly, pursuant to the definition in Rule 300(a), a trading system that performs SRO functions, or performs functions common to national securities exchanges, such as establishing listing standards, is precluded from the definition of ATS and would be required to register as a national securities exchange or be operated by a national securities association (or seek another exemption).48 Rule 301(b)(1) of Regulation ATS requires that every ATS that is subject to Regulation ATS, pursuant to paragraph (a) of Rule 301,49 be registered as a broker-dealer under Section 15 of the Exchange Act.50 As a registered broker-dealer, an ATS must also, in addition to complying with Regulation ATS, comply with broker46 See 17 CFR 242.300(a). Regulation ATS Adopting Release, supra note 3, at 70859. As we noted when we adopted Regulation ATS, any system that uses its market power to regulate its participants should be regulated as an SRO. We stated that it would consider a trading system to be ‘‘governing the conduct of subscribers’’ outside the trading system if it imposed on subscribers, as conditions of participation in trading, any requirements for which the trading system had to examine subscribers for compliance. In addition, we stated our belief that if a trading system imposed as conditions of participation, directly or indirectly, restrictions on subscribers’ activities outside of the trading system, such a trading system should be a registered exchange or operated by a national securities association, but that the limitation would not preclude an ATS from imposing credit conditions on subscribers or requiring subscribers to submit financial information to the ATS. See id. 48 See id. 49 Pursuant to Rule 301(a), certain ATSs that are subject to other appropriate regulations are not required to comply with Regulation ATS. These ATSs include those that are: Registered as a national securities exchange under Section 6 of the Exchange Act; exempt from national securities exchange registration based on the limited volume of transactions effected; operated by a national securities association; Registered as a broker-dealer under Sections 15(b) or 15C of the Exchange Act, or are banks, that limits their activities to certain instruments; or exempted, conditionally or unconditionally, by Commission order, after application by such ATS. See 17 CFR 242.301(a). 50 See 17 CFR 242.301(b)(1). daltland on DSKBBV9HB2PROD with RULES2 47 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 dealer filing and conduct obligations, including becoming a member of an SRO, such as the Financial Industry Regulatory Authority (‘‘FINRA’’), and comply with SRO rules.51 An ATS must also comply with Rule 301(b)(2) of Regulation ATS, which currently requires all ATSs to file an initial operation report with the Commission on Form ATS 52 at least 20 days before commencing operations.53 Form ATS requirements include that an ATS provide information about: Classes of subscribers and differences in access to the services offered by the ATS to different groups or classes of subscribers; securities the ATS expects to trade; any entity other than the ATS involved in its operations; the manner in which the system operates; how subscribers access the trading system; procedures governing order entry; and procedures governing execution, reporting, clearance, and settlement of transactions effected through the ATS.54 Regulation ATS states that information filed by an ATS on Form ATS is ‘‘deemed confidential when filed’’ 55 and ATSs are not otherwise required to publicly disclose such information.56 51 Section 15(b)(8) of the Exchange Act requires a broker or dealer to become a member of a registered national securities association, unless it effects transactions in securities solely on an exchange of which it is a member. 15 U.S.C. 78o(b)(8). See also Regulation ATS Adopting Release, supra note 3, at 70903 (discussing some of the regulatory obligations of registered brokerdealers, such as membership in an SRO and compliance with that SRO’s rules). For example, a broker-dealer that is a FINRA member must file an application for approval of a material change to its business operations (as defined in FINRA Rule 1011(k)). See FINRA Rule 1017(a). Among other obligations, a broker-dealer operator of an NMS Stock ATS that is a FINRA member is subject to trade reporting requirements pursuant to FINRA rules. See, e.g., supra note 15 (discussing FINRA trade reporting requirements applicable to NMS Stock ATSs). 52 Form ATS and the Form ATS Instructions are available at https://www.sec.gov/about/forms/ formats.pdf. 53 See 17 CFR 242.301(b)(2)(i). The Commission stated in the Regulation ATS Adopting Release that Form ATS would provide the Commission the opportunity to identify problems that might impact investors before the system begins to operate. See Regulation ATS Adopting Release, supra note 3, at 70864; Proposal, supra note 2, at 81005 n.70 and accompanying text. Unlike a Form 1 filed by a national securities exchange, Form ATS is not approved by the Commission. Instead, Form ATS provides the Commission with notice about an ATS’s operations prior to commencing operations. See Regulation ATS Adopting Release, supra note 3, at 70864. 54 See Proposal, supra note 2, at 81005. 55 17 CFR 242.301(b)(2)(vii). See Form ATS. 56 As we noted in the Proposal, some ATSs may currently make voluntary public disclosures. See Proposal, supra note 2, at 81011, n.156. See also infra note 559 and accompanying text (discussing comments regarding voluntary postings of Form ATS by NMS Stock ATSs). PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 38773 ATSs must notify the Commission of any changes in their operations by filing an amendment to its Form ATS initial operation report. There are three types of amendments to an initial operation report.57 First, if any material change is made to its operations, the ATS must file an amendment on Form ATS at least 20 calendar days before implementing such change.58 Second, if any information contained in the initial operation report becomes inaccurate for any reason and has not been previously reported to the Commission as an amendment on Form ATS, the ATS must file an amendment on Form ATS correcting the information within 30 calendar days after the end of the calendar quarter in which the system has operated.59 Third, an ATS must promptly file an amendment on Form ATS correcting information that it previously reported on Form ATS after discovery that any information was inaccurate when filed.60 Also, upon ceasing to operate as an ATS, an ATS is required to promptly file a cessation of operations report on Form ATS.61 As is the case with respect to initial operation reports, Form ATS amendments and cessation of operations reports serve as notice to the Commission of changes to the ATS’s operations,62 and Rule 301(b)(2)(vii) and the Instructions to the form state that Form ATS is ‘‘deemed confidential.’’ 63 Rule 301(b)(9) of Regulation ATS also requires an ATS to periodically report certain information about transactions on the ATS and information about certain activities on Form ATS–R within 30 calendar days after the end of each calendar quarter in which the market 57 Form ATS is used for three types of submissions: Initial operation reports; amendments to initial operation reports; and cessation of operations reports. An ATS designates the type of submission on the form. See Form ATS. 58 See 17 CFR 242.301(b)(2)(ii). A ‘‘material change,’’ includes, but is not limited to, any change to the operating platform, the types of securities traded, or the types of subscribers. In addition, the Commission has stated that ATSs implicitly make materiality decisions in determining when to notify their subscribers of changes. See Regulation ATS Adopting Release, supra note 3, at 70864. See also infra Section IV.B.1.a.ii (discussing the materiality standard that would apply to the filing of amendments on Form ATS–N). 59 See 17 CFR 242.301(b)(2)(iii). 60 See 17 CFR 242.301(b)(2)(iv). 61 See 17 CFR 242.301(b)(2)(v). 62 See Regulation ATS Adopting Release, supra note 3, at 70864. 63 See 17 CFR 242.301(b)(2)(vii); Form ATS at 3, General Instructions A.7. Under the final rules, NMS Stock ATSs that trade only NMS stocks will not be required to file Form ATS in accordance with Rules 301(b)(2)(i) through (vii), but instead will be required to comply with the requirements of new Rule 304 and file Form ATS–N. See infra Section III.B.4. See also infra Sections IV.A, B, and C. E:\FR\FM\07AUR2.SGM 07AUR2 38774 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations has operated.64 Form ATS–R requires quarterly volume information for specified categories of securities, as well as a list of all securities traded on the ATS during the quarter and a list of all subscribers that were participants during the quarter.65 As with respect to Form ATS, Rule 301(b)(2)(vii) and the instructions to Form ATS–R state that Form ATS–R is ‘‘deemed confidential.’’ 66 Under the amendments we are adopting, the requirements of Rule 301(b)(9) will continue to apply to all ATSs, including NMS Stock ATSs, as will the other requirements of Regulation ATS other than the Form ATS reporting requirements of Rule 301(b)(2).67 Under Rule 301(b)(3), an ATS that (1) displays subscriber orders in an NMS stock to any person (other than an employee of the ATS) and (2) during at least four of the preceding six calendar months, had an average daily trading volume of 5% or more of the aggregate average daily share volume for that NMS stock, as reported by an effective transaction reporting plan, must comply with certain order display and execution access obligations.68 An ATS that meets these criteria must comply with Rule 301(b)(3)(ii), which requires the ATS to provide to a national securities exchange or national securities association (each an SRO), for inclusion in the quotation data made available by the SRO to vendors, the prices and sizes of its orders at the highest buy price and lowest sell price for that NMS stock that are displayed to more than one subscriber.69 An ATS that meets the volume threshold also is required to comply with Rule 301(b)(3)(iii), which sets forth certain access standards regarding the orders that the ATS is required to provide to an SRO pursuant to Rule 301(b)(3)(ii).70 Under Rule 301(b)(4), an ATS must not charge any fee to broker-dealers that access the ATS through a national securities exchange or national securities association that is inconsistent with the equivalent access to the ATS that is required under Rule 301(b)(3)(iii).71 Under Rule 301(b)(5)—and even if the ATS does not display subscribers’ orders to any person (other than an ATS employee)—an ATS with 5% or more of the average daily volume in an NMS stock during at least four of the preceding six calendar months, as reported by an effective transaction reporting plan, must: 72 Establish written standards for granting access to trading on its system; not unreasonably prohibit or limit any person in respect to access to services offered by such ATS by applying the above standards in an unfair or discriminatory manner; make and keep records of all grants of access including, for all subscribers, the reasons for granting such access, and all denials or limitations of access and reasons, for each applicant, for denying or limiting access; and report the information required in Exhibit C of Form ATS–R regarding grants, denials, and limitations of access.73 These requirements are referred to as the ‘‘fair access’’ requirements and apply on a security-by-security basis.74 A denial of access to a market participant after an ATS reaches the 5% fair access 70 See 17 CFR 242.301(b)(3)(iii). 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. 72 17 CFR 242.301(b)(5)(i). 73 See 17 CFR 242.301(b)(5)(ii). Regulation ATS does not mandate compliance with these requirements when an ATS reaches the 5% trading threshold in an NMS stock if the following conditions are met: The ATS matches customer orders for a security with other customer orders; such customers’ orders are not displayed to any person, other than employees of the ATS; and such orders are executed at a price for such security disseminated by an effective transaction reporting plan, or derived from such prices. See 17 CFR 242.301(b)(5)(iii). 74 The fair access requirements also apply for non-NMS stocks when an ATS reaches a 5% trading threshold in certain securities other than NMS stocks, including certain equity securities, municipal securities, and corporate debt securities. See 17 CFR 242.301(b)(5)(i). daltland on DSKBBV9HB2PROD with RULES2 71 See 64 See 17 CFR 242.301(b)(9)(i). Form ATS–R and the Form ATS–R Instructions are available at https://www.sec.gov/about/forms/formats-r.pdf. In the Regulation ATS Adopting Release, the Commission stated that the information provided on Form ATS–R would permit the Commission to monitor the trading on ATSs. See Regulation ATS Adopting Release, supra note 3, at 70878. 65 See Form ATS–R at 4, Items 1 and 2 (describing the requirements for Exhibit A and Exhibit B of Form ATS–R). Form ATS–R also requires an ATS that is subject to the fair access obligations under Rule 301(b)(5) of Regulation ATS to provide as Exhibit C, a list of all persons granted, denied, or limited access to the ATS during the period covered by the Form ATS–R and designate for each person (a) whether it was granted, denied, or limited access; (b) the date the ATS took such action; (c) the effective date of such action; and (d) the nature of any denial or limitation of access. ATSs must also complete and file Form ATS–R within 10 calendar days after ceasing to operate. See 17 CFR 242.301(b)(9)(ii); Form ATS–R at 2, General Instructions A.2 to Form ATS–R. 66 See 17 CFR 242.301(b)(2)(vii); Form ATS–R at 2, General Instruction A.7. 67 See generally infra Section III. See also Section III.B.5. 68 See 17 CFR 242.301(b)(3)(i). 69 See 17 CFR 242.301(b)(3)(ii). VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 threshold in an NMS stock would be reasonable if it is based on objective standards.75 Prior to the Commission’s adoption of Regulation SCI,76 NMS Stock ATSs were required to comply with Rule 301(b)(6), which requires certain ATSs trading 20% or more of the volume in any equity security or debt securities to comply with standards regarding the capacity, integrity, and security of their automated systems.77 Regulation SCI superseded and replaced Rule 301(b)(6)’s requirements with regard to ATSs that trade NMS stocks and equity securities that are not NMS stocks 78 and requires SCI entities,79 including NMS Stock ATSs that meet the definition of an ‘‘SCI ATS,’’ 80 to establish written policies and procedures reasonably designed to ensure that their systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets, and that they operate in a manner that complies with the Exchange Act.81 Rule 301(b)(7) 82 requires all ATSs, regardless of the volume traded on their systems, to permit the examination and inspection of their premises, systems, and records, and cooperate with the examination, inspection, or investigation of subscribers, whether such examination is being conducted by 75 See Regulation ATS Adopting Release, supra note 3, at 70874. 76 See Securities Exchange Act Release No. 73639 (November 19, 2014), 79 FR 72251 (December 5, 2014) (adopting final rules for systems compliance and integrity) (‘‘SCI Adopting Release’’). 77 See 17 CFR 242.301(b)(6). 78 Regulation SCI does not apply to ATSs that trade municipal securities or corporate debt securities. See SCI Adopting Release, supra note 76, at 72262. 79 Regulation SCI defines ‘‘SCI entity’’ to mean ‘‘an SCI self-regulatory organization, SCI alternative trading system, plan processor, or exempt clearing agency subject to [the Commission’s Automation Review Policies].’’ See 17 CFR 242.1000. 80 Regulation SCI defines ‘‘SCI alternative trading system’’ or ‘‘SCI ATS’’ to mean an ATS, which during at least four of the preceding six calendar months: (1) Had with respect to NMS stocks (a) five percent (5%) or more in any single NMS stock, and one-quarter percent (0.25%) or more in all NMS stocks, of the average daily dollar volume reported by applicable transaction reporting plans, or (b) one percent (1%) or more in all NMS stocks of the average daily dollar volume reported by applicable transaction reporting plans; or (2) had with respect to equity securities that are not NMS stocks and for which transactions are reported to a self-regulatory organization, five percent (5%) or more of the average daily dollar volume as calculated by the self-regulatory organization to which such transactions are reported. However, an SCI ATS is not required to comply with the requirements of Regulation SCI until six months after satisfying the aforementioned criteria. See 17 CFR 242.1000. 81 See SCI Adopting Release, supra note 76, 79 FR at 72252. 82 See 17 CFR 242.301(b)(7). E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations the Commission or by an SRO of which such subscriber is a member. Rule 301(b)(8) 83 requires all ATSs to make and keep current the records specified in Rule 302 of Regulation ATS 84 and preserve the records specified in Rule 303 of Regulation ATS.85 Under Rule 301(b)(10), all ATSs must establish adequate safeguards and procedures to protect subscribers’ confidential trading information, which includes limiting access to the confidential trading information of subscribers to those employees of the ATS who are operating the system or responsible for its compliance with Regulation ATS or any other applicable rules; and implementing standards controlling employees of the ATS trading for their own accounts.86 Furthermore, all ATSs must adopt and implement adequate oversight procedures to ensure that the above safeguards and procedures are followed.87 Finally, Rule 301(b)(11) 88 expressly prohibits any ATS from using the word ‘‘exchange’’ or derivations of the word ‘‘exchange,’’ such as the term ‘‘stock market,’’ in its name.89 D. Concerns Regarding the Lack of Operational Transparency Despite their role in the equity markets and complexity of their operations, NMS Stock ATSs are not required under Regulation ATS to publicly disclose information about their operations. We are concerned that little information is widely available to market participants about NMS Stock ATSs, and that the lack of, or differential access to, information about operations of NMS Stock ATSs inhibits the ability of market participants to assess NMS Stock ATSs as potential trading venues. These concerns are shared by several commenters.90 83 See 17 CFR 242.301(b)(8). 17 CFR 242.302. 85 See 17 CFR 242.303. In the Regulation ATS Adopting Release, the Commission stated that these requirements to make, keep, and preserve records are necessary to create a meaningful audit trail and to permit surveillance and examination to help ensure fair and orderly markets. See Regulation ATS Adopting Release, supra note 3, at 70877–78. 86 See 17 CFR 242.301(b)(10)(i). 87 See 17 CFR 242.301(b)(10)(ii). 88 See 17 CFR 240.301(b)(11). 89 When we proposed Regulation ATS, we said that ‘‘it is important that the investing public not be confused about the market role [ATSs] have chosen to assume.’’ See Regulation ATS Proposing Release, supra note 7 at 23523. We expressed concern that ‘‘use of the term ‘exchange’ by a system not regulated as an exchange would be deceptive and could mislead investors that such alternative trading system is registered as a national securities exchange.’’ See id. 90 See, e.g., CFA Institute Letter at 2; ICI Letter at 3; Better Markets Letter at 2; Investor Advocate Letter at 14; Luminex Letter at 1. daltland on DSKBBV9HB2PROD with RULES2 84 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Commenters also concur with our belief that NMS Stock ATSs today play a significant role in equity market structure, and that their role has changed since Regulation ATS was adopted in 1998.91 In addition, commenters reinforce our belief that NMS Stock ATSs have become more operationally complex, that the potential for conflicts of interest has risen as a result of that complexity, and that the conditions to the exemption for NMS Stock ATSs should be modified.92 Commenters also express concern about the lack of operational transparency for NMS Stock ATSs.93 Given the complexities of NMS Stock ATS operations, the lack of information about the ATS’s order types, priority rules, segmentation procedures, use of market data, and fees, for example, may impede the ability of market participants to adequately understand how their orders in NMS stocks would interact, match, and execute. We are also concerned that the lack of available information about the ATSrelated activities of the broker-dealer operator and its affiliates may hinder the ability of market participants to evaluate potential conflicts of interest, and thus limit their ability to protect their interests. Because of overlap between a broker-dealer’s ATS operations and its other operations, there is a risk of information leakage of subscribers’ confidential trading information to other business units of the broker-dealer operator or its affiliates.94 Several commenters describe NMS Stock ATS operational 91 See, e.g., SIFMA Letter at 2; Investor Advocate Letter at 4; LeveL ATS Letter at 2. Other commenters also recognized that the role of NMS Stock ATSs has changed since the adoption of Regulation ATS. See, e.g., Schneiderman Letter at 1; Virtu Letter at 2; UBS Letter at 1; Fidelity Letter at 1; ICI Letter at 2–3; STANY Letter at 2–3. 92 See, e.g., Consumer Federation of America Letter at 4; ICI Letter at 2; HMA Letter at 18; Schneiderman Letter at 1–2; Better Markets Letter at 2; CFA Institute Letter at 2; SIFMA Letter at 8. See also infra Section V.D (describing comments on proposed disclosures required by Form ATS–N). 93 See, e.g., CBOE Letter at 1; CFA Institute Letter at 3; Consumer Federation of America Letter at 2; ICI Letter at 3. See also Investor Advocate Letter at 14; Luminex Letter at 1; Consumer Federation of America Letter at 4; UBS Letter at 5–7; AI Letter at 2. One commenter critiques both the current regulatory regime for ATSs, as well as the Proposal, but describes issues with the lack of transparency and states that the Proposal represents an important enhancement in the oversight of ATSs. See Better Markets Letter at 1–2. 94 In the Regulation ATS Adopting Release, the Commission recognized the potential for abuse involving a broker-dealer that operates an ATS and offers other traditional brokerage services, and expressed concern about the potential for the misuse of confidential trading information. See Regulation ATS Adopting Release, supra note 3, at 70879. See also Proposal, supra note 2, at 81041– 81042 n.367 and accompanying text. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 38775 structures that exemplify the kinds of relationships about which the Commission expressed concern, or otherwise reinforce our belief that the complex relationship between an NMS Stock ATS and its broker-dealer operator, or its affiliates, creates potential conflicts of interest.95 Further, in recognizing the current potential for conflicts of interest that exist as a result of the complexity of the operations of NMS Stock ATSs, the relationship many have with their broker-dealer operator or its affiliates, and the lack of transparency about those operations and potential conflicts, many commenters also highlight recent enforcement actions brought by the Commission.96 95 See, e.g., Consumer Federation of America Letter at 4; LeveL ATS Letter at 3; Fidelity Letter at 2 n.4. See also KCG Letter at 2; Luminex Letter at 3–4; Liquidnet Letter at 11. Not all NMS Stock ATSs, however, are operated by multi-service broker-dealers. See, e.g., BIDS Letter at 1. This commenter describes itself as the owner and broker-dealer operator of an NMS Stock ATS that does not engage in any proprietary trading and does not have any trading affiliates. The rules being adopted today would not require a broker-dealer that operates an NMS Stock ATSs to limit it business only to operating the ATS. We believe that the Form ATS–N disclosures will inform market participants about the ATS-related activities of the broker-dealer operator and its affiliates that give rise to potential conflicts between the interests of the broker-dealer operator and subscribers that use the services of the NMS Stock ATS. See infra Sections X.D.7 (discussing the alternative of requiring NMS Stock ATSs to operate as limited purpose entities) and V.C.8 (discussing comments stating that the Commission should prohibit conflicts of interest arising from the other business activities of the broker-dealer operator of an NMS Stock ATS, and those of its affiliates, and the Commission’s response to those comments). See also HMA Letter at 3 and attachment The Dark Side of the Pools: What Investors Should Learn from Regulator’s Action, September 15, 2015, at 10; Investor Advocate Letter at 8; Better Markets Letter at 2; infra Section V.C (discussing comments related to disclosures about the activities of an NMS Stock ATS’s broker-dealer affiliate and those of its affiliates). 96 See, e.g., Schneiderman Letter at 2; Better Markets Letter at 2–3; Consumer Federation of America Letter at 5; and HMA Letter at 12, 16–17. See also CFA Institute Letter at 2; Fidelity Letter at 4; Investor Advocate Letter at 5; Citadel Letter at 1– 7. One commenter, however, observes that in the recent settlements cited in the Proposal, there were conflicts of interest related to commercial relationships that had nothing to do with affiliates, and believes that all differential treatment of subscribers should be disclosed and recommends limiting disclosures regarding affiliate relationships. See Markit Letter at 8. Under the requirements we are adopting today, NMS Stock ATSs must disclose on Form ATS–N differences in treatment of subscribers and the broker-dealer operator and affiliate, and we have, in response to commenters, revised questions of Form ATS–N to narrow the scope of information related to affiliates to be disclosed. See infra Sections V.C and D. See also Proposal, supra note 2, at 81042–81043 n.374 (citing prior settled enforcement actions against ATSs that trade NMS stocks). Since the Proposal, we have entered additional settlements E:\FR\FM\07AUR2.SGM Continued 07AUR2 38776 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 NMS Stock ATSs, which meet the definition of ‘‘exchange’’ but are not required to register with the Commission as national securities exchanges, compete with national securities exchanges and operate with similar complexity. Unlike national securities exchanges, NMS Stock ATSs are not required to, among other things, publicly disclose their operations and fees.97 In addition, because we review the rules of national securities exchanges, a process which requires, among other things, that to approve certain rule changes, the Commission find 98 that the national securities exchange’s proposed rule changes are consistent with the Exchange Act,99 each existing national securities exchange has implemented rules that restrict affiliation between the national securities exchange and its members to mitigate the potential for conflicts of interest. We believe that the regulatory differences between NMS Stock ATSs and national securities exchanges with regard to disclosure obligations may create a competitive imbalance between two functionally similar trading centers that trade the same security. Transparency has long been a hallmark of the U.S. securities markets, and is one of the primary tools used by investors to protect their interests.100 We believe that one of the most important functions the Commission regarding NMS Stock ATSs. See In the Matter of Barclays Capital Inc., Securities Exchange Act Release No. 77001 (Jan. 31, 2016), https:// www.sec.gov/litigation/admin/2016/33-10010.pdf (order instituting administrative and cease-anddesist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order); In the Matter of Credit Suisse Securities (USA) LLC, Securities Act Release No. 77002 (Jan. 31, 2016), https://www.sec.gov/litigation/admin/2016/3310013.pdf (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order) (‘‘Crossfinder Settlement’’); In the Matter of Credit Suisse Securities (USA) LLC, Securities Act Release No. 77003 (Jan. 31, 2016), https:// www.sec.gov/litigation/admin/2016/33-10014.pdf (order instituting administrative and cease-anddesist proceedings, making findings, and imposing remedial sanctions and a cease-and-desist order); In the Matter of Deutsche Bank Securities Inc., Securities Exchange Act Release No. 79576 (Dec. 16, 2016), https://www.sec.gov/litigation/admin/ 2016/33-10272.pdf (order instituting administrative and cease-and-desist proceedings, making findings, and imposing remedial sanctions and a cease-anddesist order). 97 See infra notes 34–40 and accompanying text (discussing the regulatory framework applicable to national securities exchanges, including that national securities exchanges are self-regulatory organizations (‘‘SROs’’)). See also Regulation ATS Adopting Release, supra note 3; infra Section II.B (discussing the current requirements of Regulation ATS applicable to all ATSs). 98 See Proposal, supra note 2, at 81042 n.372 and accompanying text. 99 See 15 U.S.C. 78s(b). 100 See id. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 can perform for investors is to ensure that they have access to the information they need to protect and further their own interests.101 The amendments that we are adopting to Regulation ATS and Exchange Act Rule 3a1–1 are designed to address the concerns identified above and provide benefits to a wide range of market participants. Public disclosures on Form ATS–N will provide market participants with information about the operations of an NMS Stock ATS, which they can use to understand how orders interact, match, and execute in an NMS Stock ATS and compare to other NMS Stock ATSs and national securities exchanges. Form ATS–N will also provide the public with information about the ATS-related activities of the broker-dealer operator and its affiliates, which can be used by market participants to assess potential conflicts of interest and information leakage.102 Collectively, the Form ATS–N public disclosures will allow market participants to better evaluate an NMS Stock ATS as a potential trading destination for their orders and help them better protect their interests. The Form ATS–N public disclosures are also designed, in part, to bring the operational transparency requirements for NMS Stock ATSs more in line with the requirements for national securities exchanges. Finally, we believe that our process for reviewing Form ATS–N filings, which provides for Commission review of disclosures for compliance with the requirements of Rule 304 and Form ATS–N, and a potential declaration of ineffectiveness of a Form ATS–N, after notice and opportunity for hearing, will facilitate better Commission oversight of NMS Stock ATSs and thus, better protection of investors. III. Heightened Regulatory Requirements for NMS Stock ATSs A. Exchange Act Rule 3a1–1(a) Exemption: New Conditions for NMS Stock ATSs ATSs that trade NMS stocks operate pursuant to the exemption provided by Exchange Act Rule 3a1–1(a)(2), which exempts from the definition of an ‘‘exchange’’ any ATS that complies with Rules 300 through 303 of Regulation ATS.103 Given our concerns regarding 101 See Proposal, supra note 2, at 81010. id. at 81042. We believe that to understand the operations of an NMS Stock ATS, it is necessary to understand the relationship and interactions between the NMS Stock ATS and its registered broker-dealer operator as well as the relationship and interactions between the NMS Stock ATS and the affiliates of its broker-dealer operator. 103 17 CFR 240.3a1–1(a)(2). 102 See PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 the lack of public transparency around the operations of NMS Stock ATSs and the ATS-related activities of the brokerdealer operator and its affiliates, we proposed to expand the conditions of the Rule 3a1–1(a)(2) exemption to enhance operational transparency and oversight for these ATSs. We are adopting this requirement as proposed.104 We proposed to require NMS Stock ATSs to comply with proposed Rule 304, in addition to existing Rules 300 through 303 of Regulation ATS (except Rule 301(b)(2)), to be eligible for the exemption.105 Proposed Rule 304(a)(1)(i) set forth two new fundamental conditions to the Rule 3a1–1(a)(2) exemption: (1) An NMS Stock ATS must file Form ATS–N with the Commission (instead of the current Form ATS), and (2) the Commission must declare the Form ATS–N effective before the NMS Stock ATS can operate pursuant to the exemption. Adopted Rule 304(a)(1)(i) deletes the proposed condition that the Commission declare the Form ATS–N effective, and provides that the Form ATS–N must be effective 104 In Exchange Act Rules 3a1–1(a)(2) and (3), Regulation ATS is currently defined as ‘‘17 CFR 242.300 through 242.303.’’ We are amending the references to Regulation ATS to define Regulation ATS as ‘‘17 CFR 242.300 through 242.304.’’ We also proposed conforming Rule 3a1–1(a)(3) by changing the reference to Rule 303 to Rule 304 to make clear that an NMS Stock ATS that meets the requirements of Rule 301(a) is not required to comply with Regulation ATS, which would be amended to include proposed Rule 304. No changes were proposed to Rule 3a1–1(a)(1), which exempts any ATS that is operated by a national securities association. 105 Proposed Rule 304(a) provided that, unless not required to comply with Regulation ATS pursuant to Rule 301(a) of Regulation ATS, an NMS Stock ATS must comply with Rules 300 through 304 of Regulation ATS (except Rule 301(b)(2)) to be exempt from the definition of an ‘‘exchange’’ pursuant to Exchange Act Rule 3a1–1(a)(2). We are adopting proposed Rule 304(a) with certain modifications. As adopted, Rule 304(a) will state, ‘‘[u]nless not required to comply with Regulation ATS pursuant to § 242.301(a), an NMS Stock ATS must comply with §§ 242.300 through 242.304 (except §§ 242.301(b)(2)(i) through (vii)) to be exempt pursuant to § 240.3a-1(a)(2)’’ (emphasis added). The adopted rule text specifies the subparagraphs of Rule 301(b)(2) with which an NMS Stock ATS would not be required to comply. We believe that specifying the applicable subsections of Rule 301(b)(2) provides greater clarity, because Rule 301(b)(2)(viii) will apply to NMS Stock ATSs that also trade non-NMS stocks. The reference to Rule 301(b)(2) in the proposed rule text could be confusing to market participants because it does not make clear that Rule 301(b)(2)(viii) applies to certain NMS Stock ATSs. We believe that the added specificity in the adopted rule clarifies that only Rules 301(b)(2)(i) through (vii) will not be applicable to NMS Stock ATSs. See infra Section III.B.4. In addition, to reduce any potential ambiguity and improve readability, the adopted rule text deletes the language that states that the NMS Stock ATS would need to comply with the requirements to be exempt ‘‘from the definition of an ‘exchange’’’ pursuant to Exchange Act Rule 3a1–1(a)(2). E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations pursuant to Rule 304(a)(1)(iii) or Rule 304(a)(1)(iv)(A). Adopted Rule 304(a)(1)(iii) has been modified to provide that Form ATS–N will become effective if the Commission does not otherwise declare Form ATS–N ineffective—the Commission will not be declaring Form ATS–N filings effective.106 We proposed to amend Rules 3a1– 1(a)(2) and (3) to require compliance with proposed Rule 304 as a condition to operating pursuant to the Rule 3a1– 1(a)(2) exemption.107 We received several comments on the proposal to expand the conditions of the Rule 3a1– 1(a)(2) exemption for NMS Stock ATSs and require these ATSs to comply with Rule 304. We also received comments on the application of the Proposal to ATSs that trade securities other than NMS stocks, and, specifically, requiring these types of ATSs to file a Form ATS– N and operate pursuant to the effectiveness process. Both sets of comments are discussed below. 1. Comments on the Rule 304 Requirements; Effectiveness Nearly all commenters agree with our stated goal of enhancing operational transparency for NMS Stock ATSs.108 106 See infra Section IV.A.3. Exchange Act Rules 3a1–1(a)(2) and (3), Regulation ATS is currently defined as ‘‘17 CFR 242.300 through 242.303.’’ We proposed amending these references to Regulation ATS to define Regulation ATS as ‘‘17 CFR 242.300 through 242.304.’’ We also proposed conforming Rule 3a1– 1(a)(3) by changing the reference to Rule 303 to final Rule 304 to make clear that an NMS Stock ATS that meets the requirements of Rule 301(a) is not required to comply with Regulation ATS, which would be amended to include proposed Rule 304. No changes were proposed to Rule 3a1–1(a)(1), which exempts any ATS that is operated by a national securities association. 108 See SIFMA Letter at 2; Barnard Letter at Public comment on IOSCO’s Consultation Report on Issues Raised by Dark Liquidity; Anonymous Letter at 1; Luminex Letter at 1; MFA/AIMA Letter at 1–2; Fidelity Letter at 1; UBS Letter at 1; Markit Letter at 3–4; Schneiderman Letter at 1; ICI Letter at 3; CFA Institute Letter at 3, 6; CBOE Letter at 1; KCG Letter at 1; PDQ Letter at 1; STA Letter at 2; Liquidnet Letter at 1; STANY Letter at 1; FINRA Letter at 1; HMA Letter at 1, 5; Citadel Letter at 1; Better Markets Letter at 3–4; BIDS Letter at 1–2; SSGA Letter at 2; T. Rowe Price Letter at 1; AI Letter at 2–3; Consumer Federation of America Letter at 4; Morgan Stanley Letter at 1; Investor Advocate Letter at 2, 6; LeveL ATS Letter at 1; Virtu Letter at 2; MFA Letter 2 at 30. But see Morgan Stanley Letter at 1, 3 (stating that it is important to balance public disclosure with disclosure more suitable for the Commission (see discussion below and infra note 150 and accompanying text); that certain disclosure requirements, such as any disclosure around broker trading infrastructure and order handling practices beyond ATS operations, should apply to all brokers (see discussion infra note 217– 218and accompanying text and infra Section III.A.2); and that the Proposal treats all ATSs like exchanges and fails to account for distinct ATS models (see discussion below and infra note 176 and accompanying text)). One commenter daltland on DSKBBV9HB2PROD with RULES2 107 In VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Several commenters agree that the Commission should adopt the heightened disclosure requirements of proposed Rule 304.109 In particular, several commenters support enhancing the disclosure and oversight regime for NMS Stock ATSs as progress toward increasing operational transparency in NMS Stock ATSs.110 Specifically, some commenters express support for NMS Stock ATSs to file Form ATS–N as a tool to improve transparency.111 Several commenters assert that more transparency regarding ATS operations could help market participants evaluate and compare trading venues so they can determine where to route orders.112 One commenter states that ‘‘it is good for investors to have access to information on how their orders are handled and with whom they are dealing.’’ 113 Several commenters believe that making Form ATS–N filings public would encourage competition among trading venues,114 and one commenter asserts that the proposed transparency requirements could reduce competitive imbalances between NMS Stock ATSs and national securities exchanges.115 With respect to the Commission’s effectiveness determination for Form ATS–N, another commenter states that ‘‘given the level of competition between exchanges and NMS Stock ATSs, this effectiveness determination would better align the Commission’s oversight among different types of trading venues.’’ 116 One commenter, however, believes that ATSs do not add sufficient value to offset the regulatory inequity commented only on whether the Proposal should apply to ATSs that trade only fixed-income securities. See MarketAxcess Letter; infra Section III.A.2. 109 See generally Virtu Letter; T. Rowe Price Letter; Schneiderman Letter; ICI Letter; MFA/AIMA Letter; Consumer Federation of America Letter; CBOE Letter; Citadel Letter; Anonymous Letter; Better Markets Letter; Investor Advocate Letter. See also CFA Institute Letter at 6; SIFMA Letter at 3. 110 See SIFMA Letter at 3; Virtu Letter at 2; T. Rowe Price at 1; Schneiderman Letter at 1; MFA/ AIMA Letter at 2; MFA Letter 2 at 30; CBOE Letter at 1; Citadel Letter at 1; Consumer Federation of America Letter at 6; CFA Institute Letter at 3; Anonymous Letter at 1; KCG Letter at 3; Morgan Stanley Letter at 1; Investor Advocate Letter at 6; Better Markets Letter at 1. 111 See ICI Letter at 4–6; Consumer Federation of America Letter at 6; CFA Institute Letter at 3; Citadel Letter at 3; KCG Letter at 3; STA Letter at 2; MFA/AIMA Letter at 4; CBOE Letter at 1; Investor Advocate Letter at 2, 8. 112 See Luminex Letter at 1; Fidelity Letter at 1; SSGA Letter at 2; KCG Letter at 1; Citadel Letter at 1; ICI Letter at 3; STA Letter at 2; Schneiderman Letter at 2; Consumer Federation of America Letter at 6; Investor Advocate Letter at 11. 113 See Luminex Letter at 1. 114 See STA Letter at 2; Consumer Federation of America Letter at 6; Investor Advocate Letter at 3, 11–12. 115 See Citadel Letter at 1. 116 See Investor Advocate Letter at 12. PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 38777 and market fragmentation they have created.117 This commenter also states that the Proposal represents ‘‘meaningful progress in the effort to increase the operational transparency of NMS Stock ATSs.’’ 118 The Proposal was not designed to eliminate the exemption from the definition of exchange that is currently available to all ATSs, including NMS Stock ATSs. We believe that NMS Stock ATSs play a significant role in equity market structure and provide market participants with a variety of trading models to facilitate the interaction and execution of orders in NMS stocks. We believe that the current market for NMS stock execution services, consisting of national securities exchanges, NMS Stock ATSs, and other off-exchange venues, has resulted in an improvement to market efficiency.119 The changes to the requirements for NMS Stock ATSs that we are adopting today will increase operational transparency for these ATSs, bringing it more in line with the operational transparency for national securities exchanges, while continuing to recognize the difference in the business structure of ATSs as registered brokerdealers. We also believe that while the rules adopted today will increase the regulatory burden for NMS Stock ATSs and could result in some NMS Stock ATSs electing to no longer operate as an ATS, those NMS Stock ATSs that remain may compete more heavily with each other and with national securities exchanges, which could ultimately result in improvements to efficiency and capital formation.120 Another commenter believes that increased disclosure will aid in developing industry-based standards.121 Three commenters state that increased disclosure will boost investor confidence,122 and according to one of these commenters, increased transparency and investor confidence could lead to more investors using NMS Stock ATSs, and result in greater price discovery and lower costs of capital formation.123 We believe that a wide range of market participants will benefit from the enhanced operational transparency, 117 See CBOE Letter at 1. 118 Id. 119 See infra Section X.B.6 (discussing the effects of NMS Stock ATSs on the market for NMS stock execution services, including fragmentation). 120 See infra Section X.C (discussing the expected economic effects of today’s rulemaking, as well as its expected effects on efficiency, competition, and capital formation). 121 See STA Letter at 2. 122 See CFA Institute Letter at 3; Schneiderman Letter at 2; Investor Advocate Letter at 11–12. 123 See Investor Advocate Letter at 11, 12. E:\FR\FM\07AUR2.SGM 07AUR2 38778 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations including, for example, fund managers and the many brokers that subscribe to NMS Stock ATSs and route their orders, and those of their customers, to NMS Stock ATSs for execution. Five commenters observe, for example, that more transparency regarding ATS operations could assist market participants in achieving best execution.124 One commenter states that disclosure of material aspects of ATS operations that allow market participants to weigh the costs and benefits of venues is ‘‘particularly important for asset managers who are acting in a fiduciary capacity.’’ 125 Another commenter believes that making Form ATS–N filings publicly available would provide a ‘‘valuable tool for funds to use to assess NMS Stock ATSs, make informed routing decisions, and evaluate the performance of their brokers.’’ 126 We believe that the information disclosed on Form ATS–N will help brokers meet their best execution obligations to their customers, as they should be better able to assess the trading venues to which they route orders.127 We also believe that asset managers and institutional investors, who subscribe to an NMS Stock ATS or whose orders may be routed to an NMS Stock ATS by their brokers, should have more information about how NMS Stock ATSs operate, including how orders and trading interest of the institutional investor may be displayed or made known outside the ATS. This information also will enable asset managers to better evaluate the routing decisions of their brokers, including whether their brokers routed their orders to a venue that best fits their trading interests. a. Comments on Form ATS–N Requirement daltland on DSKBBV9HB2PROD with RULES2 Some commenters, however, believe NMS Stock ATSs should not be required to comply with new Rule 304 and the Commission should instead simply amend Regulation ATS to require making Form ATS public for NMS Stock 124 See Citadel Letter at 1; Consumer Federation of America Letter at 6; HMA Letter at 10; Luminex at 1; SIFMA Letter at 35. 125 See SSGA Letter at 2. 126 See ICI Letter at 3. 127 See, e.g., Proposal, supra note 2, at 81002 n.36 and accompanying text, 81013 n.187 and accompanying text (discussing that the Consumer Federation of America previously commented that Form ATS should require ATSs to provide ‘‘critical details about an ATS’s participants, segmentation, and fee structure’’ because the ‘‘information will allow market participants, regulators, and third party analysts to assess whether an ATS’s terms of access and service are such that it makes sense to trade on that venue’’). VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 ATSs.128 Two of these commenters assert that the Commission should mandate disclosure of current Form ATS as a first step to increase disclosure before considering implementing more burdensome disclosure requirements.129 We are not adopting commenters’ suggestion to make Form ATS public rather than requiring NMS Stock ATSs to comply with Rule 304 and file Form ATS–N. First, we believe that new Form ATS–N requires important additional disclosures that are not made under existing Form ATS.130 While Form ATS–N will require NMS Stock ATSs to disclose more information than Form ATS, in response to certain comments, we have reduced the burden of completing Form ATS–N by narrowing the scope of several requests for information and, in some cases, eliminating certain requests from the form.131 We have also simplified Form ATS–N to make completing and maintaining the form less burdensome and have modified questions so as not to solicit competitively sensitive information.132 We believe that Form ATS–N disclosures will help market participants compare and evaluate NMS Stock ATSs and make better informed decisions about where to route their orders to achieve their trading or investment objectives, enhance execution quality, and improve efficiency and capital allocation.133 Based on Commission staff’s experience reviewing disclosures made by ATSs on Form ATS over the past 19 years and as discussed in the Proposal, we have observed that ATSs have often provided minimal, rudimentary, and summary disclosures about their operations on Form ATS. One commenter agrees with our assessment, 128 See Luminex Letter at 2–3; PDQ Letter at 2; Fidelity Letter at 5; STANY Letter at 3; Morgan Stanley Letter at 2. 129 See Fidelity Letter at 5; STANY Letter at 3. 130 See infra Sections X.C.1 and X.C.2. We have considered any additional burden that may result from completion of Form ATS–N and the benefits of the additional information that will be made available to market participants by requiring NMS Stock ATSs to file Form ATS–N, and making Form ATS–N public. See id. 131 For example, we have narrowed a request for information regarding trading by affiliates of the broker-dealer operator on the NMS Stock ATS by requiring only the disclosures of affiliates that can enter or direct the entry of orders and trading interest into the ATS. See infra Section V.C.1. We are not requiring NMS Stock ATSs to provide proposed Exhibit 1 to Form ATS–N. See infra Section V.B.2. Exhibit 1 would have required that NMS Stock ATSs provide a copy of any materials currently provided to subscribers or other persons related to the operations of the ATS or the disclosures on Form ATS–N, such as frequently asked questions, manuals, and marketing materials. 132 See infra Section V.C. 133 See infra Section X.C.4. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 stating that based on its review of publicly available Forms ATS, the forms ‘‘often provide minimal and often generalized information’’ with respect to classification and segmentation of subscribers, means of access to the ATS, matching priority, order interaction, order types, and how the NBBO is calculated, and they are often missing ‘‘critical details’’ about their operations.134 Further, this commenter states that ‘‘[r]arely do Form ATSs provide information relating to their fee structures and potential or actual conflicts of interest.’’ 135 According to another commenter, current Form ATS is ‘‘not adequate’’ to allow the Commission and market participants to ‘‘understand how NMS Stock ATSs operate in today’s environment, given the complexity and the potential for significant conflicts of interest with the broker-dealer operator.’’ 136 In addition, one commenter observes that market participants currently receive ‘‘varying levels’’ of information about the operations of the NMS Stock ATS.137 As described in the Proposal,138 we believe that the complexity of NMS Stock ATS operations has increased substantially and in a manner that causes the current disclosure requirements of Form ATS to result in an insufficient, and inconsistent, level of detail about the operations of NMS Stock ATSs. Two commenters argue that a new Form ATS–N is unnecessary because most of the fundamental information required in Form ATS–N is currently covered by Form ATS.139 In addition, three commenters suggest that, as an alternative to requiring NMS Stock ATSs to file and make public Form ATS–N, we should clarify the requests for information on Form ATS and mandate that the revised Form ATS be made public.140 One of these commenters believes such an approach would help achieve the Commission’s goal of operational transparency, while ‘‘maintaining a regulatory structure under which NMS Stock ATSs can continue to innovate.’’ 141 Even if we were to ‘‘clarify’’ the requests for information on Form ATS to standardize disclosures and make current and past Forms ATS public, Form ATS does not require the 134 See Consumer Federation of America Letter at 3. 135 See id. Investor Advocate Letter at 8. 137 See Morgan Stanley Letter at 1. 138 See Proposal, supra note 2, at 81011. 139 See Luminex Letter at 2–3; STANY Letter at 136 See 3. 140 See STANY Letter at 3; PDQ Letter at 2; Fidelity Letter at 5. 141 See STANY Letter at 3. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations disclosure of certain information that will be required by Form ATS–N. For example, Form ATS–N requires NMS Stock ATSs to disclose information about the ATS-related activities of the broker-dealer operator and its affiliates that will allow market participants to assess potential conflicts of interest and information about the NMS Stock ATS’s safeguards and procedures to protect confidential trading information. The disclosure requirements of Form ATS are not sufficient to provide market participants with adequate information about the operational complexity of NMS Stock ATSs and the ATS-related activities of the broker-dealer operator and its affiliates that exist today. Form ATS–N is designed to provide market participants with more robust, detailed, and standardized disclosures, and to enable market participants to better understand the operations of NMS Stock ATSs and potential conflicts of interest between ATS operations and the other ATS-related activities of the brokerdealer operator and its affiliates. One commenter who suggests making Form ATS public as an alternative to requiring Form ATS–N expresses concern that the ‘‘crippling amount of detail’’ required to be disclosed under Form ATS–N would not be useful to market participants.142 We do not believe that Form ATS–N, as modified from the Proposal, will require a ‘‘crippling’’ level of detail that will only be useful to the Commission, and several commenters agree that the Form ATS–N disclosures would be useful for market participants in comparing trading venues and assessing conflicts of interest.143 While Form ATS–N will require NMS Stock ATSs to disclose more information than Form ATS, we have recognized commenters’ concerns regarding the burden of completing Form ATS–N by narrowing the scope of several requests, eliminating certain requests altogether, and simplifying its format.144 Other commenters discuss how market participants currently glean information about ATSs, and suggest that such methods could serve as alternatives to the requirements of Rule 304, or inform the Rule 304 requirements.145 One commenter states that it performs periodic due diligence on ATSs because it believes that as a fiduciary, it should only trade on venues or exchanges that further its 142 See 143 See id. at 4. supra notes 109–123 and accompanying text. 144 See infra Section V. SSGA Letter at 2; PDQ Letter at 2; Morgan Stanley Letter at 2. 145 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 goals of satisfying ‘‘best execution,’’ that protect client information, and generally support principles of fair access.146 This commenter also states that currently, market participants perform such due diligence by sending ATSs questionnaires.147 Similarly, another commenter observes that ATSs are incentivized to respond to these questionnaires to attract participants, and therefore, the Commission should not place additional disclosure burdens on ATSs.148 We do not believe that the practice of some market participants individually soliciting information about the operations of NMS Stock ATSs and conflicts of interest through questionnaires is an adequate alternative to Form ATS–N. We believe that disclosures on Form ATS–N should be easily accessible to all market participants. This is particularly important for NMS Stock ATSs given how orders in NMS stocks may be routed among various trading centers before receiving an execution. Based on the Commission’s experience, responses to questionnaires are generally unavailable to non-subscribers, including potential subscribers and customers of current subscribers. Without this information, potential subscribers would be unable to fully assess an NMS Stock ATS as a trading center and customers of subscribers would be inhibited from assessing their broker’s routing decisions. In addition, we believe, as indicated by comments,149 that the publicly available, standardized disclosure regime that will result from Rule 304 and Form ATS–N is critical for all market participants to receive equal information about NMS Stock ATSs. One commenter suggests that, as an alternative to the proposed Form ATS– N, the Commission should mandate that ATS operators publicly disclose current and historical Form ATS filings and related amendments, and responses to standardized, frequently asked questions (‘‘FAQs’’) regarding ATS operations.150 The commenter believes 146 See SSGA Letter at 2. See also Fidelity Letter at 8 (discussing that, from a due diligence perspective, subscribers may require NMS Stock ATS information). 147 See SSGA Letter at 2. See also PDQ Letter at 2. 148 See PDQ Letter at 2. 149 See Virtu Letter at 2; Schneiderman Letter at 1; ICI Letter at 3; Consumer Federation of America Letter at 6; and Citadel Letter at 1. 150 See Morgan Stanley Letter at 2 (asserting that ‘‘standardization is the key to concise, comparable and meaningful information regarding ATS operations’’). This commenter states that while it supports the Proposal’s effort to mandate transparency, it is concerned that proposed Form ATS–N ‘‘will result in more subjective, narrative PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 38779 that this approach would be ‘‘more balanced and appropriate’’ and ‘‘less burdensome and faster to implement.’’ 151 For the reasons discussed above in this section, we believe that the requests on Form ATS are not designed to produce adequate information for market participants about the operational complexity of NMS Stock ATSs and the ATS-related activities of their broker-dealer operators and their affiliates. We also believe that making public an ATS’s responses to standardized, FAQs regarding its operations would not achieve the same level of disclosure that Form ATS–N will require, and would not facilitate our oversight of NMS Stock ATSs. Based on Commission experience, the information required to be disclosed on Form ATS–N exceeds the information provided by NMS Stock ATSs in their responses to FAQs and will provide a greater benefit to market participants. In addition, NMS Stock ATSs must file Form ATS–N disclosures with the Commission, which will be subject to Commission review before they become public. As discussed in the Proposal, the public disclosures on Form ATS–N are designed to standardize the information available to all market participants about NMS Stock ATSs and facilitate their ability to compare and evaluate these trading venues.152 Finally, we believe that the burden resulting from filing a Form ATS–N would not be significant compared to requiring an NMS Stock ATS to prepare disclosures on Form ATS and responses to FAQs. We received four comments about the application of Rule 304 to some or all NMS Stock ATSs. We received three comments expressing the importance of the Commission’s need to heighten the regulatory requirements for all NMS Stock ATSs.153 In particular, one commenter states that the Commission’s additional disclosure requirements are important for creating a consistent and responses that will not lend themselves to side-byside comparison.’’ See id. at 1. 151 See id. at 2. 152 See Proposal, supra note 2, at 81123. See also infra Section V.A.1. We believe that requiring NMS Stock ATSs to provide only ‘‘yes’’ or ‘‘no’’ responses would limit ATSs, which provide diverse services and often operate uniquely, from accurately describing their operations and inhibit market participants from fully understanding the operations of the ATS or the ATS-related activities of the broker-dealer operator and its affiliates. See id. (discussing the Commission’s belief that narrative responses are important for market participants to understand the operations of NMS Stock ATSs given differences across ATSs, and provide NMS Stock ATSs with the flexibility in their responses). 153 See CFA Institute Letter at 3; UBS Letter at 2. See also KCG Letter at 1. E:\FR\FM\07AUR2.SGM 07AUR2 38780 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations fair set of obligations for all NMS Stock ATSs while providing market participants and subscribers with complete information.154 This commenter observes that although an ATS may have a small share of volume relative to the overall equities trading marketplace, it does not necessarily follow that such ATS has a similarly small share of each subscriber’s flow.155 Another commenter cautions the Commission about allowing exemptions based on metrics such as dollar volume, trading volume, or number of subscribers because allowing such exemptions could increase ‘‘incentives and opportunities’’ for regulatory arbitrage, and may result in unintended consequences.156 On the other hand, one commenter argues that the Commission should take a tiered regulatory approach to NMS Stock ATSs by applying certain of the enhanced requirements only to larger NMS Stock ATSs.157 This commenter suggests that to foster competitive innovations among NMS Stock ATSs, the Commission should only apply the requirement of prior Commission ‘‘approval’’ of changes before they are implemented to ‘‘larger ATSs with a substantial market footprint.’’ 158 We continue to believe that requiring all NMS Stock ATSs to publicly file a Form ATS–N, irrespective of the volume of NMS stocks transacted on the ATS is appropriate, and does not agree that its objectives would be achieved by applying Rule 304 on a tiered basis to NMS Stock ATSs. Given that brokerdealers can route their customers’ orders to any NMS Stock ATS for execution, we do not believe that transaction volume in NMS stocks serves as a proxy for whether customers of broker-dealers or subscribers to an ATS should have information about how their orders would be prioritized, matched, or executed on an NMS Stock ATS or understand the ATS-related activities of the broker-dealer operator and its affiliates that may give rise to conflicts of interest.159 As a result, customers of 154 See UBS Letter at 2. id. 156 See CFA Institute Letter at 3. 157 See STANY Letter at 2. See also Luminex Letter at 1. 158 See STANY Letter at 2. 159 National securities exchanges are subject to the same public rule filing and registration requirements irrespective of the volume transacted on the exchange. While an NMS Stock ATS may not transact significant overall volume in NMS stocks, that ATS may transact a significant volume of orders in certain NMS stocks or orders for certain subscribers. Additionally, we also believe that applying the enhanced regulatory requirements only to larger NMS Stock ATSs could create an opportunity for arbitrage without appropriate daltland on DSKBBV9HB2PROD with RULES2 155 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 broker-dealers that route their orders to NMS Stock ATSs with low volume will have the same level of information to assess their broker-dealers’ routing decisions as customers of broker-dealers that may route orders to any other NMS Stock ATSs. Amending Exchange Act Rule 3a1–1(a) to apply the requirements of Rule 304 to all NMS Stock ATSs would promote efficient and effective market operations by providing information all market participants can use to evaluate all NMS Stock ATSs that could be potential destinations for their orders. We believe that these requirements, including the requirement that NMS Stock ATSs file amendments to Form ATS–N in advance of adopting material changes,160 would not place an undue burden on smaller NMS Stock ATSs or their ability to innovate.161 Smaller NMS Stock ATSs that are not operated by multi-service broker-dealer operators and do not engage in other brokerage or dealing activities in addition to their ATS operations would have a lower burden than other ATSs because certain sections of Form ATS– N (such as several items of Part II) may not be applicable to these NMS Stock ATSs.162 We believe that the reduction in costs from exempting small NMS Stock ATSs would be minimal as compared to the benefits that would result from requiring the same level of transparency from small NMS Stock ATSs as from other NMS Stock ATSs.163 Further, under Regulation ATS, every ATS must currently wait 20 calendar days from the date of filing an amendment to Form ATS–N before implementing a material change to its benefit, in that an NMS Stock ATS may be incentivized to structure their operations to avoid being subject to enhanced requirements. We believe that the burden of complying with the enhanced regulatory requirements imposed on lower volume NMS Stock ATSs is justified by the benefits. See infra Section X.D.4. 160 One commenter expresses its concern that ‘‘small and innovative ATSs will be frustrated by the requirement that changes to their technology must be approved by the Commission prior to implementation.’’ See STANY Letter at 2. The Commission will not ‘‘approve’’ material amendments, but instead, may declare amendments ineffective if the disclosures filed by an NMS Stock ATS on Form ATS–N are materially deficient with respect to their completeness or comprehensibility. See infra Section IV.B.2. In addition, we are requiring that NMS Stock ATSs publicly disclose a brief summary of a material amendment upon filing, and after the Commission has had an opportunity to review the amendment, the material amendment would be made public. This change from the Proposal is in response to commenters who believe that an ATS may be placed at a competitive disadvantage if it is required to publicly file a material change 30 calendar days before implementing the change. See infra Section IV.E.2.c. 161 See infra Section X.D.4. 162 See infra Section V.C and Section X.C.4.a. 163 See infra Section X.D.4. PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 operations.164 In addition, we believe that the new process for NMS Stock ATSs applicable to filing material amendments is appropriate,165 and, like the other requirements of Rule 304, should be applied consistently across NMS Stock ATSs, regardless of their size or trading volume. The Commission review process for Form ATS–N amendments is designed to improve operational transparency for all market participants and not only for market participants that use NMS Stock ATSs with significant trading volume as compared to other NMS Stock ATSs. b. Comments on Effects on ATSs Relative to National Securities Exchanges We received comments regarding the competitive effect of Rule 304 on ATSs relative to national securities exchanges.166 Some commenters support public disclosure of Form ATS– N on the grounds that the current differences in transparency requirements for ATSs and national securities exchanges are competitively unfair.167 On the other hand, other commenters express concern about the competitive burden that the requirements of Rule 304 could place on ATSs.168 Specifically, one commenter states that not extending the enhanced transparency requirements to national securities exchanges may ‘‘result in a competitive advantage to exchanges.’’ 169 We believe that the new disclosure requirements for NMS Stock ATSs are not more rigorous than the disclosure standards for national securities exchanges and will not provide national securities exchanges with a competitive advantage over NMS Stock ATSs. National securities exchanges are required to publicly file proposed rule changes with the Commission to disclose, among other things, their manner of operations and fees.170 These proposed rules changes are subject to notice and comment from the public, as well as Commission consideration, pursuant to Section 19(b) and 17 CFR 240.19b–4 (Rule 19b–4).171 This is not the case for NMS Stock ATSs. Furthermore, Form ATS–N is designed to solicit information about ATS-related activities of the brokerdealer operator and its affiliates to help 164 See supra note 58 and accompanying text. infra Section IV.B.1.a. 166 See, e.g., Anonymous Letter at 1, Citadel Letter at 1; Markit Letter at 4; STANY Letter at 3. 167 See Anonymous Letter at 1; Citadel Letter at 1. 168 See Markit Letter at 4; STANY Letter at 3. 169 See Markit Letter at 4. 170 See Proposal, supra note 2, at 81011. 171 See id. 165 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 market participants better understand potential conflicts of interest and information leakage. In the context of national securities exchanges, we have expressed concern that the affiliation of a national securities exchange with one of its members raises potential conflicts of interest, and the potential for unfair competitive advantage; and because the Commission reviews the rules of national securities exchanges, a process which requires, among other things, that to approve certain rule changes the Commission find that the proposed rule change is consistent with the Exchange Act, each existing national securities exchange has implemented rules that restrict affiliation between the exchange and its members to mitigate the potential for these types of conflicts of interest.172 NMS Stock ATSs are not subject to such restrictions with respect to the activities of their broker-dealer operator and its affiliates that may raise conflicts of interests. Another commenter states its view that requiring public disclosure of Form ATS–N will ‘‘alter the competitive landscape . . . between NMS Stock ATSs and national securities exchanges.’’ 173 We continue to believe that since the adoption of Regulation ATS, the market in execution services for NMS stocks has evolved such that trading functions of NMS Stock ATSs have become more functionally similar to those of national securities exchanges.174 The enhanced transparency requirements for NMS Stock ATSs are designed to allow market participants to compare execution services of NMS Stock ATSs against national securities exchanges, to appropriately calibrate the level of transparency between NMS Stock ATSs and national securities exchanges, and to foster even greater competition for order flow of NMS stocks between those trading centers.175 One commenter asserts that the Proposal treats all ATSs as stand-alone, exchange-like price/time priority models and fails to account for distinct ATS models (e.g. price/capacity/size priority and interval VWAP crossing) and does not consider that an ATS may be part of a broader, integrated 172 See Proposal, supra note 2, at 81042 n. 370– 372 and accompanying text. In cases where we have approved exceptions to this prohibition, there have been limitations and conditions on the activities of the national securities exchange and its affiliated member designed to address concerns about potential conflicts of interest and unfair competitive advantage. See id. at 81042 n.372. 173 See STANY Letter at 3. 174 See supra Section II.D. 175 See infra Section X.C.2.a (discussing the economic benefits of the new disclosure requirements). See also Section X.C.4.a.i. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 electronic offering available to clients choosing to access the markets through a full-service broker-dealer.176 This commenter also states that while Regulation ATS recognizes the distinction between exchanges and ATS offerings, the regulatory structure specifically tailored for exchanges can be seen throughout much of the Proposal and proposed Form ATS–N, such as in the Proposal’s focus on: Subscribers, in the way an exchange has members; a subscriber manual, in the way an exchange has a rule book; and fees, similar to an exchange fee schedule.177 One commenter questions why the Commission has determined that NMS Stock ATSs should be subject to ‘‘essentially similar disclosure requirements’’ as national securities exchanges without affording NMS Stock ATSs benefits such as limited immunity and market data revenue that national securities exchanges receive.178 NMS Stock ATSs, unlike registered national securities exchanges, are registered as broker-dealers and exempt from the requirements of, among other provisions, Sections 6 and 19(b) of the Exchange Act. However, an NMS Stock ATS that desires the benefits afforded to national securities exchanges can choose to register as a national securities exchange under Section 6 of the Exchange Act 179 and be subject to the requirements of, among other provisions, Sections 6 and 19(b) of the Exchange Act. In addition, we do not agree with the commenter’s view that the disclosure requirements with which NMS Stock ATSs must comply are ‘‘essentially similar’’ to the disclosure requirements imposed on national securities exchanges. For example, a national securities exchange is required to file with the Commission all rule changes establishing or changing a due, fee, or other charge assessed to members, which the Commission reviews for consistency with the Exchange Act.180 In contrast, an NMS 176 See Morgan Stanley Letter at 3. id. at 2–3. 178 See Fidelity Letter at 4. 179 See 15 U.S.C. 78f. An ATS is not required to comply with the requirements of Rule 301(b) if it is registered as an exchange under Section 6 of the Exchange Act. See 17 CFR 242.301(a)(1). 180 See 17 CFR 240.19b–4(f)(2). Another commenter states that while Regulation ATS recognizes the distinction between national securities exchanges and ATS offerings, the regulatory structure tailored for national securities exchanges can be seen throughout much of the Proposal and proposed Form ATS–N, and included as examples the Proposal’s focus on disclosures regarding subscribers, subscriber manuals, and fees, as well as the public posting upon filing of amendments to Form ATS–N. See Morgan Stanley Letter at 3–4. This commenter believes this 177 See PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 38781 Stock ATS will be required to provide disclosure on the types of fees and charges of the NMS Stock ATS.181 Further, disclosure is only one of the requirements to which national securities exchanges are subject. Notably, the rules and changes to the rules of national securities exchanges are required to be filed with the Commission and are subject to public notice and comment.182 NMS Stock ATSs are not subject to these requirements, as well as many others, applicable to national securities exchanges.183 While NMS Stock ATSs and national securities exchanges are subject to different regulatory regimes, NMS Stock ATSs are trading centers that perform similar trading functions as national securities exchanges and have evolved to become more like national securities exchanges in their operations. We believe that Form ATS–N, as adopted, accommodates the differences between the regulatory requirements for national securities exchanges and those of NMS Stock ATSs while increasing public operational transparency for NMS Stock ATSs. The Commission does not agree that NMS Stock ATSs are being treated like national securities exchanges and believes that Form ATS–N is designed in a manner that allows ATSs to explain their unique business models. For example, NMS Stock ATSs will be able to explain their trading models, and associated facilities and procedures, in Part III, Item 11 of adopted Form ATS– N (‘‘Trading, Rules and Facilities’’). In addition, Part III, Item 19 (‘‘Fees’’) requires an NMS Stock ATS to identify and describe the types of fees or charges of the ATS and any differences among subscribers, whereas national securities exchanges are required to publicly post their complete fee schedules and any changes are subject to the SRO rule filing process under Section 19 of the approach is contrary to the objectives of Regulation ATS and urges the Commission to reconsider aspects of the Proposal that have the effect of not recognizing the materially different roles that ATSs and exchanges are intended to play in the U.S. marketplace. See id at 4. We agree that registered broker-dealers that operate ATSs should continue to be able to avail themselves of the exemption from the definition of ‘‘exchange’’ provided by Exchange Act Rule 3a1–1 and Regulation ATS, but believe that due to changes in the role and operation of NMS Stock ATSs since the adoption of Regulation ATS, it is in the public interest to update the requirements for that exemption applicable to that subset of ATSs. Also many of the disclosure items identified by this commenter are the kinds of disclosures other commenters have described as significant to their understanding of the operation of NMS Stock ATSs. 181 See infra Section V.D.19. 182 See generally 15 U.S.C. 78s(b); 17 CFR 240.19b–4. 183 See 15 U.S.C. 78f(b). E:\FR\FM\07AUR2.SGM 07AUR2 38782 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Exchange Act. The Commission also understands that some broker-dealer operators offer their NMS Stock ATSs along with other execution and routing services. We believe that requests on Form ATS–N are appropriately designed, and provide narrative flexibility, to elicit information about the varying NMS Stock ATS models, including those of multi-service brokerdealers.184 daltland on DSKBBV9HB2PROD with RULES2 c. Comments on Effectiveness Requirement We proposed that to qualify for the exemption from the definition of ‘‘exchange,’’ an NMS Stock ATS’s Form ATS–N must be declared effective by the Commission; as adopted, a Form ATS–N must be effective for the ATS to qualify for the exemption.185 Several commenters express their support for requiring that Form ATS–N be subject to Commission review,186 and some commenters support the proposed requirement that Form ATS–N be declared effective by the Commission,187 while other commenters raise concerns about requiring that Form ATS–N be declared effective by the Commission.188 One commenter states that the proposed effective/ineffective process is ‘‘unnecessary’’ and ‘‘will have a chilling effect’’ on, or stifle innovation of, ATS operations.189 Another commenter similarly questions the need for the Commission to make a determination of effectiveness for Form ATS–N, and expresses concern that such a process would increase the regulatory risk for new NMS Stock ATSs and stifle innovation in the ATS marketplace by delaying the effectiveness of NMS Stock ATSs whose features, while meeting regulatory requirements, do not meet industry norms.190 We do not believe that requiring Form ATS–N to become effective after Commission review is ‘‘unnecessary;’’ 191 rather, the review 184 See, e.g., infra Section V.D.11 (describing Part III, Item 11 of Form ATS–N, which asks NMS Stock ATSs to provide a summary of their marketplaces and the means and facilities for bringing together the orders of multiple buyers and sellers on the NMS Stock ATS). 185 See infra Section IV.A.1. As adopted, the Commission will not declare initial Form ATS–N filings effective under Rule 304. 186 See Citadel Letter at 3; HMA Letter at 7–8; and Investor Advocate Letter at 11–12. 187 See MFA/AIMA Letter at 4; CFA Institute Letter at 4; and PDQ Letter at 2. Two commenters do not object to the effectiveness process. See Liquidnet Letter at 3 and STANY Letter at 2. 188 See Luminex Letter at 1; Fidelity Letter at 8– 9. 189 See Luminex Letter at 1. 190 See Fidelity Letter at 8–9. 191 See supra note 189 and accompanying text. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 process will facilitate the Commission’s oversight of NMS Stock ATSs and help ensure that information required by the form is disclosed in a complete and comprehensible manner. We have modified the proposed effectiveness process for initial Form ATS–N so that the Commission will not declare initial Form ATS–N effective; instead, initial Form ATS–N, as amended, will become effective, unless declared ineffective, upon the earlier of: (1) The completion of review by the Commission and publication pursuant to Rule 304(b)(2), or (2) the expiration of the Commission review period, or, if applicable, the extended review period.192 Form ATS– N will nevertheless be subject to Commission review, and, as proposed, the Commission may declare a Form ATS–N ineffective if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors.193 We believe that requiring Form ATS–N to be effective, which would occur only after being subject to Commission review, could incentivize NMS Stock ATSs to make more detailed and informative disclosures than under current Form ATS. While requiring Form ATS–N to be effective may have some impact on innovation,194 our review of Form ATS–N is designed to mitigate any effect on innovation, and accordingly would focus on, for example, the completeness and comprehensibility of the Form ATS–N disclosures and not include a review of the merits of the disclosures or whether such trading functionalities meet industry norms.195 We do not believe that requiring Form ATS–N to be effective will unduly increase the ‘‘regulatory risk’’ of launching a new NMS Stock ATS as one commenter suggests.196 We understand that the Commission review process will generate some uncertainty for NMS Stock ATSs as a Form ATS–N could be declared ineffective, which is not currently the case with respect to Form ATS.197 The Commission review process, however, will not be merit based, and determinations of ineffectiveness will require the Commission to make certain findings after notice to the NMS Stock ATS and opportunity for hearing.198 In addition, 192 See infra Sections IV.A.3.c and IV.A.4.a. id. 194 See infra Section X.C. 195 See supra note 190 and accompanying text. See also infra Section IV.A.3.d. 196 See supra note 190 and accompanying text. 197 See infra Section X.C.4. 198 See infra Section IV.A.3. 193 See PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 the rule provides that if the Commission does not declare the Form ineffective before the end of a fixed time period, the Form ATS–N will become effective. We believe that these factors will provide NMS Stock ATSs with greater regulatory certainty regarding the effectiveness process. 2. Comments on Extending Rule 304 to Non-NMS Stock ATSs Rule 304 of Regulation ATS, as proposed and adopted, would apply only to NMS Stock ATSs, as defined in Rule 300(k) of Regulation ATS. We are concerned that, given the significance of NMS Stock ATSs in equity market structure and their operational complexities, the lack of transparency around NMS Stock ATSs operations could inhibit market participants’ ability to evaluate NMS Stock ATSs as potential routing destinations for their orders in NMS stocks. As discussed in the Proposal, we did not propose to apply Rule 304 to non-NMS Stock ATSs, which would include ATSs that trade corporate or municipal fixed income securities (‘‘Fixed Income ATSs’’), U.S. Government securities (‘‘Government Securities ATSs’’),199 or OTC Equity securities (‘‘OTC Equity Securities ATSs’’).200 We sought comment on whether Rule 304, in whole or in part, should apply to Fixed Income ATSs, Government Securities ATSs, and OTC Equity Securities ATSs.201 We also did not propose to apply Rule 304 to any other type of trading center besides NMS Stock ATSs,202 such as non-ATS OTC trading centers 203 or national securities exchanges. 199 The term ‘‘U.S. Government securities’’ is defined under Section 3(a)(42) of the Exchange Act. See 15 U.S.C. 78c(a)(42) (defining ‘‘government securities’’ as, among other things, ‘‘securities which are direct obligations of, or obligations guaranteed as to principal or interest by, the United States’’). 200 For purposes of this discussion, we are using the term ‘‘OTC Equity Security’’ as it is defined in FINRA’s 6400 rule series for quoting and trading in OTC Equity Securities. FINRA defines OTC Equity Security as ‘‘any equity security that is not an ‘NMS stock’ as that term is defined in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that the term ‘OTC Equity Security’ shall not include any Restricted Equity Security,’’ which FINRA defines as ‘‘any equity security that meets the definition of ‘restricted security’ as contained in Securities Act Rule 144(a)(3).’’ See FINRA Rules 6420(f), (k). 201 See Proposal, supra note 1, at 81018. 202 See Proposal, supra note 2. See also infra note 668 and accompanying text (discussing the term ‘‘trading center’’). 203 For purposes of this discussion, references to non-ATS OTC trading centers, as used herein, encompass all executions that occur off a national securities exchange and outside an ATS, including when a 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, E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 We received several comments generally supporting operational transparency and about whether or not to apply Rule 304 to non-NMS Stock ATSs.204 Of the commenters generally supporting enhanced operational transparency, several encourage the Commission to make the current Form ATS public for all ATSs.205 Some commenters urge the Commission to amend Regulation ATS to apply Rule 304 to all ATSs.206 Two commenters explicitly support applying the Proposal solely to NMS Stock ATSs.207 Several commenters specifically argue for extending Rule 304, including Form ATS–N, to Fixed Income ATSs.208 Several commenters, however, recommend against extending the Proposal requirements for NMS Stock ATSs to Fixed Income ATSs.209 Several commenters suggest that the 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 13, at 3599–3600. 204 See Better Markets Letter at 3, 8; CFA Institute Letter; Citadel Letter; Consumer Federation of America Letter at 6–7; Fidelity Letter at 6–7; HMA Letter at 5–6, 10, 12; ICI Letter at 11; Investor Advocate Letter at 2, 12–15; KCG Letter at 12–13; Liquidnet Letter at 3; Luminex Letter at 2, 4; MarketAxess Letter; Markit Letter at 2, 4, 9; MFA/ AIMA Letter 2–4; MFA Letter 2 at 30; Morgan Stanley Letter at 5–6; PDQ Letter at 2; SIFMA Letter at 3, 5; STANY Letter at 5; T. Rowe Price Letter at 2; Virtu Letter at 2. 205 See Fidelity Letter at 7; ICI Letter at 11; Luminex Letter at 2; Morgan Stanley Letter 2, 5; Investor Advocate Letter at 2–3; PDQ Letter at 2; STANY Letter at 3; SIFMA Letter at 3–4. 206 See Better Markets Letter at 3, 8; CFA Institute Letter at 3–4; Consumer Federation of America Letter at 6–7; HMA Letter 5–6, 10, 12. 207 See ICI Letter at 11; Liquidnet Letter at 3. 208 See Consumer Federation of America Letter at 6; Better Markets Letter at 8; CFA Institute Letter at 3–4; HMA Letter at 10; MFA/AIMA Letter at 2– 3. 209 See Fidelity Letter at 6–7; KCG Letter at 12– 13; Liquidnet Letter at 3; MarketAxess Letter at 3– 4 ; Markit Letter at 9; SIFMA Letter at 3. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Commission require Fixed Income ATSs to make their Forms ATS public.210 We also received several comments that specifically address enhancing operational transparency for, or extending Rule 304 to, Government Securities ATSs.211 Several commenters support applying Rule 304 requirements to Government Securities ATSs,212 while several state that Regulation ATS should be amended to include electronic platforms for U.S. Government securities.213 Other commenters believe that the Commission should gather additional information on fixed income markets, which include U.S. Government securities markets, and as an interim step, make the Form ATS filings for these ATSs public.214 We also received comments that specifically oppose applying the Proposal requirements to Government Securities ATSs,215 or more generally oppose expanding Rule 304 to non-NMS Stock ATSs.216 We also received comments regarding enhancing operational transparency for other non-ATS OTC trading centers— namely broker-dealers that internalize order flow.217 In general, these commenters point out the discrepancy in disclosure obligations that would result from the Proposal, or the possibility that broker-dealers would route order flow to non-ATS trading centers as a result.218 210 See Fidelity Letter at 6; SIFMA Letter at 34– 35; Markit Letter at 9; Investor Advocate Letter at 12–16; ICI Letter at 11. See also Luminex Letter at 4. 211 See Better Markets Letter at 8; CFA Institute Letter at 3–4; Citadel Letter at 4–5; Investor Advocate Letter at 16–17; KCG Letter; Liquidnet Letter at 3; MFA/AIMA Letter at 2–7; SIFMA Letter at 3, 5, 35–36; Virtu Letter at 2. 212 Some commenters specifically support operational transparency and enhanced monitoring of trading activity for Government Securities ATSs. See Virtu Letter at 2; Better Markets Letter at 8; CFA Institute Letter at 3–4; Citadel Letter at 4–5; MFA/ AIMA Letter at 2–7. See also Liquidnet Letter at 3 (stating that it does ‘‘not object’’ to the requirements of Regulation ATS applying to systems that cross trades in U.S. Government securities). 213 See Citadel Letter at 4–5; Liquidnet Letter at 3; Investor Advocate Letter at 16–19; Virtu Letter at 2. One commenter combined its support for transparency of ATSs that trade U.S. Government securities and Fixed Income ATSs. See MFA/AIMA Letter at 3–4 214 See SIFMA Letter at 34–35; Markit Letter at 9; Investor Advocate Letter, at 14. See also Fidelity Letter at 6. 215 See KCG Letter at 13; SIFMA Letter at 3, 5, 36. 216 See supra note 209 accompanying text. 217 See ICI Letter at 12; Morgan Stanley Letter at 2–3. 218 See id. See also Fidelity Letter at 11–12. Another commenter recommends that the Commission be required to conduct a review within a designated time-period to assess the effectiveness of the new rules and determine if any refinements should be proposed. See T. Rowe Price Letter at 3. In addition, one commenter suggests that regulators PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 38783 Given the range of commenter views on these questions and our belief that it is appropriate to take an incremental approach by first applying the amended regime to NMS Stock ATSs before considering a further step, we are not amending Rule 3a1–1(a) and Regulation ATS for non-NMS Stock ATSs. We intend to monitor the implementation and effectiveness of Rule 304 to NMS Stock ATSs, and should we decide to take further action with respect to nonNMS Stock ATSs, we would do so in a separate rulemaking and take into account our experience with Rule 304 and NMS Stock ATSs. The Commission notes that the Fixed Income Market Structure Advisory Committee (‘‘FIMSAC’’) was formed in 2017 pursuant to the Commission’s authority under the Federal Advisory Committee Act to provide the Commission with diverse perspectives on the structure and operations of the U.S. fixed income markets, as well as advice and recommendations on matters related to fixed income market structure.219 The FIMSAC recently issued recommendations for the Commission to review the framework for the oversight of electronic trading platforms for municipal securities and corporate bonds. Specifically, the FIMSAC recommended that the Commission form, together with FINRA and the MSRB, a joint working group to review the regulatory framework for oversight of electronic trading platforms used in the municipal securities and corporate bond markets.220 In light of recent recommendations of the FIMSAC, and comments received, we will review the regulatory framework for fixed income electronic trading platforms, including to consider whether we should propose amendments to Regulation ATS (and any other applicable rules) to account for operational and regulatory differences among electronic trading periodically monitor the development of the market and technological developments, and take appropriate action as needed. See Barnard Letter at 3. In addition to the Commission’s ongoing oversight responsibilities under the Exchange Act, Rule 304 provides a process for the Commission to review disclosures filed on Form ATS–N, either through an initial Form ATS–N, Form ATS–N amendment, or cessation of operations. 219 See 5 U.S.C.—App; Securities Exchange Act Release No. 81958 (October 26, 2017), 82 FR 50460 (October 31, 2017) (Notice of Federal Advisory Committee Establishment). 220 See Recommendation for the SEC to Review the Framework for the Oversight of Electronic Trading Platforms for Corporate and Municipal Bonds (July 16, 2018) available on the Commission’s website at https://www.sec.gov/ spotlight/fixed-income-advisory-committee/fimsacelectronic-trading-platforms-recommendation.pdf. E:\FR\FM\07AUR2.SGM 07AUR2 38784 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations platforms for municipal securities and corporate bonds. B. Amendments to Existing Regulation ATS Rules for NMS Stock ATSs To operate pursuant to the Exchange Act Rule 3a1–1a(2) exemption, NMS Stock ATSs will be required to comply with new Rule 304, in addition to the applicable existing Rules 300 through 303 of Regulation ATS. In light of the new requirements of Rule 304, we are adopting, with modifications discussed below, amendments to several existing rules of Regulation ATS. 1. Rule 300(k): Definition of NMS Stock ATS Proposed Rule 300(k) of Regulation ATS defined ‘‘NMS Stock ATS’’ in new paragraph (k) as ‘‘an alternative trading system, as defined in § 242.300(a), that facilitates transactions in NMS stocks, as defined in § 242.300(g).’’ We received no comments on the proposed definition of NMS Stock ATS and are adopting Rule 300(k) with modifications. We are replacing ‘‘facilitates transactions in’’ with ‘‘trades.’’ The term ‘‘trades’’ is well understood in the context Regulation ATS 221 and the term ‘‘facilitates’’ is not used in the definition of an ATS. This change is non-substantive and will clarify the rule text.222 Accordingly, Rule 300(k), as adopted, defines an ‘‘NMS Stock ATS’’ as ‘‘an alternative trading system, as defined in paragraph (a) of [Rule 300], that trades NMS stocks, as defined in paragraph (g) of [Rule 300].’’ daltland on DSKBBV9HB2PROD with RULES2 2. Rule 301(a): Exemption From Compliance With Regulation ATS We made explicit in proposed Rule 304(a) that NMS Stock ATSs must comply with Rules 300 through 304, unless not required to comply with Regulation ATS pursuant to Rule 301(a). Pursuant to Rule 301(a), certain ATSs 221 We believe that the concept of NMS Stock ATSs ‘‘trading’’ or ‘‘transacting’’ in NMS stocks, should be familiar to existing NMS Stock ATSs as Form ATS requires disclosure regarding, among other things ‘‘the types of securities the [ATS] trades’’ and ‘‘the name of any entity, other than the [ATS] that will be involved in the operation of the [ATS], including the execution, trading, clearing, and settling of transactions on behalf of the [ATS].’’ See Form ATS. Additionally, Form ATS requires disclosure regarding ‘‘[t]he procedures governing execution, reporting, clearance and settlement of transactions effected through the [ATS]’’; and Form ATS–R requires NMS Stock ATSs to ‘‘[p]rovide the total unit and dollar volume of transactions’’ in specified securities categories. See Form ATS and Form ATS–R. 222 As proposed, an NMS Stock ATS would include any ATS that effects transactions in securities that are listed on a national securities exchange (other than options, debt or convertible debt). See Proposal, supra note 2, at 81015–81016. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 that are subject to other appropriate regulations are not required to comply with Regulation ATS.223 To the extent that an NMS Stock ATS meets the criteria of the Rule 301(a) exemption, such ATS would not be required to comply with Rules 300 through 304 of Regulation ATS. We received no comments on the application of Rule 301(a) to NMS Stock ATSs and are adopting as proposed this language in Rule 304(a) to make clear that Rules 300 through 303 of Regulation ATS, including Rule 301(a) continue to apply to NMS Stock ATSs, unless otherwise provided by Rule 301(a). 3. Rule 301(a)(5): Exemptions From Certain Requirements of Regulation ATS Pursuant to Application to the Commission Rule 301(a)(5) of Regulation provides that an ATS shall comply with the requirements of Rule 301(b) unless such ATS is exempted, conditionally or unconditionally, by Commission order after application by such ATS, from one or more of the requirements of Rule 301(b), and that the Commission will grant such exemption only after determining that such an order is consistent with the public interest, the protection of investors, and the removal of impediments to, and perfection of, a national market system.224 When adopting Rule 301(a)(5), we stated that while the requirements of Regulation ATS are appropriate for all ATSs, a system may develop in the future for which these requirements may not be appropriate. The Commission expected to issue such an order only under unusual circumstances, and only after making the applicable determination.225 The requirements of Rule 304 were not part of Regulation ATS at the time the Commission adopted Rule 301(a)(5). We believe that, given the amendments to Regulation ATS that will require NMS Stock ATSs to comply with the filing requirements of Rule 304, including filing Form ATS–N, instead of the Form ATS filing requirements of Rules 223 ATSs that are not subject to Rule 301(a) include those that are: Registered as an exchange under Section 6 of the Exchange Act; exempt from national securities exchange registration based on limited volume; operated by a national securities association; registered as a broker-dealer, under Sections 15(b) or 15C of the Exchange Act, or that are banks, and that limit their securities activities to certain instruments; or exempted, conditionally or unconditionally, by Commission order, after application by such ATS from one or more of the requirements of Rule 301(b). See 17 CFR 242.301(a). See also Regulation ATS Adopting Release, supra note 3, at 70859–63. 224 See 17 CFR 242.301(a)(5). 225 Regulation ATS Adopting Release, supra note 3, at 70863. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 301(b)(2)(i)–(vii), it may be appropriate under certain limited, unusual facts and circumstances for the Commission to exempt an NMS Stock ATS, conditionally or unconditionally, by Commission order, from one or more requirements of Rule 304. As such, we are amending Rule 301(a)(5) to include exemptions from the requirements of Rule 304.226 In response to the Proposal, we received one comment regarding possible use of the Commission Section 36 exemptive authority in connection with the requirements of Rule 304.227 This commenter states that instead of modifying the requirements under the Proposal in such a way that could result in less relevant information being provided to the Commission and to the public, certain concerns of other commenters could be addressed through use of the Commission’s Section 36 exemptive authority. Specifically, this commenter observes that an NMS Stock ATS could seek relief tailored to its unique facts and circumstances pursuant to Section 36(a)(1) of the Exchange Act, and that Section 36(a)(1) permits the Commission to grant both conditional and unconditional exemptions from any provisions of a rule, to the extent necessary or appropriate in the public interest and consistent with the protection of investors.228 This commenter also states that using Section 36 exemptive authority would be consistent with the manner in which the Commission generally treats requests it receives from regulated entities, and encourages the Commission to consider providing guidance as to what factors it might consider when evaluating a request for specific exemptive relief.229 We believe that amendments made to Rule 301(a)(5) make clear that the Commission could 226 The Commission continues to also have general exemptive authority pursuant to Section 36(a) of the Exchange Act to grant both conditional and unconditional exemptions from any provisions or provisions of the Exchange Act, or any rule or regulation thereunder (including Rule 304 and any other provision of Rule 3a1–1 and Regulation ATS), to the extent necessary or appropriate in the public interest and consistent with the protection of investors. See 15 U.S.C. 78mm(a). 227 See Investor Advocate Letter at 8. 228 See id. See also infra notes 723–725 and accompanying text (discussing this comment in the specific context of disclosures regarding affiliates of the broker-dealer operator). 229 See Investor Advocate Letter at 9. For example, in the context of any exemptions from the requirements applicable to disclosures regarding affiliates of the broker-dealer operator of an NMS Stock ATS, the commenter encouraged the Commission to consider providing guidance as to what facts and circumstances it might consider when evaluating a broker-dealer operator’s request for exemptive relief. See id. See also infra notes 723–725 and accompanying text. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations exempt an NMS Stock ATS, conditionally or unconditionally, by order, after application by the ATS from one or more of the requirements of Rule 304 of Regulation ATS provided that the Commission determines that such an exemption is consistent with the public interest, the protection of investors, and removal of impediments to, and perfection of the mechanisms of, a national market system. We also received other comments regarding specific exceptions from the proposed requirements of Rule 304. Specifically, three commenters suggest providing an exception to the 30calendar day advance notice requirement for material changes in case of exigent circumstances.230 One commenter states that unless the Commission narrows the materiality standard for material amendments, the 30-calendar day advance notice requirement could affect an ATS operator’s ability to take ‘‘decisive action.’’ 231 This commenter further believes that NMS Stock ATS operators often must take decisive action without time for a lengthy review and approval process, given that the speed of response to technical or operational issues (including cybersecurity) often is measured in seconds. This commenter believes there should be a carve-out for exigent circumstances when an NMS Stock ATS must act swiftly.232 Another commenter states that there could be situations in which it would be difficult for an NMS Stock ATS to meet the 30calendar day advance notice requirement based on ongoing business changes, and that the Commission should clarify that certain Form ATS–N disclosures may be subject to immediate change without notice.233 Another commenter states that the Commission should allow for more rapid action (than the 30-day advance notice requirement) in the event of an ‘‘external emergency,’’ such as an extreme market event, but that such circumstances should be rare and only granted upon express approval of the Commission, upon a finding that such action is necessary to protect daltland on DSKBBV9HB2PROD with RULES2 230 See HMA Letter at 10; SIFMA Letter at 31; KCG Letter at 10. 231 See SIFMA Letter at 31. 232 See id. 233 See KCG Letter at 10. The commenter states that, for example, if a broker-dealer operator provides a disclosure that it routes orders to the ATS from its algorithmic business, and the data center from which the algorithmic business operates subsequently experiences systems issues that force it to stop routing orders to the ATS, the disclosure would no longer be accurate and the broker-dealer operator would not be in position to provide 30-calendar day advance notice of the change. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 investors and promote fair and efficient markets.234 We believe that there may be unusual circumstances under which an NMS Stock ATS may need to seek an exemption from the requirements of Rule 304 or the disclosure requirements of Form ATS–N. For example, under exceptionally rare occasions, an NMS Stock ATS may need to make a material change to its operations on an expedited basis to prevent substantial harm to market participants, such as in response to a significant operational or marketwide event. The amendments to Rule 301(a)(5) are designed to address these concerns.235 Applications for relief from a requirement of Rule 304 generally should explain why the applicant believes the relief sought is consistent with the public interest, the protection of investors, and the removal and impediments to, and perfection of the mechanism of, a national market system.236 As noted by commenters, circumstances may necessitate the implementation of a material change to the operations of an NMS Stock ATS on an expedited basis. We believe that, based on particular facts and circumstances, it may be appropriate to grant such an exemption from the 30day advance notice requirement of Rule 304(a)(2)(i)(A), for example, in the event of extraordinary, unforeseen circumstances, and if delaying implementation pursuant to the 30calendar day advance notice requirement would cause substantial harm to subscribers or other markets trading NMS stocks. By comparison, to the extent that an NMS Stock ATS may need to change its operations in response to an operational problem, as suggested by one commenter, an NMS Stock ATS could proactively develop and disclose in the relevant Form ATS– N Item alternative procedures that the ATS would apply if the ATS experiences a systems problem that causes it to be unable to perform a particular function. For example, an HMA Letter at 10. amended, Rule 301(a)(5) will apply to ATSs that have received exemptive relief from one or more requirements of Rule 304. See Rule 301(a)(5). 236 Applications for exemptive relief from the 30calendar day advance notice requirement of Rule 304(a)(2)(i)(A) generally should, for example, contain a description of the circumstances that necessitate the implementation of the material change on an expedited basis, and why, in the view of the NMS Stock ATS, expedited implementation is necessary or appropriate in the public interest, and consistent with the protection of investors, such as why the expedited implementation is necessary to prevent substantial harm to investors. The Commission will not consider hypothetical or anonymous requests for exemptive relief. 38785 NMS Stock ATS that routes orders and trading interest resting in the ATS to destinations outside the ATS could state, for example, that the NMS Stock ATS will either execute or cancel orders and trading interest submitted to the ATS if the ATS is unable to route orders and trading interest away from the ATS due to a systems problem. 4. Rule 301(b)(2): Form ATS Reporting Requirements No Longer Apply to NMS Stock ATSs We proposed in Rule 304 to except NMS Stock ATSs from complying with Rule 301(b)(2) of Regulation ATS. Existing Rule 301(b)(2) requires an ATS to file with the Commission a Form ATS initial operation report, amendments to the Form ATS initial operation report, and cessation of operations reports on Form ATS, all of which are ‘‘deemed confidential when filed.’’ 237 We proposed this exception to make clear that NMS Stock ATSs would not be required to comply with the Form ATS reporting requirements provided in Rule 301(b)(2) because the NMS Stock ATS would file a Form ATS–N pursuant to Rule 304. We also proposed Rule 301(b)(2)(viii) to make clear that NMS Stock ATSs must file with the Commission the reports and amendments required by Rule 304 and that NMS Stock ATSs were not subject to Rule 301(b)(2) of Regulation ATS. We also proposed that ATSs that effect transactions in both NMS stocks and non-NMS stocks would be subject to the requirements of proposed Rule 304, with respect to NMS stocks, and Rule 301(b)(2), with respect to non-NMS stocks. We received one comment regarding proposed Rule 301(b)(2)(viii).238 The commenter states that requiring an ATS that transacts in both NMS stocks and non-NMS Stocks to file reports on Form ATS–N with respect to NMS stocks but also file reports on Form ATS with respect to non-NMS stocks could be unduly burdensome.239 The commenter states that an ATS should have the option to file reports on Form ATS–N 234 See 235 As PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 237 See Rule 301(b)(2)(vii). Liquidnet Letter at 3. We received two comments regarding the application of Rule 301(b)(2)(i) through (vii) to Legacy NMS Stock ATSs that have filed a Form ATS–N that has not yet become effective. See Liquidnet Letter at 3; BIDS Letter at 2–3. We are adopting a transitional rule that will not require a Legacy NMS Stock ATS to amend its Form ATS under Rule 301(b)(2) if it has filed a Form ATS–N with the Commission that has not yet become effective. We are instead requiring such Legacy NMS Stock ATS to file amendments on Form ATS–N pursuant to the requirements of Rule 304(a)(2)(i)(A) through (C). Rule 304(a)(1)(v)(C) is discussed below in greater detail. See infra Section IV.A.4.c. 239 See Liquidnet Letter at 3. 238 See E:\FR\FM\07AUR2.SGM 07AUR2 38786 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations for all U.S. equities that it trades, whether listed or unlisted because an ATS operator would otherwise have the burden of maintaining two separate ATS filings for what the commenter believes is essentially the same functionality.240 We do not believe that requiring an ATS that trades both NMS stocks and non-NMS stocks to file reports on Form ATS–N with respect to NMS stocks, but also file reports on Form ATS with respect to non-NMS stocks, will be unduly burdensome. We recognize the additional burdens for NMS Stock ATSs resulting from the requirement to file disclosures on new Form ATS–N; however, we estimate that the burden for these ATSs to maintain their Forms ATS will decrease, because they will no longer be required to disclose information about their NMS stock operations on Form ATS.241 We also believe that allowing a broker-dealer operator to choose to disclose information on Form ATS–N about trading in non-NMS stocks, as suggested by the commenter,242 would likely result in incomplete disclosures about the ATS’s non-NMS stock operations that may be confusing or not useful to market participants. Form ATS–N was specifically designed to solicit information about trading in NMS stocks on an ATS to allow market participants to understand the ATS’s NMS stock operations and readily compare the ATS against other ATSs and national securities exchanges that trade NMS stocks.243 While many of the requests on Form ATS–N could apply to Fixed Income ATSs or Government Securities ATSs, the requests are not fully tailored to solicit information about trading in those types of securities and the systems that trade them. For example, transactions in NMS stocks are, in some cases, subject to different federal securities laws and Commission rules than transactions in other securities, such as fixed income securities.244 Because Form ATS–N is specifically designed for NMS Stock 240 See id. ATS that trades both NMS stocks and nonNMS stocks will be required to amend its Form ATS, after the ATS files Form ATS–N, by removing information that pertains solely to the ATS’s NMS stock operations. Amending Form ATS in this manner should help ensure that the Form ATS accurately describes the ATS’s non-NMS stock operations. 242 See Liquidnet Letter at 3. 243 See supra Section III.A. 244 For example, Rule 611 of Regulation NMS, which requires a trading center to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trade-throughs on that trading center, subject to certain exceptions, applies only to protected quotations in NMS stocks, and not to non-NMS stocks. See 17 CFR 242.611. daltland on DSKBBV9HB2PROD with RULES2 241 An VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 ATSs, subscribers relying on Form ATS–N disclosures to assess a non-NMS Stock ATS, such as one that trades fixed income securities, as a potential trading venue may not receive a complete or comprehensible understanding of the ATS’s fixed income operations, or fixed income activities of the broker-dealer operator and its affiliates as such activities relate to the ATS, because Form ATS–N does not solicit such information. We believe that allowing NMS Stock ATSs to choose whether to integrate information about trading in non-NMS stocks on a Form ATS–N could make the disclosures confusing for users and make it difficult for them to compare the operations of an NMS Stock ATS against other NMS Stock ATSs. Because we are adopting rules that require NMS Stock ATSs to file Form ATS–N pursuant to Rule 304, we are adopting Rule 304(a) with modifications to provide that an NMS Stock ATS would specifically be excepted from compliance with Rules 301(b)(2)(i) through (vii) of Regulation ATS, which govern the filing of Form ATS.245 An NMS Stock ATS that is operating pursuant to an initial operation report on Form ATS as of January 7, 2019 (‘‘Legacy NMS Stock ATS’’) will be required to file a Form ATS–N no earlier than January 7, 2019 and no later than February 8, 2019.246 We are also adopting Rule 301(b)(2)(viii) to provide for how Legacy NMS Stock ATSs transition from filing a Form ATS to filing a Form ATS–N. We are defining the term ‘‘Legacy NMS Stock ATS’’ to mean an NMS Stock ATS that is operating pursuant to an initial operation report on Form ATS as of January 7, 2019. We are also replacing proposed language that stated that an NMS Stock ATS would not be subject to the requirements of Rule 301(b)(2) with language stating that a Legacy NMS Stock ATS shall be subject to the Form ATS filing requirements of Rule 301(b)(2)(i) through (vii) until the Legacy NMS Stock ATS files an initial Form ATS–N with the Commission pursuant to Rule 304(a)(1)(iv)(A), and that thereafter, the Legacy NMS Stock ATS shall file reports 247 pursuant to Rule 304(a)(1)(iv)(A). We intended in 245 See supra Section III.A. 246 See infra Section IV.A.4. 247 To reduce redundancy, we are revising the proposed rule text to state that the Legacy NMS Stock ATS must file ‘‘reports’’ (rather than ‘‘the reports and amendments’’) required by Rule 304. Rule 304(b)(1) provides that every Form ATS–N, which will include every amendment filed on Form ATS–N, shall constitute a ‘‘report’’ within the meaning of sections 11A, 17(a), 18(a), and 32(a) (15 U.S.C. 78k–1, 78q(a), 78r(a), and 78ff(a)), and any other applicable provisions of the Exchange Act. PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 the Proposal to except a Legacy NMS Stock ATS from compliance with Rule 301(b)(2)(i) through (vii) after it filed Form ATS–N, but also intended that a Legacy NMS Stock ATSs be subject to Rule 301(b)(2)(viii), which requires NMS Stock ATSs to file reports required by Rule 304.248 We believe that this modification will make clear that, until a Legacy NMS Stock ATS files its Form ATS–N with the Commission, the Legacy NMS Stock ATS must amend Form ATS in compliance with Rule 301(b)(2) of Regulation ATS. We are also including language in Rule 301(b)(2)(viii) stating that as of January 7, 2019, an entity seeking to operate as an NMS Stock ATS shall not be subject to the ATS filing requirements of Rule 301(b)(2)(i) through (vii) and shall file reports pursuant to Rule 304.249 Rule 301(b)(2)(viii) describes the reporting obligations of Legacy NMS Stock ATSs, and we believe that this additional language will make clear that NMS Stock ATSs must file an initial Form ATS–N, and that they do not need to comply with Rule 301(b)(2)(i) through (vii) and therefore should not file Form ATS.250 We recognize that an entity may wish to start operating as an NMS Stock ATS between the time the final rule is adopted and January 7, 2019. During that time, an entity must file an initial operation report on Form ATS and comply with Rule 301(b)(2); after January 7, 2019, the ATS, which would operate as a Legacy NMS Stock ATS, must file an initial Form ATS–N between January 7, 2019 and February 8, 2019 pursuant to Rule 304(a)(1)(iv)(A).251 As of January 7, 2019, an entity that seeks to operate as an NMS Stock ATS must comply with Rule 304 (and not with Rules 301(b)(2)(i) through (vii)) and file an initial Form ATS–N with the Commission. We are adopting, with a nonsubstantive modification, the proposed Rule 301(b)(2)(viii) requirement that an ATS that effects transactions in both NMS stocks and non-NMS stocks be subject to the requirements of new Rule 304 with respect to NMS stocks and 248 See Proposal, supra note 2, at 81022–24, 81027–31. Without this modification, Rule 301(b)(2)(viii) could be interpreted, contrary to the Commission’s intention, to except an NMS Stock ATS from compliance with all of Rule 301(b)(2), including Rule 301(b)(2)(viii) itself. 249 EDGAR will be ready to accept Form ATS–N filings on January 7, 2019, and we have conformed Rule 301(b)(2)(iii) to be consistent with the EDGAR ability to accept Form ATS–N filings. 250 See infra Section IV.A.1 (discussing the filing requirements for new NMS Stock ATSs). 251 See infra Section IV.A.4.a. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Rule 301(b)(2) with respect to non-NMS stocks. We are modifying the requirement to replace ‘‘effects transactions in’’ with ‘‘trades.’’ As adopted, Rule 301(b)(2)(viii) requires that an ATS that trades both NMS stocks and non-NMS stocks be subject to the requirements of new Rule 304 with respect to NMS stocks and Rule 301(b)(2) with respect to non-NMS stocks.252 By adopting Rule 304 and Form ATS–N, we believe it has addressed concerns raised by NMS Stock ATSs, as discussed above and in the Proposal, but that applying Rule 304 to the non-NMS Stock ATS operations of ATSs that trade both NMS stocks and non-NMS stocks would impose unequal regulatory burdens across ATSs that transact in non-NMS stocks. Finally, we are adopting as proposed nonsubstantive amendments to Rule 301(b)(2)(i) and Rule 301(b)(2)(vii) to delete outdated references to dates for phased-in compliance with Regulation ATS for ATSs that were operational as of April 21, 1999, and to update the name of the Division of Trading and Markets, respectively.253 daltland on DSKBBV9HB2PROD with RULES2 5. Rule 301(b)(9): Form ATS–R Quarterly Reports We also proposed to amend Rule 301(b)(9) of Regulation ATS,254 which provides that an ATS shall report transaction volume on Form ATS–R on a quarterly basis and within 10 calendar days after it ceases operation,255 to require an ATS that trades both NMS stocks and non-NMS stocks to separately report its transactions in NMS stocks on one Form ATS–R, and its transactions in non-NMS stocks on another Form ATS–R.256 We received two comments regarding Form ATS–R. One commenter states that in light of information on FINRA’s website regarding ATSs,257 and the detailed disclosures in periodic disclosures required by Form ATS–N, the Commission should no longer require an NMS Stock ATS to file Form ATS–R.258 We are not amending Regulation ATS at this time to remove the requirement for NMS Stock ATSs to 252 This modification is being made for clarity and consistency with the Rule 300(k) definition of NMS Stock ATS. See supra Section III.B.1. 253 See 17 CFR 242.301(b)(2)(i) and (vii), respectively. 254 See 17 CFR 242.301(b)(9). 255 See Regulation ATS Adopting Release, supra note 3, at 70878. The information filed on Form ATS–R permits the Commission to monitor trading on an ATS. 256 We did not propose any other changes to Rule 301(b)(9). Form ATS–R would continue to be deemed confidential. 257 See supra note 15. 258 See SIFMA Letter at 8 n.16. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 file Form ATS–R. Notwithstanding the disclosure on FINRA’s website of certain volume information for ATSs that trade NMS stocks, we continue to believe that the form helps the Commission oversee and monitor the trading activity of NMS Stock ATSs, because Form ATS–R provides the Commission with information that is unavailable on the FINRA website.259 Another commenter states that to alleviate burdens on ATSs and promote more meaningful comparisons across firms and venues, the Commission should significantly revise reporting obligations on Form ATS–R.260 The commenter does not specify how Form ATS–R should be revised; however, we believe that the role Form ATS–R plays in helping the Commission to oversee and monitor the trading activities of NMS Stock ATSs justifies the burden on NMS Stock ATSs to file Form ATS– R.261 6. Rule 303: Recordkeeping Requirements for Form ATS–N We proposed amending Rules 303(a)(1) and 303(a)(2) of Regulation ATS to reflect the proposed amendments to Rule 301(b)(2) 262 and the addition of Rule 304.263 In addition, the proposed rules would make minor technical amendments to Rule 303. We received no comments on the proposed amendments to Rule 303 and are adopting these requirements as proposed. Unless not required to comply with Regulation ATS pursuant to Rule 301(a) 264 of Regulation ATS, an ATS must comply with the recordkeeping requirements of Regulation ATS.265 Specifically, Rule 301(b)(8) 266 requires an ATS to make and keep current the records specified in Rule 302 267 and to preserve the records specified in Rule 303.268 Before the adoption of the 259 Form ATS–R requires ATSs to provide, among other things, trading volumes, a list of all subscribers that were participants of the ATS, and a list of all securities traded. The information on Form ATS–R permits the Commission to monitor ATSs for compliance with the fair access requirements of Rule 301(b)(5), as ATSs subject to those requirements must report quarterly on Form ATS–R the persons to whom they grant, deny, or limit access to the ATS, as well as the date of the action, the effective date of the action, and the nature of the denials of limitations of access. See Form ATS–R; see also Regulation ATS Adopting Release, supra note 3, at 70878. 260 See HMA Letter at 11 n.64. 261 See supra Section X.D.6. 262 See supra Section III.B.4. 263 See infra Section IV. 264 17 CFR 242.301(a). 265 See Proposal, supra note 2, at 81087. 266 See 17 CFR 242.301(b)(8). 267 See 17 CFR 242.302. 268 See 17 CFR 242.303. PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 38787 amendments to Rule 303, Rule 303(a)(1) required an ATS to preserve certain records for at least three years, the first two years in an easily accessible place.269 Specifically, Rule 303(a)(1) 270 required an ATS to preserve: (1) All records required to be made pursuant to Rule 302; (2) all notices provided to subscribers, including notices addressing hours of operations, system malfunctions, changes to system procedures, maintenance of hardware and software, and instructions pertaining to access to and denials of, or limitations on, access to the ATS; (3) documents made or received in the course of complying with the system capacity, integrity, and security standards in Rule 301(b)(6), if applicable; 271 and (4) if the ATS is subject to the fair access requirements under Rule 301(b)(5),272 a record of its access standards. Rule 303(a)(2) 273 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),274 which includes current Form ATS, and records made pursuant to Rule 301(b)(5).275 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.276 We are amending the record preservation requirements of Rule 303 to incorporate the preservation of records that would be created pursuant to the requirements that NMS Stock ATSs file initial Form ATS–N, Form ATS–N amendments, and notices of cessation on Form ATS–N, instead of Form ATS. Specifically, we are amending 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 Stock ATS—Rule 304, and records made pursuant to Rule 301(b)(5).277 As a result, because an NMS Stock ATS will be required to file initial Form ATS–N, Form ATS–N amendments, and notices of cessation on Form ATS–N pursuant to Rule 304, 269 See 17 CFR 242.303(a)(1). id. 271 See supra notes 77–81 and accompanying text. 272 See supra notes 72–75 and accompanying text. 273 See 17 CFR 242.303(a)(2). 274 See 17 CFR 242.301(b)(2). 275 See supra notes 72–75 and accompanying text. 276 See 17 CFR 242.301(b)(2). 277 See 17 CFR 242.303(a)(2)(ii). 270 See E:\FR\FM\07AUR2.SGM 07AUR2 38788 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations instead of on Form ATS pursuant to Rule 301(b)(2), the NMS Stock ATS must preserve those reports for the life of the enterprise and of any successor enterprise pursuant to Rule 303(a)(2) as amended.278 We are not amending the recordkeeping requirements of Rule 302, or any other amendments to the record preservation requirements of Rule 303(a)(2). We are also adopting a minor technical amendment to Rule 303(a). Currently, Rule 303(a) references ‘‘paragraph (b)(9) of § 242.301’’ when setting forth the record preservation requirements for ATSs; this reference is incorrect, as Rule 301(b)(9) describes the filing requirements, rather than the recordkeeping requirements, for ATSs. We are therefore adopting a change to correct the above reference to ‘‘paragraph (b)(8) of § 242.301.’’ In addition, we are adopting an amendment to Rule 303(a)(1) to incorporate amendments to Rule 301(b)(10).279 daltland on DSKBBV9HB2PROD with RULES2 7. Comments Recommending Changes to Other Existing Regulation ATS Rules In the Proposal, we requested comment on other potential changes to Regulation ATS rules, including the order display and execution access requirement in Rule 301(b)(3) and the fair access requirement in Rule 301(b)(5).280 We received two comments recommending changes to Rule 301(b)(3) of Regulation ATS.281 One commenter urges the Commission to consider lowering or eliminating the threshold for the order display requirement.282 Another commenter states that lowering the threshold for the order display requirement would result in reduced choice and higher trading costs for long-term investors, and urges the Commission to provide a block exemption from the order display requirement.283 278 NMS Stock ATSs that had previously made filings on Form ATS must preserve those filings for the life of the enterprise, as well as filings made going forward on Form ATS–N. See id. We believe that the 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 staff to help ensure fair and orderly markets without imposing any undue burden on ATSs. 279 See infra Section VI. 280 See Proposal, supra note 2, at 81058, 81083. 281 See Citadel Letter at 3; Liquidnet Letter at 14– 15; see also supra Section II.C (discussing the order display and execution access requirements under Rule 301(b)(3) of Regulation ATS). 282 See Citadel Letter at 3. 283 The commenter believes that the threshold for the order display requirement may prevent it from offering functionalities that may provide market participants flexibility in how they display block orders. See Liquidnet Letter at 14–15. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 In addition, the Commission received two comments recommending changes to the fair access requirements in Rule 301(b)(5).284 One commenter urges the Commission to eliminate the 5% trading volume fair access threshold, in light of the importance of NMS Stock ATSs to equity markets today.285 Another commenter states that rather than lowering the trading volume threshold that triggers the fair access requirement of Rule 301(b)(5), the Commission should exclude block executions from counting towards the fair access threshold.286 In addition, one commenter believes that, in connection with Rule 301(b)(3) of Regulation ATS (order display and execution access), it is not appropriate to include actionable indications of interest in the definitions of ‘‘bid’’ and ‘‘offer’’ under Regulation NMS.287 Another commenter states that actionable indications of interest should be treated as quotes and should be transparent to the public.288 We are not adopting changes to the order display and execution requirement or the fair access requirement at this time. We believe that it is appropriate to take an incremental approach by first applying the amended regime to NMS Stock ATSs before considering a further step and we intend to monitor the effectiveness of Rule 301(b)(3) and Rule 301(b)(5) requirements. Should the Commission decide to take further action with regard to these requirements, such as proposing to amend Regulation ATS, the Commission would do so in a separate rulemaking and take into account its experience with Rule 304 and NMS Stock ATSs. IV. Form ATS–N Filing Process; Effectiveness Review A. Initial Form ATS–N 1. Rule 304(a)(1)(i): Filing and Effectiveness Requirement Rule 304(a)(1)(i) requires that an NMS Stock ATS operate pursuant to an effective initial Form ATS–N to be exempt from the definition of 284 See Citadel Letter at 2–3; Liquidnet Letter at 9–12; see also supra Section II.C (discussing the fair access requirements under Rule 301(b)(5) of Regulation ATS). 285 See Citadel Letter at 2. 286 See Liquidnet Letter at 10. 287 See UBS Letter at 8. 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. See Regulation of NonPublic Trading Interest at 61209 (proposal to amend, among other things, Rule 301(b)(3) of Regulation ATS). 288 See Barnard Letter at 2. PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 ‘‘exchange.’’ Proposed Rule 304(a)(1)(i) (‘‘Filing’’) provided that 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. Proposed Rule 304(a)(1)(i) also included transitional provisions for Legacy NMS Stock ATSs to file Form ATS–N and operate under Rule 304. These provided that if an NMS Stock ATS is operating pursuant to a previously-filed initial operation report on Form ATS as of the 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 the effective date of the final rule. Further, proposed Rule 304(a)(1)(i) would have provided that an NMS Stock ATS operating as of the 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. We are adopting Rule 304(a)(1)(i) (‘‘Filing and Effectiveness Requirement’’) with modifications and relocating the provisions applicable to Legacy NMS Stock ATSs to another provision within Rule 304(a)(1). Rule 304(a)(1)(i) sets forth two principal conditions of the Exchange Act Rule 3a1–1(a)(2) exemption for NMS Stock ATSs: (1) The NMS Stock ATS must file an initial Form ATS–N, and (2) the initial Form ATS–N must be effective.289 We are relocating the provisions of proposed Rule 304(a)(1)(i) regarding the filing of Form ATS–N by Legacy NMS Stock ATSs during the Commission review period to Rule 304(a)(1)(iv) to better organize the rule text, particularly in light of other changes we are making to the proposed rule in response to comments. In addition, we are making other, non-substantive modifications that we believe will not impact NMS Stock ATSs and will result in a more readable rule text for the public.290 We are also changing Rule 304(a)(1)(i) to state that the exemption for NMS Stock ATSs will not be available unless ‘‘the initial Form ATS–N is effective 289 See supra Section III.A.1. See also Rule 301(a)(1)(i). 290 We are making the following non-substantive modifications to Rule 304(a)(1)(i): (1) Deleting the phrase ‘‘from the definition of ‘exchange’;’’ (2) changing the phrase ‘‘in accordance with the instructions therein’’ to ‘‘in accordance with the conditions of this section;’’ and (3) adding the term ‘‘initial’’ before ‘‘Form ATS–N.’’ E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations pursuant to paragraph (a)(1)(iii) or (a)(1)(iv)(A) of [Rule 304]’’ rather than the proposed rule text, which stated that the exemption is available only if ‘‘the Commission declares the Form ATS–N effective.’’ This change is made in connection with adopted Rule 304(a)(1)(iii) and Rule 304(a)(1)(iv)(A), which, in response to comments, provide that an initial Form ATS–N for both a non-Legacy NMS Stock ATS and Legacy NMS Stock ATS, as amended, becomes effective, unless declared ineffective, upon the earlier of: (1) The completion of review by the Commission and publication pursuant to Rule 304(b)(2) or (2) the expiration of the Commission review period, or, if applicable, the end of the extended review period. Accordingly, we are adopting Rule 304(a)(1)(i), which provides that no exemption is available to an NMS Stock ATS pursuant to Rule 3a1–1(a)(2) unless the NMS Stock ATS files with the Commission an initial Form ATS–N, in accordance with the conditions of Rule 304 and the initial Form ATS–N is effective pursuant to Rule 304(a)(1)(iii) or Rule 304(a)(1)(iv)(A). Consequently, an NMS Stock ATS that is not a Legacy NMS Stock ATS operating pursuant to an initial operation report on Form ATS as of January 7, 2019, will be required to comply with the requirements of Rule 304 as of that date. 291 daltland on DSKBBV9HB2PROD with RULES2 2. Rule 304(a)(1)(ii): Commission Review Period Rule 304(a)(1)(ii) describes the timing for the Commission’s review of initial Form ATS–N for Legacy NMS Stock ATSs. Proposed Rule 304(a)(1)(ii) provided the timing for the Commission’s review of initial Form ATS–N as adopted for both Legacy NMS Stock ATSs and non-Legacy NMS Stock ATSs. The timing for the Commission’s review of initial Form ATS–N for Legacy NMS Stock ATSs is provided by Rule 304(a)(1)(iv)(B).292 Proposed Rule 304(a)(1)(ii)(A) (‘‘Review period and extension of the 120-day review period’’) provided that the Commission would declare a Form ATS–N filed by a Legacy NMS Stock ATS effective or ineffective no later than 120 calendar days from filing with the Commission. Proposed Rule 304(a)(1)(ii)(A) also provided that the 291 See Rule 301(b)(1). An entity seeking to operate as an NMS Stock ATS that has filed an initial operation report on Form ATS prior to January 7, 2019, but has not yet become operational pursuant to Rule 301(b)(2)(i), must file an initial operation report on Form ATS–N, in accordance with the conditions of Rule 304, and the initial Form ATS–N must become effective before the new NMS Stock ATS may commence operations. 292 See infra Section IV.A.4.b. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Commission could extend the review period for Forms ATS–N filed by Legacy NMS Stock ATSs: (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 120calendar 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. Proposed Rule 304(a)(1)(ii)(B) would have provided that the Commission would declare a Form ATS–N filed by an non-Legacy NMS Stock ATS effective or ineffective no later than 120 calendar days from filing with the Commission. The proposed rule also would have provided that 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-calendar 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. We received three comments regarding the length of the Commission review period and extended review period for Form ATS–N filings.293 One commenter states that the 120-calendar day period for the Commission to review Form ATS–N filings is a reasonable amount of time for the Commission to process each filing, and the 120-day extension of the review period for Form ATS–N filings by Legacy NMS Stock ATSs that are particularly novel or complex is agreeable.294 Another commenter does not object to the proposed period for reviewing Form ATS–N.295 We continue to believe that an initial review period of 120 calendar days for Form ATS–N filings would provide the Commission adequate time to carry out its oversight functions with respect to its review of Forms ATS–N filed by both Legacy NMS Stock ATSs and non-Legacy NMS Stock ATSs, including its responsibilities to protect investors and maintain fair, orderly, and efficient 293 See CFA Institute Letter at 4; Liquidnet Letter at 3; PDQ Letter at 2. See also infra note 435. 294 See CFA Institute Letter at 4. 295 See Liquidnet Letter at 3. See also PDQ Letter at 2. PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 38789 markets.296 We also continue to believe that extended review periods of 120 calendar days for Form ATS–N filings by Legacy NMS Stock ATSs, and 90 calendar days for filings by non-Legacy NMS Stock ATSs, that are unusually lengthy or raise novel or complex issues, are appropriate. As discussed in the Proposal, these time periods will allow the 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 a filing with an NMS Stock ATS if necessary.297 One commenter worries the review process may devolve into other market centers seeking to have the Commission preserve their market positions, and urges the Commission to promptly evaluate and act on initial Form ATS– N filings.298 We believe that the proposed time periods for review of Form ATS–N filings are appropriate. The Commission could, depending on the length and complexity of a Form ATS–N filing, complete the review prior to the expiration of the review period; thus, the Form ATS–N would become effective upon publication, pursuant to Rule 304(b)(2).299 The review periods and extended review periods combined cannot exceed 240 calendar days for a Legacy NMS Stock ATS or 210 calendar days for a non-Legacy NMS Stock ATS unless the NMS Stock ATS agrees, in writing, to a longer review period.300 In addition, one commenter states that the proposed process for determining whether an NMS Stock ATS qualifies for the exemption from the definition of ‘‘exchange’’ could, in light of the Commission’s SRO rule filing review responsibilities, overwhelm staff by adding potentially hundreds of new NMS Stock ATS filings.301 This commenter expresses concern that Commission staff may spend too much time reviewing whether an NMS Stock ATS meets its procedural obligations rather than trying to better understand the ‘‘substance, merits, and potential misconduct of ATSs’ trading operations and activities, and how they fit into the broader market structure,’’ and worries that Commission staff ‘‘might get caught in a procedural morass and miss the 296 See Proposal, supra note 2, at 81023–81024. See infra Section IV.A.4.b for a description of Rule 304(a)(1)(iv)(B), which provides the Commission review period for Legacy NMS Stock ATSs. 297 See Proposal, supra note 2, at 81024. 298 See HMA Letter at 7–8. 299 See Rule 304(a)(1)(iii); Rule 304(a)(1)(iv)(A). See also Section IV.A.4.b. 300 See Rule 304(a)(1)(ii)(A); 304(a)(1)(iv)(B). See also infra Section IV.A.4.b. 301 See Consumer Federation of America Letter at 10. E:\FR\FM\07AUR2.SGM 07AUR2 38790 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations forest for the trees.’’ 302 This commenter compares the proposed review process for Form ATS–N filings to the review and approval process for SRO rule changes, and states that unless the Commission is more willing than it has previously been to challenge applications, the proposed process for reviewing Form ATS–N filings will devolve into an ‘‘unreasonably burdensome exercise for Commission staff while providing little benefit to market integrity or investor protection.’’ 303 We do not believe that the review process would be unreasonably burdensome to the Commission or its staff. The Commission’s review will not be meritbased; instead, it will focus on the completeness and comprehensibility of disclosures. In addition, under the adopted rules, a Form ATS–N, as amended, will become effective, unless declared ineffective, upon the earlier of the completion of Commission review or the end of the Commission review period. This streamlined process will facilitate efficient Commission review, which is designed to protect investors by allowing the Commission to review disclosures on Form ATS–N for potential deficiencies that might otherwise confuse or mislead market participants about the operations of the NMS Stock ATS or the ATS-related activities of the broker-dealer operator and its affiliates. We are adopting proposed Rule 304(a)(1)(ii)(B) with modifications, renumbering the proposed rule as Rule 304(a)(1)(ii) (‘‘Commission review period’’), and relocating Rule 304(a)(1)(ii)(A), which relates to Legacy NMS Stock ATSs, to Rule 304(a)(1)(iv)(B). We are modifying proposed Rule 304(a)(1)(ii) to state that the Commission ‘‘may,’’ ‘‘by order,’’ 304 as provided in Rule 304(a)(1)(iii), declare an initial Form ATS–N filed by an NMS Stock ATS ineffective no later than 120 calendar days from the date of filing with the Commission or, if applicable, the end of the extended review period.305 Proposed Rule daltland on DSKBBV9HB2PROD with RULES2 302 See id. 303 See id. at 2, 10. 304 We are: (1) Deleting proposed Rule 304(a)(1)(iv), which stated that the Commission would issue an order declaring a Form ATS–N effective or ineffective and (2) adding the words ‘‘by order’’ to adopted Rule 304(a)(1)(ii). These changes simplify the rule text without changing the Commission’s proposal to inform the public about the ineffectiveness of Form ATS–N by issuing an order. 305 We are deleting text that states that this provision applies to ‘‘an NMS Stock ATS that was not operating as of [effective date of the final rule]’’ as it will be clear that the provisions of Rule 304(a)(1)(ii) apply to the filing of initial Form ATS– VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 304(a)(1)(iv) (‘‘Order regarding effectiveness’’) would have required the Commission to issue an order to declare a Form ATS–N effective or ineffective. We are not adopting the proposed requirement 306 that the Commission issue an order to declare a Form ATS– N effective because, as described below, the Commission will only issue orders of ineffectiveness. In addition, to improve readability, the adopted rule references the ineffectiveness process in Rule 304(a)(1)(iii). The Commission will make public, on its website, any effective initial Form ATS–N, as amended.307 We are modifying Rule 304(a)(1)(ii) to add a provision that will allow NMS Stock ATSs to amend their initial Forms ATS–N during the Commission review period. We discussed in the Proposal that during the Commission’s review, the Commission 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.308 In addition, an NMS Stock ATS may need to update disclosures on its initial Form ATS–N to otherwise reflect changes during the Commission review period. To allow an NMS Stock ATS to correct or update its disclosures on an initial Form ATS–N during the review period, we are modifying Rule 304(a)(1)(ii) to provide that during the review period of the initial Form ATS–N, the NMS Stock ATS shall amend its initial Form ATS– N pursuant to the requirements of Rules 304(a)(2)(i)(B) and (C), which are discussed further below.309 We believe that updates or corrections to an NMS Stock ATS’s disclosures about its intended operations would be properly filed as updating or correcting amendments pursuant to Rules 304(a)(2)(i)(B) and (C).310 We believe allowing an entity seeking to operate as an NMS Stock ATS to amend its initial Form ATS–N during the Commission review period will promote transparency and facilitate complete and comprehensible disclosures. Once N by non-Legacy NMS Stock ATSs and that the provisions of Rule 304(a)(1)(iv) will apply to filings by Legacy NMS Stock ATSs. 306 See proposed Rule 304(a)(1)(iv). 307 See Rule 304(b)(2)(i). 308 See Proposal supra note 2, at 81026. 309 See infra Sections IV.B.1.b and IV.B.1.c. Amendments will be subject to Commission review under Rule 304(a)(2)(ii), which states that the Commission will, by order, declare ineffective any Form ATS–N amendment no later than 30 calendar days from filing of such amendment with the Commission if the Commission finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors. 310 See id. PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 an initial Form ATS–N becomes effective, the Commission will make public the initial Form ATS–N, as amended, which will incorporate any amendments that were filed during the Commission review period. An NMS Stock ATS (other than a Legacy NMS Stock ATS),311 however, seeking to amend its initial Form ATS–N to make a material change to its Form ATS–N disclosures during the Commission review period must withdraw its initial Form ATS–N and may refile a new, initial Form ATS–N pursuant to Rule 304(a)(1). We believe a material change to the disclosures on an initial Form ATS–N would necessitate a full review period.312 In addition, we have made several technical, non-substantive modifications to Rule 304(a)(1)(ii) that are designed to improve the readability of the rule, reduce potential ambiguity, or both.313 3. Rule 304(a)(1)(iii): Effectiveness; Ineffectiveness Determination Rule 304(a)(1)(iii) describes the process by which an initial Form ATS– N would become effective, or be declared ineffective by the Commission. Proposed Rule 304(a)(1)(iii) (‘‘Effectiveness’’) provided that the Commission will declare effective a Form ATS–N if the NMS Stock ATS qualifies for the Rule 3a1–1(a)(2) exemption and 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.314 Proposed Rule 304(a)(1)(iv) (‘‘Order regarding effectiveness’’) 311 Unlike non-Legacy NMS Stock ATSs, Legacy NMS Stock ATSs will operate during the Commission review period pursuant to a filed, but not yet effective, initial Form ATS–N. Accordingly, Legacy NMS Stock ATSs may file amendments to their Form ATS–N during the Commission review period to make material changes to their operations and introduce new functionalities. See infra Section IV.A.4.c. 312 The Commission could, however, complete its review of a refiled initial Form ATS–N in less than 120 calendar days from the date of filing, and the Form ATS–N would become effective upon publication. See Rules 304(a)(1)(ii)-(iii) and 304(b). 313 We are making additional changes from proposed Rule 304(a)(1)(ii) to: (1) Rename the paragraph from ‘‘Review period and extension of the 120-day review period’’ to ‘‘Commission review period;’’ (2) add to the end of the first sentence that the Commission may declare an initial Form ATS– N ineffective no later than 120 calendar days from the date of filing with the Commission ‘‘or, if applicable, the end of the extended review period;’’ (3) specify that the Commission will declare an initial Form ATS–N ineffective no later than 120 calendar days from ‘‘the date of’’ filing with the Commission; (4) add the word ‘‘initial’’ before Form ATS–N; and (5) add the word ‘‘calendar’’ before ‘‘day’’ in the description of the 90-day extension period. 314 See proposed Rule 304(a)(1)(iii). E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations provided that the Commission will issue an order to declare a Form ATS–N effective or ineffective. Proposed Rule 304(a)(1)(iv) also provided that upon the effectiveness of the Form ATS–N, the NMS Stock ATS may operate pursuant to the conditions of Rule 304, and 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) further provided that a Form ATS–N declared ineffective would not prevent the NMS Stock ATS from subsequently filing a new Form ATS–N. We also discussed in the Proposal our preliminary beliefs regarding when it would be necessary or appropriate in the public interest to declare ineffective a Form ATS–N.315 We received several comments related to proposed Rule 304(a)(1)(iii), proposed Rule 304(a)(1)(iv), and the standard of review for declaring Form ATS–N filings effective or ineffective, which are summarized below. Pursuant to Rule 304 and Form ATS– N, as adopted and as discussed below, an NMS Stock ATS must provide all the information required by the form and respond to each item, as applicable, and disclose information that is accurate, current, and complete. A Form ATS–N filing that is defective may be rejected. If the filing is accepted for review, it will become effective unless the Commission finds, after notice and opportunity for hearing, that it is necessary or appropriate in the public interest, and consistent with the protection of investors, to declare the filing ineffective. Responsibility for current, complete, and accurate disclosures rests with the NMS Stock ATS.316 The Commission will consider whether it is necessary or appropriate in the public interest, and consistent with the protection of investors, to declare an initial Form ATS–N filing ineffective because, for example, the Form ATS–N was filed by an entity that does not meet the proposed definition of NMS Stock ATS; one or more disclosures reveal non-compliance with federal securities laws, or the rules or regulations thereunder, including Regulation ATS; or the disclosures are materially deficient with respect to completeness or comprehensibility. daltland on DSKBBV9HB2PROD with RULES2 315 See Proposal, supra note 2, at 81024–81026. Rule 304(c); Instructions to Form ATS–N. The Commission’s staff may become aware of information, as a result of discussions with the NMS Stock ATS or otherwise, that calls into question, for example, the currency or accuracy of the disclosures on a Form ATS–N, which may result in a determination to begin the process to declare the Form ATS–N ineffective. See infra Section IV.A.3.d. 316 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 a. Comments on the Standard of Review To Accept Filings of Form ATS–N The determination of whether to reject a Form ATS–N filing is separate from the Commission’s determination to declare a filed Form ATS–N ineffective after Commission review. We received one comment regarding the process pursuant to which a Form ATS–N would be accepted for Commission review.317 The commenter states that the Commission should not review a Form ATS–N filing for accuracy and completeness in connection with accepting a Form ATS–N filing, but rather that such review should be conducted when the Commission is considering whether to declare the Form ATS–N effective or ineffective.318 The commenter states that the Commission’s standards for accepting a Form ATS–N should be clear and objective, and Form ATS–N should be rejected only for purely ‘‘technical deficiencies.’’ 319 As proposed, the Instructions to Form ATS–N required that ‘‘[a]n 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.’’ 320 In the Proposal, we stated that 317 See SIFMA Letter at 28. id. 319 See id. 320 See proposed Instructions to Form ATS–N. As adopted, the Instructions to Form ATS–N state that: ‘‘An NMS Stock ATS must provide all the information required by Form ATS–N, including responses to each Item, as applicable, and the Exhibits, and disclose information that is accurate, current and complete. . . . A filing that is defective may be rejected and not accepted by the EDGAR system. Any filing so rejected shall be deemed not to have been filed.’’ The Instructions to Form ATS– N replace the proposed cite to 17 CFR 240.0–3 under the Exchange Act, which applies to paper filings, with a cite to Regulation S–T, which applies to electronic filings, because the form will be electronically filed via EDGAR. See Instructions to Form ATS–N. Because Form ATS–N will be electronically filed, we do not believe it is necessary to return a copy of Form ATS–N filings and are therefore replacing the word ‘‘returned’’ with ‘‘rejected’’ to specify this. We are also modifying the Instructions to Form ATS–N to delete the phrase: ‘‘and must present the information in a clear and comprehensible manner.’’ See Instructions to Form ATS–N. This modification to the Instructions to Form ATS–N will streamline the instructions by removing confusing language relating to the Commission’s standard of review, but will not modify an NMS Stock ATS’s obligations with respect to Form ATS– N. Additionally, the Commission has reorganized the Instructions to differentiate between an NMS Stock ATS’s filing obligations, and the consequences of incompleteness or similar deficiency. 318 See PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 38791 ‘‘a Form ATS–N that contains technical deficiencies, such as missing pages or one in which the entity does not respond to all questions, including subquestions, would not be complete and would be returned to the NMS Stock ATS.’’ 321 We believe that it would be appropriate to reject a Form ATS–N if the filing is defective.322 For example, a Form ATS–N is defective if it is missing sections or missing responses to any questions, including sub-questions, or does not comply with the electronicfiling requirements. A decision to reject a Form ATS–N filing, and not accept it for review, would be for reasons distinct from Commission review pursuant to Rule 304(a)(1)(iii), as discussed below. The rejection of a Form ATS–N would not prejudice any decision by the Commission regarding ineffectiveness should the NMS Stock ATS resubmit a Form ATS–N.323 An NMS Stock ATS also may choose to withdraw a filed Form ATS–N.324 The Commission will apply the same standard when determining whether to accept an amendment to Form ATS–N for review or reject the filing. b. Comments on the Review for Declarations of Ineffectiveness We proposed that the Commission will declare effective a Form ATS–N if the NMS Stock ATS qualifies for the Rule 3a1–1(a)(2) exemption, and will declare it ineffective if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors.325 We discussed in the Proposal that the Commission would use Form ATS–N to evaluate whether an entity qualifies for the exemption, and would evaluate, among other things, whether the entity satisfies the definition of NMS Stock ATS.326 We also discussed our preliminary beliefs regarding when it would be necessary or appropriate in the public interest to declare ineffective We are modifying our guidance and the rule text for determinations of ineffectiveness, and believe these modifications to the Instructions to Form ATS–N better align them with that guidance and adopted rule text and reduce any potential confusion about the difference between an NMS Stock ATS’s obligations with respect to completing Form ATS–N and the standard of review that the Commission will apply when determining whether to declare a Form ATS–N ineffective. See infra Section IV.A.3.d. See also infra Section V.A.1 (discussing the Form ATS–N disclosure requirements). 321 See Proposal, supra note 2, at 81024 n.284. 322 See 17 CFR part 232. 323 Proposal, supra note 2, at 81024 n.284. 324 See id. 325 See proposed Rule 303(a)(1)(iii). 326 See Proposal, supra note 2, at 81024. E:\FR\FM\07AUR2.SGM 07AUR2 38792 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations a Form ATS–N, and provided examples.327 We stated that it would be necessary and appropriate in the public interest to declare a Form ATS–N ineffective if the Commission finds, after notice and opportunity for hearing, that: An entity does not meet the definition of NMS Stock ATS; one or more disclosures on Form ATS–N are materially deficient with respect to their accuracy, currency or completeness; or one or more disclosures reveal noncompliance with federal securities laws, or the rules and regulations thereunder, including Regulation ATS.328 We also stated that a declaration of effectiveness would not constitute a finding that the NMS Stock ATS’s operations are consistent with the Exchange Act, but rather only address the issue of whether the NMS Stock ATS had complied with the requirements of Form ATS–N.329 We received several comments regarding the standard that the Commission would apply to declare a Form ATS–N effective or ineffective. One commenter asserts that it would be helpful to have the Commission review initial Forms ATS–N for completeness and accuracy, and legal and regulatory compliance, and to help standardize the level of disclosure across NMS Stock ATSs.330 Another commenter urges the Commission to move forward with the effectiveness determination as proposed.331 This commenter states that market participants will use the 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, and that it is important that the detailed information be accurate, current, and complete.332 This commenter also states that the Commission should be able to conduct a ‘‘red flag’’ review of the disclosures for apparent noncompliance with the federal securities laws, and avoid having a noncompliant NMS Stock ATS begin operation with inadequate system operations; this commenter states that while not affording complete certainty, this review 327 See id. at 81024–81026. id. 329 See id. at 81026. With respect to compliance with federal securities laws, we stated that the Commission’s evaluation would involve a ‘‘redflag’’ review of the Form ATS–N disclosures. See id. at 81025. With respect to whether an entity meets the definition of NMS Stock ATS, we stated our preliminary belief that 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. See id. at 81024 n.288 and accompanying text. 330 See MFA/AIMA Letter at 4. 331 See Investor Advocate Letter at 11. 332 See id. daltland on DSKBBV9HB2PROD with RULES2 328 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 process would be an improvement over the review process for Form ATS.333 Further, the commenter states that the notice and hearing process will furnish the industry with useful information regarding specific regulatory concerns and questions.334 One commenter expresses concern that the Commission would lack objective standards to evaluate initial Forms ATS–N and amendments.335 Another commenter believes that in the Proposal, the Commission did not articulate a ‘‘consistent standard of review’’ for declaring a Form ATS–N or Form ATS– N amendment effective or ineffective.336 The commenter expresses its view that the standard for declaring a Form ATS– N ineffective should be only if the Form ATS–N is ‘‘materially deficient with respect to completeness,’’ 337 asserting that criteria such as currency, accuracy, and fair presentation are subjective standards that could make it difficult for NMS Stock ATSs to understand the level of disclosure necessary to satisfy the Commission’s review requirements, and therefore require extended discussion with the Commission.338 Further, the commenter believes that such subjective standards would be difficult to standardize in application from firm to firm, would complicate the Commission’s review of Form ATS–N, and are unnecessary to increase the operational transparency of NMS Stock ATSs and to ensure a consistent level of information regarding NMS Stock ATSs is available to market participants.339 The commenter believes that the rule’s directives to consider whether to declare a Form ATS–N ineffective would provide the Commission with flexibility to determine whether declaring a Form ATS–N ineffective is ‘‘necessary or appropriate in the public interest’’ and ‘‘consistent with the protection of investors,’’ and therefore that including additional subjectivity in the Commission’s standard is unnecessary.340 The commenter believes that NMS Stock ATSs would have other incentives to ensure the accuracy of their Forms ATS–N.341 This commenter also states that the Commission should only find a 333 See id. id. We agree with the commenter and intend to help market participants understand the reason the Form ATS–N was declared ineffective by explaining the Commission’s reasoning for the ineffective declaration in the Commission order. See supra Section IV.A.3.d. 335 See LeveL ATS Letter at 8–9. 336 See SIFMA Letter at 32. 337 See id. 338 See id. at 33. 339 See id. 340 See id. 341 See id. 334 See PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 disclosure to be ‘‘materially deficient’’ with respect to the accuracy, currency, and completeness in an ‘‘extreme situation, not a circumstance where additional color or language might be viewed as preferable to a disclosure as filed,’’ and asserts that a response that is facially responsive to a question on Form ATS–N should be deemed sufficient.342 This commenter agrees with the examples of ‘‘materially deficient’’ disclosures that the Commission provided in the Proposal, but also requests that the Commission provide examples of ‘‘disclosures that would not be viewed as materially deficient.’’ 343 Additionally, this commenter states that if the Commission declares an initial Form ATS–N or amendment ineffective, it should provide the NMS Stock ATS with a clear written statement of the reasons for the declaration.344 The commenter urges the Commission to provide clarity and practical guidance around its expectations on declaring Form ATS–N filings effective.345 Another commenter raises concerns that the process for declaring Form ATS–N effective or ineffective may result in the Commission staff undertaking meritbased reviews of the disclosures on Form ATS–N that could be used to delay the effectiveness of NMS Stock ATSs whose features, ‘‘while meeting regulatory requirements, do not meet current industry norms.’’ 346 We believe 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, for example, the Commission finds, after notice and opportunity for hearing, the Form ATS–N was filed by an entity that does not meet the definition of NMS Stock ATS; one or more disclosures reveal non-compliance 342 See id. at 30. id. at 30 (emphasis in original). See also Proposal, supra note 2, at 81025. Another commenter states that it recognizes the difficulty associated with identifying every potential scenario that might cause a Form ATS–N to be declared ineffective, but requests that the Commission provide additional guidance to ensure that NMS Stock ATS operators understand the standard to be applied. See LeveL ATS Letter at 9. 344 See SIFMA Letter at 30. 345 See id. 346 See Fidelity Letter at 2, 9. This commenter requests that the Commission implement a ‘‘completeness review’’ under which the Commission would review responses to Form ATS– N for completeness and consistency without considering the merits of each answer. The commenter also requests that the Commission provide additional guidance with respect to the process by which it could declare a Form ATS–N ineffective, and questions how review by Commission staff of initial filings will be undertaken to ensure consistency across Form ATS–N filings. See id. at 9. 343 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations with federal securities laws, or the rules or regulations thereunder, including Regulation ATS; or one or more disclosures on Form ATS–N are materially deficient with respect to their completeness or comprehensibility.347 We are providing additional examples of when, depending on the facts and circumstances, the Commission may make such a finding.348 In response to comments regarding the scope of the Commission’s review of initial Form ATS–N filings and the standard to be applied for declarations of ineffectiveness, we are making clear that the Commission will not be conducting a merit-based review.349 c. Effectiveness, Ineffectiveness Process daltland on DSKBBV9HB2PROD with RULES2 The Commission received comments about the proposed process by which a Form ATS–N would become effective or ineffective, including the potential implications of the proposed process. One commenter expresses concern that a declaration of effectiveness may give market participants a false sense of security that the Commission’s deeming an NMS Stock ATS’s Form ATS–N ‘‘effective’’ will be tantamount to the Commission’s approval of an ATS’s operations on the merits, as market participants may not fully understand that a declaration of effectiveness only implies that the NMS Stock ATS has met the Form ATS–N filing requirements, and that the Commission is not approving the merits of the NMS Stock ATS’s operations or conflicts of interest. 350 The commenter believes that such mistaken belief could cause market participants to route orders to venues that are not in their best interests.351 Another commenter states that there is the danger that the Commission review process would encourage market complacency, and that the Commission, through guidance in this adopting release and continuing investor education, should help to ensure that: (1) Investors understand that such a determination would not constitute a finding that the NMS Stock ATS’s operations are necessarily consistent with the Exchange Act; and (2) operators of NMS Stock ATSs understand that the determination would not preclude the Commission from later determining that an NMS 347 See infra Section IV.A.3.d. id. 349 See infra notes 404–407 and accompanying text. 350 See Consumer Federation of America Letter at 2, 10–11. 351 See id. at 11. 348 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Stock ATS has violated federal securities laws.352 We also received two comments about an NMS Stock ATS potentially using a declaration of effectiveness to shield itself from potential liability.353 Both express concern that, although the Proposal explains that a declaration of effectiveness is not an ‘‘approval’’ of Form ATS–N, the process could be used to inappropriately inoculate NMS Stock ATS operators from liability.354 One of these commenters states that its concern is heightened by a recent court decision in which the court found that the Commission’s review and approval of exchanges’ activities made the activities legal.355 One commenter believes that a declaration of ineffectiveness will ‘‘sound the death knell’’ for an NMS Stock ATS and that the opportunity to file a new Form ATS–N would be of no practical value because the marketplace would not use the ATS.356 While we do not believe that providing a process by which Form ATS–N filings will become effective or ineffective 357 would risk misleading market participants about the kind of review that will be undertaken by the Commission,358 we are modifying the process for initial Form ATS–N filings to become effective, to mitigate any such risk. Accordingly, the Commission will not declare initial Form ATS–N filings effective pursuant to Rule 304(a)(1)(iii). Further, the Commission will only declare ineffective an initial 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. An initial Form ATS–N, as amended, will become effective, unless declared ineffective, upon the earlier of completion of review by the Commission and publication pursuant to Rule 304(b)(2), or the expiration of the review period, or, if 352 See Investor Advocate Letter at 12. See also supra note 340 and accompanying text. Pursuant to Rule 304(a)(1)(iii) the Commission will issue an order declaring an initial Form ATS–N filing ineffective if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors if, for example, the Form ATS–N was filed by an entity that does not meet the definition of NMS Stock ATS; one or more disclosures reveal non-compliance with federal securities laws, or the rules or regulations thereunder, including Regulation ATS; or the disclosures are materially deficient with respect to completeness or comprehensibility. 353 See HMA Letter at 8; Consumer Federation of America Letter at 11. 354 See id. 355 See HMA Letter at 8. 356 See Fidelity Letter at 9. 357 See Rule 304(a)(1)(iii). 358 See Consumer Federation of America Letter at 2, 10. PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 38793 applicable, the extended review period. Unlike proposed rule changes filed by national securities exchanges, the Commission will not make affirmative findings about Form ATS–N filings with regard to consistency with the Exchange Act in the general course of the review of Form ATS–N filings.359 As discussed below, the Commission’s review will not focus on the merits of the Form ATS–N disclosures, such as determining the strengths and weaknesses of the trading platform or a protocol offered by the NMS Stock ATS, nor is the Commission making findings regarding whether the means by which orders will interact on the trading platform are consistent with certain provisions of the Exchange Act.360 If disclosures on Form ATS–N reveal non-compliance with federal securities laws or the rules and regulations thereunder, however, the Commission may find that it is appropriate to declare the filing ineffective. We believe that the scope of the Commission’s review is clear and that the benefits of the Commission review process for Form ATS–N filings justify any risk that market participants misunderstand that the Commission is not performing a merit review of Form ATS–N. We further believe that adopting a process for initial Form ATS–N filings to become effective without the Commission affirmatively declaring them effective by order will help signal to market participants that the Commission is not passing on the merits of the NMS Stock ATSs’ disclosures regarding their operations. Even if we assume that a declaration of ineffectiveness will ‘‘sound the death knell,’’ as suggested by a commenter,361 or result in reputational harm to an NMS Stock ATS, the process for declaring a Form ATS–N filing ineffective will be consistent with the Commission’s objective to protect investors and the public interest and will provide NMS Stock ATSs with opportunities to avoid or mitigate such a declaration. An NMS Stock ATS would be given notice and an opportunity for hearing to respond to the Commission’s concerns. A nonLegacy NMS Stock ATS would also have the option of withdrawing and subsequently refiling its Form ATS–N. In addition, during the Commission review period, both non-Legacy NMS Stock ATSs and Legacy NMS Stock ATSs can amend their initial Form ATS–N to cure potential deficiencies. Additionally, if the Commission does 359 See 360 See supra note 405. infra notes 404–407 and accompanying text. 361 See E:\FR\FM\07AUR2.SGM supra note 356. 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38794 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations declare an initial Form ATS–N ineffective, the NMS Stock ATS will have an opportunity to revise its disclosures, or change its operations, and subsequently file a new initial Form ATS–N, and such filing could become effective. In addition, one commenter argues that a Form ATS–N should be considered ineffective upon filing until the Commission affirmatively declares it effective or ineffective.362 However, this commenter also recommends that if the Commission fails to declare a Form ATS–N effective or ineffective within the 120-calendar day review period, or does not extend the review period, the ‘‘default decision’’ should be that the Form ATS–N is declared effective.363 We believe that it would be appropriate for an initial Form ATS–N to become effective if the Commission does not declare, by order, the filing ineffective during the initial review period, or in the case of an extended review period, during the extended period, to provide certainty about timing of the Commission’s review to the NMS Stock ATS and to market participants. Providing for an initial Form ATS–N filed by a Legacy NMS Stock ATS to become effective in this manner will allow the Legacy NMS Stock ATS to continue to operate without disruption to its subscribers (provided the Commission does not declare the Form ATS–N ineffective).364 Considering an initial Form ATS–N ineffective upon filing, before the Commission has completed the review, as suggested by a commenter, would cause a Legacy NMS Stock ATS to stop operating, which may harm the market participants that currently use the services on the Legacy NMS Stock ATS. Once an initial Form ATS–N is effective, Rule 304(a)(4) provides a process for the Commission to suspend, limit, or revoke the exemption for the NMS Stock ATS. Given this change in the effectiveness determination process, we do not believe that requiring that an initial Form ATS–N filing be considered ineffective upon filing would provide any additional benefit, because an NMS Stock ATS (except for a Legacy NMS Stock ATS) may not operate pursuant to the conditions of the Rule 3a1–1(a)(2) exemption unless its Form ATS–N has become effective, pursuant to Rule 304(a)(1)(iii). 362 See CFA Institute Letter at 5. id. at 4. 364 See Rule 304(a)(1)(iv)(A). See also infra Section IV.A.4.a (discussing the initial Form ATS– N requirements for Legacy NMS Stock ATSs). 363 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 d. Effectiveness; Ineffectiveness Determinations Under Rule 301(a)(1)(iii) We are adopting Rule 304(a)(1)(iii) with modifications, and relocating most of proposed Rule 304(a)(1)(iv), with modifications,365 to adopted Rule 304(a)(1)(iii) (‘‘Effectiveness; Ineffectiveness determination’’). For the reasons described above, we are modifying Rule 304(a)(1)(iii) to provide that an initial Form ATS–N filed by an NMS Stock ATS, as amended,366 will become effective, unless declared ineffective, upon the earlier of: (1) The completion of review by the Commission and publication pursuant to Rule 304(b)(2)(i), or (2) the expiration of the review period, or, if applicable, the end of the extended review period, pursuant to Rule 304(a)(1)(ii). Rule 304(a)(1)(iii) will further provide that the Commission will, by order, declare ineffective an initial 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.367 365 See infra note 368 and accompanying text. 366 We are adopting a process that allows NMS Stock ATSs to file an updating and correcting amendment to an initial Form ATS–N during the Commission review period. See supra Section IV.A.2. We are adding to Rule 304(a)(1)(iii) that an initial Form ATS–N ‘‘as amended’’ will become effective, which includes any amendments filed to the initial Form ATS–N during the Commission review period. Amendments filed by an NMS Stock ATS to an initial Form ATS–N during the Commission review period are subject to Rule 304(a)(2)(ii), which provides that the Commission will, by order, declare ineffective any Form ATS– N amendment no later than 30 calendar days from filing with the Commission. The Commission will have 30 calendar days to declare any amendments ineffective, including amendments to Form ATS–N that are filed during the Commission review period. For example, if an NMS Stock ATS files an updating or correcting amendment to an initial Form ATS–N on calendar day 110 of the Commission review period, and the initial Form ATS–N becomes effective on calendar day 120, the updating or correcting amendment could be declared ineffective by the Commission up to an additional 20 calendar days after the initial Form ATS–N becomes effective—until the Commission’s 30-calendar day review period has expired. 367 We are also making technical changes to the proposed text of Rule 304(a)(1)(iii) by adding to Rule 304(a)(1)(iii) the word ‘‘initial’’ before Form ATS–N and renaming the paragraph as ‘‘Effectiveness; Ineffectiveness determination.’’ In the Proposal, we stated 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. See Proposal, supra note 2, at 81025. As discussed further below, we are modifying the proposed guidance regarding when it may be necessary or appropriate to declare a Form ATS–N ineffective. We are also modifying the Instructions to Form ATS–N to better align them with that guidance, and PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 We are also relocating two provisions of proposed Rule 304(a)(1)(iv), with non-substantive modifications,368 to adopted Rule 304(a)(1)(iii). As a result, Rule 304(a)(1)(iii) states that if the Commission declares an initial Form ATS–N ineffective, the NMS Stock ATS shall be prohibited from operating as an NMS Stock ATS pursuant to § 240.3a1– 1(a)(2); and that an initial Form ATS–N declared ineffective does not prevent the NMS Stock ATS from subsequently filing a new Form ATS–N. We believe Rule 304(a)(1)(iii), as modified, clearly explains when an initial Form ATS–N will become effective or declared ineffective, and the consequences of an order of ineffectiveness. Accordingly, an NMS Stock ATS whose initial Form ATS–N has become effective may commence operations and will be required to comply with Rule 304 as well as applicable provisions of Rules 300 through 303 of Regulation ATS. An NMS Stock ATS whose initial Form ATS–N was declared ineffective would be prohibited from operating pursuant to reduce any potential confusion about the difference between an NMS Stock ATS’s obligations with respect to completing Form ATS–N and the standard of review that the Commission will apply when determining whether to declare a Form ATS– N ineffective. See supra note 320. The same standard for declarations of ineffectiveness will apply to filings of both initial Form ATS–N and Form ATS–N amendments. See infra Section IV.B.2. 368 We are deleting the following language, which was part of proposed Rule 304(a)(1)(iv): ‘‘The Commission will issue an order to declare a Form ATS–N effective or ineffective.’’ This is addressed in the adopted rule text stating that ‘‘[a]n initial Form ATS–N, as amended, filed by an NMS Stock ATS will become effective, unless declared ineffective, upon the earlier of: (1) [T]he completion of review by the Commission and publication pursuant to paragraph (b)(2)(i) of [Rule 304] or (2) [t]he expiration of the review period, or, if applicable, the end of the extended review period, pursuant to paragraph (a)(1)(ii) of [Rule 304]’’ and that ‘‘[t]he Commission will, by order, declare an initial Form ATS–N ineffective if it finds, after notice and opportunity for hearing, that such action is necessary and appropriate in the public interest, and is consistent with the protection of investors.’’ See Rule 304(a)(1)(iii)(B). In addition, we are not adopting the language that states ‘‘[u]pon the effectiveness of the Form ATS–N, the NMS Stock ATS may operate pursuant to the conditions of this section’’ or language that states ‘‘[i]f the Commission declares an initial Form ATS–N effective, the NMS Stock ATS may operate pursuant to the conditions of this section’’ for purposes of clarity and readability. Rule 304(a)(1)(i) provides that an initial Form ATS–N must be effective for the NMS Stock ATS to avail itself of the Rule 3a1– 1(a)(2) exemption (see supra Section IV.A.1), and Rule 304(a)(1)(iii) specifies when an initial Form ATS–N filing will become effective. Rule 304(a)(1)(iii) also states that: (1) if the Commission declares an initial Form ATS–N ineffective, the NMS Stock ATS shall be prohibited from operating as an NMS Stock ATS ‘‘pursuant to § 240.3a1– 1(a)(2);’’ and (2) an initial Form ATS–N declared ineffective ‘‘does’’ not (rather than ‘‘would’’ not) prevent the NMS Stock ATS from subsequently filing a new Form ATS–N. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 to the Rule 3a1–1(a)(2) exemption. Similarly, a Legacy NMS Stock ATS whose initial Form ATS–N was declared ineffective would no longer be eligible for the Rule 3a1–1(a)(2) exemption and would be required to cease operations.369 If the Commission declares an initial Form ATS–N ineffective, the NMS Stock ATS that filed the form could subsequently file a new Form ATS–N for Commission consideration. In the Proposal, we provided certain examples of scenarios in which we believed 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, after notice and opportunity for hearing.370 We continue to believe that the examples provided in the Proposal are appropriate for the Commission to declare a Form ATS–N ineffective and will provide NMS Stock ATSs and market participants with clarity with respect to when the Commission could find, after notice and opportunity for hearing, it necessary or appropriate in the public interest, and consistent with the protection of investors, to declare ineffective a Form ATS–N. We are also providing additional clarity with respect to this guidance. Several commenters request additional guidance and clarity regarding the Commission’s review of initial Form ATS–N filings and Form ATS–N amendments and the circumstances under which the Commission may declare a Form ATS– N ineffective.371 We believe 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 the Commission finds, for example, after notice and opportunity for hearing, the Form ATS–N was filed by an entity that does not meet the definition of NMS Stock ATS; one or more disclosures reveal non-compliance with federal securities laws, or the rules or regulations thereunder, including Regulation ATS; or one or more disclosures on Form ATS–N are materially deficient with respect to their completeness or comprehensibility. Given that the objective of Rule 304 is to provide market participants with 369 The initial filing of Form ATS–N by Legacy NMS Stock ATSs is discussed further below. See infra Section IV.A.4.a. 370 See Proposal, supra note 2, at 81024–26. 371 See supra notes 343, 345, and 346 and accompanying text. See also supra notes 335–340 and accompanying text discussing commenter concerns regarding whether the Commission articulated an objective or consistent standard of review. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 information about NMS Stock ATSs through Form ATS–N disclosures, our review is designed to focus on the Form ATS–N disclosures and is not a meritbased review of the operations of the NMS Stock ATS or the ATS-related activities of the broker-dealer operator.372 We believe 373 that it would be necessary to declare ineffective a Form ATS–N if the Form ATS–N was filed by an entity that does not satisfy the definition of ATS, and more specifically, the definition of NMS Stock ATS.374 The 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.375 We believe that the review of Form ATS–N disclosures will help 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. We believe that it would be necessary to declare Form ATS–N ineffective if one or more disclosures reveal noncompliance with federal securities laws, including Regulation ATS. As discussed in the Proposal,376 the Commission will conduct a ‘‘red-flag’’ review for instances of non-compliance with federal securities laws that seem apparent from the disclosures on 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.377 Section 15(b)(8) of the Exchange Act 378 prohibits a registered broker or dealer from effecting a transaction unless the broker or dealer is a member 372 See of a securities association registered pursuant to Section 15A of the Exchange Act 379 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 and comply with the rules of the SRO, including obtaining approval by the SRO to operate an ATS in accordance with applicable SRO rules. If an entity were to file a Form ATS–N before registering as a brokerdealer under Section 15 of the Exchange Act, the entity would not be in compliance with Rule 301(b)(1) of Regulation ATS.380 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) of the Exchange Act 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,381 and the Commission’s order granting broker-dealer registration would not be effective.382 As another example, if the Form ATS–N reveals non-compliance with Regulation NMS, including, among other provisions, Rule 612, 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 $0.01,383 the Form ATS–N would not be consistent with Rule 304 because the NMS Stock ATS would operate in a manner that may violate the federal securities laws. We believe that it would be necessary to declare Form ATS–N ineffective if one or more disclosures are materially deficient with respect to their completeness and comprehensibility. The following are non-exhaustive examples of Form ATS–N disclosures that may be deficient with respect to infra notes 404–407 and accompanying text. 379 15 373 See Proposal, supra note 2, at 81024–81025. 374 See Rule 300(k). 375 For example, an ATS that is not an NMS Stock ATS would be subject to different conditions under Regulation ATS 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 a national securities exchange. See Proposal, supra note 2, at 81024 n.288 and accompanying text. 376 See Proposal at 81025–26. 377 17 CFR 242.301(b)(1). 378 15 U.S.C. 78o(b)(8). PO 00000 38795 Frm 00029 Fmt 4701 Sfmt 4700 U.S.C. 78o–3. 17 CFR 301(b)(1). Rule 301(b)(1) of Regulation ATS requires an ATS to register as a broker-dealer under Section 15 of the Exchange Act. 381 See 15 U.S.C. 78o(b)(1). 382 See 17 CFR 242.301(b)(1). 383 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). 380 See E:\FR\FM\07AUR2.SGM 07AUR2 38796 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 their completeness: 384 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; 385 an NMS Stock ATS describes some of its priority rules, but fails to describe conditions or exceptions to its priority rules, or fails to describe any priority overlays; 386 an NMS Stock ATS, in response to Part II, Item 1 of adopted Form ATS–N, discloses that a principal trading desk of the broker-dealer operator trades on the NMS Stock ATS, but does not explain advantages the broker-dealer operator receives compared to other subscribers; an NMS Stock ATS, in response to Part III, Item 19 of adopted Form ATS–N, fails to provide complete information about fees and rebates charged for use of the NMS Stock ATS; an NMS Stock ATS discloses that it 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 ATS in fact has several classes of subscribers; or an NMS Stock ATS discloses that it has two classes of subscribers that are charged the same trading fees, but the Commission or its staff learns through discussions with the ATS or otherwise that in fact one class receives more favorable fees than the other.387 The following are non-exhaustive examples of Form ATS–N disclosures that may be deficient with respect to their comprehensibility: 388 Form ATS– 384 These are some, but not all, of the types of circumstances that could result in the Commission declaring a Form ATS–N ineffective due to being materially deficient with respect to completeness. We also provided some of these examples in the Proposal as examples of disclosures 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. See Proposal, supra note 2, at 81025. Because we are modifying the standard of review to focus on completeness and comprehensibility, some of the examples discussed in the Proposal are also discussed below to show application of the standard the Commission is adopting to the same scenarios. 385 This example was discussed in the Proposal as an example of a disclosure that may be materially deficient because it may not be sufficiently detailed. See Proposal, supra note 2, at 81025. 386 See id. Another example would be if the NMS Stock ATS fails to describe which order would receive priority where two or more orders are otherwise on par, such as a situation in which a customer and non-customer order are at the same price in a price priority system. 387 These examples were discussed in the Proposal as examples of disclosures that may be materially deficient because they would not be accurate. See Proposal, supra note 2, at 81025. 388 These are some, but not necessarily all, of the types of circumstances that could result in the VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 N includes inconsistent information among the disclosures, such as a statement by the NMS Stock ATS in one part of the form that the ATS uses private feeds to calculate the NBBO but in another part of the form indicates that it uses the SIP; 389 the NMS Stock ATS states in one part of Form ATS–N that it does not segment its orders but provides a description in another part of the Form ATS–N that indicates that the ATS offers a functionality that allows institutional investors to limit their trading activity to interactions with other institutional investors; the Form ATS–N disclosures indicate that the NMS Stock ATS uses time/price priority to execute orders but provides an example that demonstrates an order received before an identically priced order does not receive priority over the later order; or the NMS Stock ATS states in one part of the Form ATS–N that it provides certain order types, transacts in certain types of securities, or provides access to certain classes of subscribers, and there is contrary disclosure in other parts of the Form ATS–N. We do not agree with the commenter that believes that the term materially deficient should be understood to represent only ‘‘extreme situation[s].’’ 390 The Commission review will focus on whether the lack of completeness or comprehensibility in a Form ATS–N disclosure would prevent market participants from understanding an ATS’s operations or the ATS-related activities of its broker-dealer operator or its affiliates. We believe that subscribers and market participants will rely on Form ATS–N disclosures to understand and evaluate the operations of the NMS Stock ATS and conflicts of interest that may arise from the ATS-related activities of the broker-dealer operator and its affiliates and use this information to help determine where to route their orders, or the orders of their customers. We believe that a disclosure on Form ATS–N that is materially deficient with respect to its completeness or comprehensibility could mislead market participants or Commission declaring a Form ATS–N ineffective due to being materially deficient with respect to comprehensibility. 389 In the Proposal, this was provided as an example of a disclosure that may be materially deficient because it may not be accurate; however, inconsistent disclosures in a Form ATS–N also may render disclosures unclear as to which rule or procedure, for example, controls and how the NMS Stock ATS intends to operate. See Proposal, supra note 2, at 81025. Depending on the facts and circumstances, inconsistent or contradictory disclosures in a Form ATS–N may be materially deficient with respect to comprehensibility. 390 See supra note 342 and accompanying text. PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 impede their ability to understand an NMS Stock ATS’s operations, or the ATS-related activities of its brokerdealer operator, which would frustrate the purpose of the transparency goals of this rulemaking. We do not believe that it would be practical, as one commenter suggests,391 to provide examples of disclosures that the Commission would not view as materially deficient because the context of each disclosure is crucial to determining whether a disclosure is complete and comprehensible. Whether a disclosure deficiency is material depends on the facts and circumstances, as does whether the deficiency would support a finding that the deficiency is such that a declaration of ineffectiveness would be in the public interest and consistent with the protection of investors. As discussed above, one commenter questions how the Commission’s review will be undertaken to help ensure consistency across filings when initial Form ATS–N filings are made ‘‘without any prior knowledge of the detail the Commission expects,’’ 392 and another states that it ‘‘would be helpful’’ to have the Commission review initial filings to, among other things, help ‘‘standardize the level of disclosure across NMS Stock ATSs.’’ 393 We have revised Form ATS– N in a number of ways in response to comments. For instance, we added more ‘‘yes’’ or ‘‘no’’ questions, separated questions into distinct subject matter categories, provided additional examples as guidance, and made requests more explicit for more targeted responses.394 These changes to Form ATS–N are designed to better inform NMS Stock ATSs of the requirements of Form ATS–N and to solicit more consistent responses from NMS Stock ATSs. However, NMS Stock ATSs operate differently, and with different complexities, and use different terms to describe their systems. While this could lead to different levels of disclosures among ATSs, we believe that the combination of refinements to the form, and the Commission’s review of all Forms ATS–N filed by Legacy NMS Stock ATSs during the same period of time, will assist the Commission in providing a consistent level of comment on the forms that will help facilitate a more consistent and standard level of information disclosed across NMS Stock ATSs. 391 See 392 See supra note 343 and accompanying text. Fidelity Letter at 9. See also supra note 346. 393 See MFA/AIMA Letter at 4. See also supra note 330 and accompanying text. 394 See infra Section V (discussing modifications to Proposed Form ATS–N). E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Any order declaring a Form ATS–N ineffective will require the Commission to find that such action is necessary or appropriate in the public interest, and consistent with the protection of investors. Rule 304(a)(1)(iii) provides that the Commission must provide notice to the NMS Stock ATS and provide an opportunity for a hearing. As such, an NMS Stock ATS will have the opportunity to be heard before the Commission declares its Form ATS–N ineffective. As discussed above, we do not agree with a commenter’s suggestion that a Form ATS–N be considered ineffective upon filing.395 We also do not agree with the comment that a declaration of ineffectiveness of a Form ATS–N will prejudice an entity such that a revised filed Form ATS–N will have no practical value.396 We anticipate a dialogue between Commission staff and the NMS Stock ATS regarding the Form ATS–N disclosures and an NMS Stock ATS will have the opportunity to amend its initial Form ATS–N during the Commission review period. If a Form ATS–N is declared ineffective by the Commission, the Commission’s order will provide the basis for the declaration of ineffectiveness, and the NMS Stock ATS will have the opportunity to file another Form ATS–N that addresses the basis for the ineffectiveness determination. To the extent that the NMS Stock ATS files a revised initial Form ATS–N or Form ATS–N amendment that no longer contains, for example, material deficiencies with respect to its completeness or comprehensibility, the Form ATS–N would become effective, assuming no other basis for an ineffectiveness determination. Regarding the comment that the Commission should provide an NMS Stock ATS with a clear written statement of the reasons for a declaration of ineffectiveness,397 the Commission intends to provide the basis for declaring a Form ATS–N ineffective in an order declaring a Form ATS–N ineffective, which will help the NMS Stock ATS address disclosure deficiencies if the ATS decides to refile an initial Form ATS–N and help market participants understand the reason the Form ATS–N was declared ineffective. We also received three comments regarding whether the Commission should add a requirement to make available Form ATS–N filings for public notice and comment before the Commission declares a Form ATS–N 395 See supra notes 362–363 and accompanying text. 396 See 397 See supra note 356 and accompanying text. supra note 344 and accompanying text. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 effective or ineffective. One commenter notes that the rule filings of national securities exchanges are made publicly available and subject to notice and comment before approval, and that Form ATS–N should be the same.398 Another commenter expresses the view that it would be helpful for the Commission to receive feedback from market participants regarding Form ATS–N filings, and supports harmonizing the process with the application and filing process for national securities exchanges.399 One commenter, however, expresses the view that Form ATS–N should not be subject to a public notice and comment process.400 This commenter states that the Commission has long recognized several fundamental differences between national securities exchanges and ATSs, and that imposing a public notice and comment period on ATSs would not be equitable and would impede dynamic market structure advances because the Commission has fostered competition among different types of trading venues.401 We believe that it would not be appropriate to subject Form ATS–N filings to public notice and comment, as some commenters suggest. The Commission did not propose to subject Form ATS–N filings to a public notice and comment process. As discussed above,402 the Commission is not performing a review of the merits of initial Form ATS–N disclosures, such as determining the strengths and weaknesses of the trading platform or a protocol offered by the NMS Stock ATS. The Commission also is not making findings regarding whether the means by which orders will interact on the trading platform are, or are not, consistent with the Exchange Act, as is the case with respect to certain SRO rule filings.403 Rather the Commission’s review of Form ATS–N disclosures will focus on the completeness and comprehensibility of the disclosures, which does not lend itself to public notice and comment. We do not believe that public comment would facilitate the review of Form ATS–N, and are not subjecting Form ATS–N filings to a process similar to SROs’ proposed rule 398 See CBOE Letter at 2. Citadel Letter at 3. UBS Letter at 4. 401 See id. Another commenter, in expressing the view that Form ATS–N amendments should not be made public upon filing, states that doing so would risk turning the effectiveness process into an extended review, notice, and comment period, which the commenter believes would be inappropriate and unwarranted. See SIFMA Letter at 31–32. 402 See supra Section IV.A.3.c. 403 See supra note 359 and accompanying text. 399 See 400 See PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 38797 change filings, which are subject to notice and comment, and consideration by the Commission. The standard of review for ineffectiveness of Form ATS–N filings that we are adopting does not include an evaluation of the merits of the services that an NMS Stock ATS offers to subscribers. As discussed above, some commenters raise concerns about whether the Commission review process will result in imposing substantive standards on NMS Stock ATSs.404 Rule 304 and Form ATS–N are designed to enhance operational transparency for NMS Stock ATSs, and therefore, the standard of review undergirding the Commission review will focus on the disclosures on Form ATS–N, as described above, and not the manner in which the NMS Stock ATS operates. Unlike proposed rule changes filed by national securities exchanges, the Commission will not make affirmative findings about Form ATS–N filings with regard to consistency with the Exchange Act.405 Regulation ATS was designed to encourage innovation 406 and provide enough flexibility to accommodate the business objectives of, and benefits provided by, alternative trading systems.407 As follows, the standard of review for ineffectiveness of Form ATS– N is designed to enhance the transparency objectives of the new disclosure requirements in a manner consistent with allowing NMS Stock ATSs to continue to innovate and provide benefits to the market. The Commission review is not intended to evaluate an NMS Stock ATS’s services against industry norms, nor approve or disapprove aspects of the NMS Stock ATS’s operations, for example, a new trading functionality, order type, or execution protocol. 404 See, e.g., supra note 346 and accompanying text. 405 Proposed rule changes filed by national securities exchanges pursuant to Section 19 of the Exchange Act must be consistent with the Exchange Act. In addition, filings made pursuant to Section 19(b)(2) require the Commission to approve a proposed rule change if it finds the proposed rule change is consistent with the Exchange Act and the rules and regulations thereunder, or it must disapprove the proposed rule change. While a disclosure that reveals non-compliance with the federal securities laws or the rules and regulations thereunder may be a basis for the Commission finding that a declaration of ineffectiveness would be in the public interest and consistent with the protection of investors, Regulation ATS is a disclosure regime, and the Commission will not be making findings on consistency with the Exchange Act with respect to disclosures on Form ATS–N. 406 See Regulation ATS Adopting Release, supra note 3, at 70910. 407 See id. at 70847. E:\FR\FM\07AUR2.SGM 07AUR2 38798 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations end of the extended review period, pursuant to Rule 304(a)(1)(iv)(B). Adopted Rule 304(a)(1)(iv) modifies a. Rule 304(a)(1)(iv)(A): Initial Filing proposed Rule 304(a)(1)(i) to address Requirements certain commenter concerns, as Rule 304(a)(1)(iv) describes the described below. Under the proposed process through which Legacy NMS rule, an NMS Stock ATS operating as of Stock ATSs would file their initial Form the effective date of the final rule would ATS–N. We are adopting Rule continue to operate pursuant to its 304(a)(1)(iv) (‘‘Transition for Legacy previously filed initial operation report NMS Stock ATSs’’) to provide a process on Form ATS, pending the for a Legacy NMS Stock ATS to file its Commission’s review of the filed Form initial Form ATS–N, and to continue to ATS. We modified this proposed operate while its initial Form ATS–N is process in response to comments. In the under Commission review.408 Adopted Proposal, we asked whether the Rule 304(a)(1)(iv)(A) (‘‘Initial Form Commission should allow a Legacy ATS–N filing requirements’’) requires NMS Stock ATS to continue operations that a Legacy NMS Stock ATS shall file pursuant to Form ATS pending the with the Commission an initial Form Commission’s review of Form ATS– ATS–N, in accordance with the N.411 Two commenters express support conditions of Rule 304(a)(1)(iv), no for certain aspects of the proposed earlier than January 7, 2019, and no transition process for Legacy NMS Stock later than February 8, 2019. Further, ATSs (including that the Commission adopted Rule 304(a)(1)(iv)(A) provides allow Legacy NMS Stock ATSs to that an initial Form ATS–N filed by a operate during the Commission review Legacy NMS Stock ATS shall supersede period).412 One commenter states that it and replace for purposes of the supports requiring Legacy NMS Stock exemption the previously-filed Form ATSs to file an initial Form ATS–N.413 ATS (including any amendments to A Legacy NMS Stock ATS will be Form ATS) of the Legacy NMS Stock required to file an initial Form ATS–N ATS.409 The Legacy NMS Stock ATS to continue to operate pursuant to the may operate, on a temporary basis, Rule 3a1–1(a)(2) exemption with respect pursuant to the filed initial Form ATS– to its Rule 3b–16 activity in NMS stocks N, and any amendment thereto, during beyond January 7, 2019. This provision the review of the initial Form ATS–N by will allow a Legacy NMS Stock ATS to 410 In addition, adopted the Commission. continue its current operations without Rule 304(a)(1)(iv)(A) provides that an disruptions to the ATS or its current initial Form ATS–N filed by a Legacy subscribers and provide the Legacy NMS Stock ATS, as amended, will NMS Stock ATS with sufficient time to become effective, unless declared make an orderly transition from ineffective, upon the earlier of: (1) The compliance under the current completion of review by the Regulation ATS requirements to Commission and publication pursuant compliance with Rule 304. to Rule 304(b)(2) or (2) the expiration of Under the adopted rule, both Legacy the review period, or, if applicable, the NMS Stock ATSs and non-Legacy NMS Stock ATSs will be required to file an 408 We are adopting Rule 304(a)(1)(iv) to delineate initial Form ATS–N. We believe that the initial filing process applicable to Legacy NMS market participants should have access Stock ATSs from the initial filing process to the same level of information applicable to non-Legacy NMS Stock ATSs. This differs from the proposed rule text, which disclosed by both Legacy NMS Stock integrated the requirements applicable to Legacy ATSs and non-Legacy NMS Stock ATSs NMS Stock ATSs within the requirements as market participants will consider applicable to all NMS Stock ATSs set forth in routing orders to both types of NMS proposed Rule 304(a)(1)(i) through (iii). Providing these requirements in a separate section of the rule Stock ATS. Allowing Legacy NMS Stock better organizes the rule text so filers can more ATSs to file Form ATS instead of Form easily understand the initial Form ATS–N filing ATS–N would limit the amount of process that is applicable to Legacy NMS Stock information available to market ATSs and is responsive to comments, which are discussed below. participants about these ATSs’ 409 Although the Form ATS for a Legacy NMS operations and the ATS-related Stock ATS will no longer have any legal effect for activities of their broker-dealer purposes of the exemption after the ATS files a operators, and would thereby make it Form ATS–N, a Form ATS will nevertheless continue to be subject to the federal securities laws difficult for market participants to and the regulations thereunder, including assess Legacy NMS Stock ATSs as daltland on DSKBBV9HB2PROD with RULES2 4. Rule 304(a)(1)(iv): Transition for Legacy NMS Stock ATSs Regulation ATS, as a Form ATS previously filed with the Commission will 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. See 17 CFR 242.301(b)(2)(vi). 410 See Rule 304(a)(1)(iv)(A). VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 potential routing destinations for their orders. We believe that a Legacy NMS Stock ATS should be permitted to continue to operate during the Commission review period for initial Form ATS–N.414 Therefore, we are adopting Rule 304(a)(1)(iv)(A) to transition Legacy NMS Stock ATSs from operating pursuant to Form ATS to operating pursuant to Form ATS–N without interruption. As noted above, the transition for Legacy NMS Stock ATSs will benefit Legacy NMS Stock ATSs and their subscribers, as subscribers will be able to continue to send their orders to Legacy NMS Stock ATSs without disruption. Two commenters request clarification about the process for a Legacy NMS Stock ATS to file an initial Form ATS– N and its obligations to update its Form ATS on file with the Commission while the Commission reviews its initial Form ATS–N.415 One commenter expresses concerns about the regulatory and legal uncertainties that could result from a Legacy NMS Stock ATS operating while having filed with the Commission both a Form ATS and a Form ATS–N.416 Similarly, another commenter requests clarification about how a Legacy NMS Stock ATS should handle material changes to the NMS Stock ATS’s Form ATS.417 This commenter also asks the Commission to clarify whether a Legacy NMS Stock ATS should amend its Form ATS to avoid potential liability caused by the NMS Stock ATS submitting the additional information required in Form ATS–N.418 These commenters suggest processes that they believe will address these concerns.419 One commenter suggests that the Commission deem effective a Legacy NMS Stock ATS’s Form ATS–N upon filing but nevertheless subject it to a review and comment period by the Commission.420 We are not adopting this suggestion because labeling an initial Form ATS–N ‘‘effective’’ before the Commission has completed the review could mislead market participants. Another commenter suggests that a Legacy NMS Stock ATS that makes changes to its operations during the 120-calendar day review period or extended review period should only be required to amend its Form ATS, and that the Legacy NMS Stock ATS should not be required to 414 See also supra note 412 and accompanying text. 415 See BIDS Letter at 2–3; SIFMA Letter at 29. BIDS Letter at 2. 417 See SIFMA Letter at 29. 418 See id. 419 See BIDS Letter at 2–3; SIFMA Letter at 29. 420 See BIDS Letter at 2. 416 See 411 See 412 See Proposal, supra note 2, at 81026. CFA Institute Letter at 5; BIDS Letter at 413 See CFA Institute Letter at 4. 3. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations also amend its initial Form ATS–N until the Commission declares it effective, and that the NMS Stock ATS could then file a ‘‘clean-up’’ amendment to its initial Form ATS–N.421 We are not adopting this approach because, as discussed below, our adopted approach to require a Legacy NMS Stock ATS to amend Form ATS–N would be less burdensome for the ATS than requiring the Legacy NMS Stock ATS to amend its Form ATS during the Commission review period and Form ATS–N after the Form ATS–N becomes effective. In response to these commenters, and after considering their alternative suggestions, we are adopting Rule 304(a)(1)(iv)(A), which is modified from proposed Rule 304(a)(1)(i), to provide that a filed Form ATS–N shall supersede and replace for purposes of the exemption a Legacy NMS Stock ATS’s previously-filed Form ATS. After considering the comments, we acknowledge that if the Commission were to require a Legacy NMS Stock ATS to file and amend both Form ATS and Form ATS–N during the Commission review period for an initial Form ATS–N, the Legacy NMS Stock ATS could incur additional legal and regulatory risks, as it would be required to make changes to two forms and ensure that the information on the two forms is consistent. The disclosures on an initial Form ATS–N would include the vast majority of information provided to the Commission on Form ATS that pertains to the ATS’s NMS stock operations. Therefore, we believe that the modifications to the proposed rule would alleviate the burden on Legacy NMS Stock ATSs of filing two separate documents with the Commission that would likely contain significantly overlapping information. In addition, to address the commenters’ concerns, and facilitate the ability of a Legacy NMS Stock ATS to maintain only one filing for a limited time during the transition, we are also modifying proposed Rule 304(a)(1)(i), and adopting as Rule 304(a)(1)(iv)(A), to provide that the Legacy NMS Stock ATS may operate, on a provisional basis, pursuant to the filed Form ATS–N, and any amendments thereto,422 during the daltland on DSKBBV9HB2PROD with RULES2 421 See SIFMA Letter at 29. 422 A Legacy NMS Stock ATS may file amendments pursuant to Rule 304(a)(1)(iv)(C) during the Commission review period. A change subject to a material amendment filed by a Legacy NMS Stock ATS within 30 calendar days of the end of the 240-calendar day extended review period, as provided by Rule 304(a)(1)(iv)(B)(1), or other period to which the Legacy NMS Stock ATS agrees in writing described in Rule 304(a)(1)(iv)(B)(2), may only be implemented by the Legacy NMS Stock ATS after the expiration of the 30-calendar day period provided by Rule 304(a)(2)(i)(A), and the VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Commission review period of the filed initial Form ATS–N. This provision is designed to facilitate an orderly transition for Legacy NMS Stock ATSs from the Form ATS regime to the Form ATS–N regime while at the same time requiring an appropriate level of disclosure by NMS Stock ATSs. In addition, we are adopting a provision in Rule 304(a)(1)(iv)(A) that provides that an initial Form ATS–N filed by a Legacy NMS Stock ATS, as amended, will become effective, unless declared ineffective, upon the earlier of: (1) The completion of review by the Commission and publication pursuant to Rule 304(b)(2) or (2) the expiration of the review period, or, if applicable, the end of the extended review period, pursuant to Rule 304(a)(1)(iv)(B). We are adding this provision to reflect changes to the effectiveness process; this provision is designed to replace parts of proposed Rule 304(a)(1)(iii). In addition, because we are adopting a process that allows a Legacy NMS Stock ATS to amend its initial Form ATS–N during the Commission review period, we are adding to Rule 304(a)(1)(iv)(A) that a Legacy NMS Stock ATS’s Form ATS–N ‘‘as amended’’ will become effective, which will include any amendments made to an initial Form ATS–N during the Commission review period. Finally, proposed Rule 304(a)(1) would have required Legacy NMS Stock ATSs to submit their initial Form ATS– N filings within 120 days of the effective date of this rulemaking. We received one comment supporting the requirement that Legacy NMS Stock ATSs file Form ATS–N within 120 calendar days of the effective date of the final rule, ‘‘given the reasonable assumption that the operators of the ATS should be very familiar with the operational structure of said ATS.’’ 423 We are modifying proposed Rule 304(a)(1)(i) (as part of adopted Rule 304(a)(1)(iv)(A)) to require Legacy NMS Stock ATSs to file an initial Form ATS– N no earlier than January 7, 2019, and no later than February 8, 2019 and making additional technical modifications.424 We believe that this Commission may declare such an amendment ineffective, as appropriate, until the 30-calendar day review period expires. 423 See CFA Institute Letter at 5. 424 This provision, which was proposed as the second sentence of proposed Rule 304(a)(1)(i) is now the first sentence of adopted Rule 304(a)(1)(iv)(A). In the adopted rule, we are making technical, non-substantive modifications to the proposed rule text, including: (1) Referring to ‘‘an’’ NMS Stock ATS rather than ‘‘the’’ NMS Stock ATS; (2) defining an NMS Stock ATS operating pursuant to an initial operation report on Form ATS as of the effective date as a ‘‘Legacy NMS Stock ATS;’’ (3) revising the definition of Legacy NMS Stock ATS PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 38799 will provide adequate time following the date that the enhanced disclosure requirements under Rule 304 become effective and for NMS Legacy NMS Stock ATSs to prepare and file an initial Form ATS–N with the Commission. NMS Stock ATSs will file Form ATS– N via EDGAR, which will be ready to accept Form ATS–N filings on January 7, 2019. We agree with the commenter that a Legacy NMS Stock ATSs should be knowledgeable of the operations of its system and the ATS-related activities of the broker-dealer operator and its affiliates and believes that requiring Legacy NMS Stock ATSs to file their initial Form ATS–N between January 7, 2019 and February 8, 2019 provides these with reasonable time to prepare and file their disclosures on Form ATS– N.425 We note that, until a Legacy NMS Stock ATS files its initial Form ATS–N with the Commission, the Legacy NMS Stock ATS must provide notice of changes to its operations by amending its Form ATS on file with the Commission pursuant to Rule 301(b)(2) of Regulation ATS.426 b. Rule 304(a)(1)(iv)(B): Commission Review Period; Ineffectiveness Determination Rule 304(a)(1)(iv)(B) provides the process and timing for the Commission to review a Legacy NMS Stock ATS’s initial Form ATS–N, and, if applicable, declare such initial Form ATS–N effective. We are adopting Rule 304(a)(1)(iv)(B) (‘‘Commission review period; Ineffectiveness determination’’), which provides that the Commission may, by order, as provided in Rule 304(a)(1)(iii), declare an initial Form ATS–N filed by a Legacy NMS Stock ATS ineffective no later than 120 calendar days from the date of filing with the Commission, or, if applicable, the end of the extended review period. The Commission may extend the initial Form ATS–N review period for a Legacy NMS Stock ATS for: (1) An additional 120 calendar days if the initial 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 to state that it operates pursuant to ‘‘an initial operation report’’ rather than a ‘‘previously filed’’ initial operation report; and (4) adding to Rule 304(a)(1)(i) the term ‘‘initial’’ before Form ATS–N. We are also changing the term ‘‘in accordance with the instructions therein’’ to ‘‘in accordance with the conditions of this section’’ because we intended for NMS Stock ATSs to comply with all of the applicable provisions of Rule 304, including any procedural provisions, in addition to the Instructions on Form ATS–N. 425 See Proposal, supra note 2, at 81023. 426 See 17 CFR 242.301(b)(2). See supra notes 57– 63 and accompanying text. E:\FR\FM\07AUR2.SGM 07AUR2 38800 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Legacy NMS Stock ATS in writing within the initial 120-calendar 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 Legacy NMS Stock ATS agrees in writing. As discussed above, we received comments on the 120-calendar day review period and extended review periods that either support or do not object to the time frames proposed for both non-Legacy NMS Stock ATSs and Legacy NMS Stock ATSs.427 We continue to believe that 120 calendar days typically would provide the Commission adequate time to carry out its oversight functions with respect to the review of Forms ATS–N filed by Legacy NMS Stock ATSs, including its responsibilities to protect investors and maintain fair, orderly, and efficient markets, and that the extended review period for filings that are unusually lengthy or raise novel or complex issues will allow the Commission and its staff to conduct a thorough review and provide sufficient opportunity to discuss the filing with the NMS Stock ATS if necessary.428 We are adopting Rule 304(a)(1)(iv)(B), which was proposed as part of Rule 304(a)(1)(ii)(A), with modifications, consistent with and for the reasons discussed above with respect to the Commission review period for Form ATS–N filings by nonLegacy NMS Stock ATSs.429 One commenter suggests that if the Commission declares a Legacy NMS Stock ATS’s initial Form ATS–N ineffective, the NMS Stock ATS should 427 See supra notes 294–295 and accompanying text. daltland on DSKBBV9HB2PROD with RULES2 428 See Proposal, supra note 2, at 81023–24. See also supra notes 296–297 and accompanying text. 429 See supra Section IV.A.3. We added language to the proposed rule text, and created a separate paragraph (B) of Rule 304(a)(1)(iv) to address the Commission review period for Legacy NMS Stock ATS amendments including: (1) Specifying, consistent with the proposed rule text, that the Commission will declare ‘‘by order’’ an initial Form ATS–N ineffective and referencing the paragraphs under the rule that delineate the process pursuant to which the Commission will do so; (2) specifying that the Commission will declare an initial Form ATS–N ineffective no later than 120 calendar days from ‘‘the date of’’ filing with the Commission; (3) adding to the first sentence that the Commission may declare an initial Form ATS–N ineffective no later than 120 calendar days from the date of filing with the Commission, ‘‘or, if applicable, the end of the extended review period’’ to reduce ambiguity regarding the length of the Commission review period; (4) specifying that the Commission will notify the Legacy NMS Stock ATS of any extension of the review period within the 120 ‘‘calendar day’’ review period; (5) specifying that the Commission review period described in this section applies to ‘‘initial’’ Form ATS–N; and (6) using the defined term ‘‘Legacy NMS Stock ATS’’ throughout the paragraph. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 have the opportunity to amend its Form ATS–N so that the form would be effective before the NMS Stock ATS is required to cease operating.430 During the review process, we expect to engage in dialogue with the Legacy NMS Stock ATSs about their Form ATS–N disclosures. To the extent any deficiencies exist with the Form ATS– N disclosures, we expect that the Legacy NMS Stock ATSs typically will have an opportunity to understand and cure deficiencies in the filing before the Commission declares the Form ATS–N ineffective. If, after discussion with Commission staff, a Legacy NMS Stock ATS determines that it needs more time to address deficiencies in its initial Form ATS–N to avoid a Commission declaration of ineffectiveness, a Legacy NMS Stock ATS could consent to an extended Commission review period under Rule 304(a)(1)(iv)(B)(2). Prior to declaring a Legacy NMS Stock ATS’s Form ATS–N ineffective, the Commission will provide the ATS with notice and opportunity for hearing about the Commission’s intention to declare the form ineffective. After the Commission declares a Form ATS–N ineffective, however, the Legacy NMS Stock ATS will not have an opportunity to amend its Form ATS–N.431 Upon its Form ATS–N being declared ineffective, a Legacy NMS Stock ATS must cease operating pursuant to the Rule 3a1–1(a) exemption,432 and to the extent that the ATS does continue to operate, the Commission could find it to be an unregistered national securities exchange, and thus operating in violation of Section 5 of the Exchange Act. This commenter also states that a declaration of ineffectiveness should remain confidential until the Legacy NMS Stock ATS has amended the Form ATS–N and the amended form is ‘‘approved.’’ 433 We do not agree with the commenter’s suggestion. As discussed immediately above, there will be an opportunity during the review process for the ATS to supplement its filing. Once its initial Form ATS–N is declared ineffective, a Legacy NMS Stock ATS would not be able to operate pursuant to the Rule 3a1–1(a)(2) exemption and would not be able to amend its Form ATS–N after it is declared ineffective. It could file a new SIFMA Letter at 29. its initial Form ATS–N supersedes and replaces a Legacy NMS Stock ATS’s Form ATS for purposes of the exemption and the initial Form ATS–N can be amended, a Legacy NMS Stock ATS may not withdraw its initial Form ATS–N. See infra Section V.B.1. 432 See infra note 434. 433 See SIFMA Letter at 29. Form ATS–N, which the Commission will review without prejudice. We believe that it is in the public interest for the Commission to make an order of ineffectiveness for a Legacy NMS Stock ATS publicly available so that market participants have notice of the operating status of the NMS Stock ATS and can make appropriate adjustments to their routing strategies.434 Two commenters request clarification about whether amending an initial Form ATS–N as a result of a material change during the Commission review period would toll the review period, and suggest that the review period should not restart with every amendment.435 The filing of a Form ATS–N material amendment by a Legacy NMS Stock ATS, even if filed within 30 days of the expiration of the Commission’s extended review period, would not toll the review period for the Form ATS–N; initial Form ATS–N will become effective in accordance with the timeframes set forth in Rule 304(a)(1)(iv)(A). However, a change reflected in a material amendment that is filed within 30 days of the expiration of the Commission review period could not be implemented until the end of the Commission’s 30-calendar day review period pursuant to Rule 304(a)(2)(i)(A). c. Rule 304(a)(1)(iv)(C): Amendments to Initial Form ATS–N Rule 304(a)(1)(iv)(C) describes the process through which Legacy NMS Stock ATSs would amend their initial Form ATS–N during the Commission review period. We are adopting Rule 304(a)(1)(iv)(C) (‘‘Amendments to initial Form ATS–N’’), which requires that during the review period of the initial Form ATS–N filed by a Legacy NMS Stock ATS, the Legacy NMS Stock ATS shall amend its initial Form ATS–N pursuant to the requirements of Rule 304(a)(2)(i)(A) through (D). The adopted rule differs from the Proposal. As proposed, during the Commission review period for an initial Form ATS– N filed by a Legacy NMS Stock ATS, the Legacy NMS Stock ATS would have been required to continue operating pursuant to its existing Form ATS initial operation report and file amendments on Form ATS to provide notice of changes to the operations of its 430 See 431 Because PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 434 The Commission could also, in the case of a Legacy NMS Stock ATS, provide in its order of ineffectiveness a period of time for the NMS Stock ATS to wind down its operations. Because Commission orders of ineffectiveness would be made public, market participants would also have notice of any wind down period. 435 See BIDS Letter at 3; SIFMA Letter at 29. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 system.436 Because adopted Rule 304(a)(1)(iv)(A) states that a filed Form ATS–N will supersede and replace for purposes of the exemption a Legacy NMS Stock ATS’s previously-filed Form ATS, a Legacy NMS Stock ATS will no longer file Form ATS amendments once it files an initial Form ATS–N. Instead, a Legacy NMS Stock ATS will be required to update Form ATS–N during the Commission review period.437 If the ATS trades both NMS stocks and nonNMS stocks, such ATS would update its Form ATS with respect to its non-NMS stock operations. As discussed above, two commenters request that the Commission clarify the process for filing amendments during the Commission review period for Legacy NMS Stock ATSs 438 and suggest alternative approaches.439 The modifications in adopted Rule 304(a)(1)(iv)(C) are designed to address the comments requesting clarification about the process for reporting material changes during the time the Commission reviews the initial Form ATS–N of a Legacy NMS Stock ATS.440 Adopted Rule 304(a)(1)(iv)(C) also addresses the alternative approaches that the commenters suggest by requiring a Legacy NMS Stock ATS to update its Form ATS–N (rather than Form ATS), and operate pursuant to its Form ATS–N (rather than Form ATS).441 We believe that Rule 304(a)(1)(iv)(C) will relieve any unnecessary burden from maintaining two forms and ease the transition to the Form ATS–N regime. In addition, one commenter asked the Commission to adopt a process that would allow Legacy NMS Stock ATSs to introduce a new functionality or make changes during the 120-calendar day review period for the initial Form ATS– N.442 We agree with the commenter that Legacy NMS Stock ATSs should have a method to make changes to their operations and introduce new functionalities during the Commission review period. In accordance with Rule 304(a)(1)(iv)(C), during the Commission review period, the Legacy NMS Stock ATSs may make changes to the operations of the ATS and shall file 436 See Proposal, supra note 2, at 81023; see also 17 CFR 242.301(b)(2)(ii) through (iv). The Commission is modifying the proposed rule by creating a new paragraph (C) of Rule 304(a)(1)(iv), which provides a process for reporting changes during the Commission review period for Legacy NMS Stock ATSs. 437 See supra note 409. 438 See supra note 415 and accompanying text. 439 See supra notes 420 and 421 and accompanying text. 440 See supra note 415 and accompanying text. 441 See id. 442 See Liquidnet Letter at 4. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 amendments to reflect those changes pursuant to the requirements of Rule 304(a)(2)(i)(A) through (D). For example, during the period of Commission review of its initial Form ATS–N, a Legacy NMS Stock ATS may make a material change to its operations, provided that it files with the Commission an amendment to its Form ATS–N describing such change at least 30 calendar days prior to the date of implementation of such change, pursuant to Rule 304(a)(2)(i)(A). A change subject to a material amendment filed by a Legacy NMS Stock ATS may be implemented by the Legacy NMS Stock ATS after the expiration of the 30calendar day period provided by Rule 304(a)(2)(i)(A). Rule 304(a)(1)(iv)(C) provides that a Legacy NMS Stock ATS shall amend its initial Form ATS–N pursuant to the requirements of Rule 304(a)(2)(i)(A) through (D), which govern the process for filing amendments to Form ATS–N. Amendments will be subject to Commission review and could be declared ineffective under Rule 304(a)(2)(ii). Filed Form ATS–N amendments will not be made public until the Legacy NMS Stock ATS’s initial Form ATS–N becomes effective and publicly available. Once a Legacy NMS Stock ATS’s initial Form ATS–N becomes effective, the Commission will make public the Form ATS–N, as amended, which will incorporate any amendments that the Legacy NMS Stock ATS filed to the initial Form ATS–N during the Commission review period, except for any material amendments still subject to the 30-calendar day Commission review period.443 In connection with the changes described above, we are adopting Rule 304(a)(1)(iv)(C), which provides that a Legacy NMS Stock ATS shall amend its filed Form ATS–N during the Commission review pursuant to the requirements of Rule 304(a)(2)(i)(A) through (D). B. Rule 304(a)(2): Form ATS–N Amendments 1. Rule 304(a)(2)(i): Filing Requirements Rule 304(a)(2)(i) describes the types of amendments that NMS Stock ATSs would be required to file to their Form ATS–N. We proposed Rule 304(a)(2)(i) (‘‘Form ATS–N amendment filing requirements’’) to require an NMS Stock ATS to update information disclosed on Form ATS–N concerning its manner of operations and the ATS-related activities of its broker-dealer operator and its affiliates. Proposed Rule 443 See PO 00000 infra note 587 and accompanying text. Frm 00035 Fmt 4701 Sfmt 4700 38801 304(a)(2)(i) would have required 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 proposed Rule 304(a)(1)(i) or (a)(2)(i)(A) or (B) was inaccurate or incomplete when filed. We are adopting Rule 304(a)(2)(i) with modifications. As adopted, Rule 304(a)(2)(i) requires an NMS Stock ATS to amend a Form ATS–N in accordance with the conditions of Rule 304: 444 (1) At least 30 calendar days, except as provided by Rule 304(a)(2)(i)(D), 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) no later than 30 calendar days after the end of each calendar quarter to correct information that has become inaccurate or incomplete for any reason and was not required to be reported to the Commission as a Form ATS–N amendment pursuant to Rules 304(a)(2)(i)(A), (C), or (D); (3) promptly, to correct information in any previous disclosure on Form ATS–N, after 444 The proposed rule text required that an NMS Stock ATS amend ‘‘an effective’’ Form ATS–N in accordance with the ‘‘instructions therein.’’ We have modified this requirement in the Rule 304(a)(2)(i) as adopted by deleting the word ‘‘effective’’ because, as discussed in Section IV.A.4.c, we are adopting Rule 304(a)(1)(ii) and Rule 304(a)(1)(iv)(C), which allow an NMS Stock ATS to amend a Form ATS–N that has not yet become effective. In addition, we are replacing the rule text that stated that an NMS Stock ATS shall amend Form ATS–N in accordance with ‘‘the instructions therein’’ with text requiring an NMS Stock ATS to amend Form ATS–N in accordance with ‘‘the conditions of this section’’ because we intended for NMS Stock ATSs to comply with all of the applicable provisions of Rule 304, including any procedural provisions, in addition to the Instructions on Form ATS–N. We are also adding a separate amendment filing process for changes to information disclosed in Part III, Item 24 and 25 of Form ATS–N. See infra Sections IV.B.1.a.iii. Because in Rule 304(a)(2)(i)(D) we are specifying treatment for order display and fair access amendments, which generally would be material changes, we are also adding that Rule 304(a)(2)(i)(A) applies ‘‘except as provided by’’ Rule 304(a)(2)(i)(D). See infra Sections IV.B.1.a.iii. E:\FR\FM\07AUR2.SGM 07AUR2 38802 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations discovery that any material information previously filed on Form ATS–N was inaccurate or incomplete when filed; and (4) no later than seven calendar days after information required to be disclosed in Part III, Items 24 and 25 on Form ATS–N has become inaccurate or incomplete. Form ATS–N requires an NMS Stock ATS filing an amendment to ‘‘select one’’ of the four types of amendments; each amendment type is mutually exclusive.445 a. Material Changes daltland on DSKBBV9HB2PROD with RULES2 (i) Comments on Advance Notice We proposed that an NMS Stock ATS would be required to amend an effective Form ATS–N 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.446 In the Proposal, we stated that a 30-calendar day advance notice period would give the Commission the opportunity to clarify any questions that might arise or to take action, if appropriate, regarding problems that may impact market participants, before the NMS Stock ATS implemented the change.447 We also stated that such advance notice would allow market participants to evaluate the changes before implementation and assess the NMS Stock ATS as a continued, or potential, trading venue.448 We received several comments relating to the proposed 30-calendar day advance notice requirement for material changes in proposed Rule 304(a)(2)(i)(A). One commenter states that it supports the requirement that an NMS Stock ATS file a material amendment to Form ATS–N 30 days in advance of implementing a material change to the operations of the NMS Stock ATS, or the activities of the broker-dealer operator or its affiliates.449 Another commenter states that although advance notice of 20 calendar days before implementing a material change may be adequate, it believes that the 30calendar day advance notice requirement strikes an appropriate balance between an NMS Stock ATS’s ability to innovate, while also providing market participants and regulators adequate time to evaluate and respond to the intended change.450 cover page to Form ATS–N. proposed Rule 304(a)(2)(i)(A). 447 See Proposal, supra note 2, at 81027–28. 448 See id. at 81028. 449 See MFA/AIMA Letter at 4. 450 See HMA Letter at 9. Two commenters suggest that instead of requiring 30 calendar days of advance notice, the Commission should require NMS Stock ATSs to file an amendment on Form ATS–N at least 20 calendar days in advance of implementing a material change, which is the same as the current requirement for filing amendments to Form ATS.451 One commenter believes the 30-calendar day advance notice period would provide minimal benefit for the Commission because the Commission may at any time object to an NMS Stock ATS’s functionality or require clarification.452 This commenter also states that lengthening the advance notice period would create an unnecessary delay for NMS Stock ATSs in introducing new functionality and improving existing functionality and processes.453 The other commenter supports retaining the 20-calendar day advance notice period, stating that due to the breadth of disclosures on Form ATS–N and the fact that Form ATS–N disclosures will be made public, market participants will have access to a much greater level of information about ATS operations and changes than in the past.454 Another commenter states that a process for reviewing Form ATS–N amendments that extends beyond 30 days could have a significant impact on NMS Stock ATS operations, particularly with regard to the launch of new technologies.455 We are adopting Rule 304(a)(2)(i)(A) with modifications. We do not agree with commenters who believe that the current 20-calendar day advance notice period for material amendments to be filed on Form ATS would be more appropriate for NMS Stock ATSs than a 30-calendar day period. We believe that a 30 calendar day advance notice period for a material change would allow the Commission sufficient time to review the amendment and determine, if necessary, whether the filing should be declared ineffective. Although we agree with the commenter that states that market participants will have access to more information regarding NMS Stock ATS operations than in the past,456 given the complexity of NMS Stock ATSs today and the breadth of disclosures required on Form ATS–N, the 10 additional calendar days provides the Commission with the necessary time to review, and communicate with the NMS Stock ATS about, the Form ATS–N disclosures. We 445 See 451 See 446 See 452 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Liquidnet Letter at 4; KCG Letter at 5. Liquidnet Letter at 4. 453 See id. 454 See KCG Letter at 5. 455 See Fidelity Letter at 10. 456 See KCG Letter at 5. believe that the benefits of a longer advance notice period justify any potential burden on an NMS Stock ATS and any potential delay to the introduction of a new technology. We believe that a 30-calendar day review period will benefit subscribers and market participants as the time will allow the Commission to help ensure that disclosures made available to the public are complete and comprehensible. One commenter states that the advance notice requirement for material changes would be close to an ‘‘advance notice and approval’’ approach that may effectively result in a merit review process of NMS Stock ATS operations.457 As discussed above with respect to the Commission’s review of an initial Form ATS–N pursuant to Rule 304(a)(1)(iii),458 the Commission’s review of a Form ATS–N amendment does not weigh the merits of a change that is the subject of a Form ATS–N amendment. Rather, the Commission’s review is focused on the completeness and comprehensibility of the disclosures themselves. Another commenter expresses concern regarding situations in which it files a material amendment to Form ATS–N but needs to modify a functionality based on customer feedback or unanticipated workflows or scenarios.459 The commenter states that it would be beneficial for an NMS Stock ATS to have the flexibility to make modifications without delay, as long as any modifications were disclosed in advance to customers, would not adversely impact customers, and do not change the key elements of the new functionality that had been previously described in a Form ATS–N amendment.460 In addition to providing advance notice to the public about a potential material change to the NMS Stock ATS, the advance notice period allows the Commission to review the disclosures on Form ATS–N, and we believe that the review will help ensure that market participants receive complete and comprehensible disclosures. We are providing guidance for determining whether a change is material.461 In deciding whether to implement a modification to a functionality without delay in response to customer feedback or unanticipated workflows or scenarios, an NMS Stock ATS is required to determine if, in light of all relevant facts and circumstances, PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 457 See KCG Letter at 4. supra Section IV.A.3. 459 See Liquidnet Letter at 5. 460 See id. 461 See infra Section IV.B.1.a.ii. 458 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations the modification constitutes a material change. If the modification does not constitute a material change, the NMS Stock ATS could implement the change and file an updating amendment. However, if the modification is material, the NMS Stock ATS must file a material amendment and wait 30 calendar days before implementing the change.462 daltland on DSKBBV9HB2PROD with RULES2 (ii) Comments on Materiality In the Proposal, we stated our belief that a change to the operations of an NMS Stock ATS, or the disclosures regarding the activities of the brokerdealer 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.463 We continue to believe that this standard of materiality is appropriate. This standard of materiality is similar to materiality standards applied in the context of securities disclosures made pursuant to other rules.464 Some commenters agree that materiality is an appropriate standard for requiring advance notice.465 One commenter states that it agrees with the guidance regarding materiality set forth in the Proposal 466 but notes that facts and circumstances could determine whether the scenarios the Commission provided in the Proposal would likely constitute material changes, and states that although the scenarios set forth in the Proposal are helpful examples, they are broadly written.467 We continue to believe that scenarios that are particularly likely to implicate a material change would include: (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 462 In the event that it is appropriate for the Commission to exempt an NMS Stock ATS, conditionally or unconditionally, by Commission order, after application by the ATS, from the advance filing requirement, the Commission will be able to issue exemptions. See supra note 226 and accompanying text. 463 See Proposal, supra note 2, at 81028. 464 See id. at 81028 n.309. 465 See BIDS Letter at 3; SIFMA Letter at 30–31. 466 See infra note 468 and accompanying text. 467 See Liquidnet Letter at 4. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 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 subscribers’ confidential trading information.468 This list is not intended to be exhaustive, and we do not mean to imply that other changes to the operations of an NMS Stock ATS or the activities of the broker-dealer operator or its affiliates could not constitute material changes. Further, the NMS Stock ATS should generally consider whether the cumulative effect of a series of changes to the operations of the NMS Stock ATS or the activities of the broker-dealer operator or its affiliates with regard to the NMS Stock ATS is material. In addition, in determining whether a change is material, an ATS generally should consider whether such change would affect: (1) The competitive dynamics among ATS subscribers; (2) the execution quality or performance of the orders of any subscriber or category of subscribers; (3) the fees that any subscriber or category of subscribers would pay to access and/ or use the ATS; (4) the nature or composition of counter-parties with which any subscriber or category of subscribers interact; and (5) the relative speed of access or execution of any subscriber or group of subscribers. Some commenters ask that we provide greater clarity with respect to the types of changes that would be material changes.469 One commenter states that we should provide examples of types of changes that would not be considered material or would be excluded from being considered ‘‘material’’ given the impracticality of the 30-calendar day amendment period, and states that changes that are not subscriber-facing (e.g., changes to software, hardware, or other trading infrastructure) should not be deemed to be material changes.470 This commenter also states that NMS Stock ATSs should not be required to make a good-faith decision that a change is not material ‘‘only to be informed that the Commission has decided the change is material based on an unpublished standard.’’ 471 Another commenter states that the ‘‘standard’’ for determining material changes is one of the most difficult and potentially unworkable obligations under the Proposal.472 Another commenter states that the Commission should provide ‘‘clear and objective standards’’ on what triggers the requirement for an NMS Stock ATS to file a Form ATS–N amendment; this commenter states that if the Commission staff regards every change as material, then it means nothing to provide that amendments are required only for material changes.473 In addition, one commenter states that a clearer ‘‘definition’’ of what is considered a ‘‘material amendment’’ is critical to NMS Stock ATS broker-dealer operators due to the fact that NMS Stock ATSs must provide advance notice before implementing a material change.474 Another commenter observes that NMS Stock ATSs have operations, offerings, and interactions that regularly evolve and states that it is ‘‘essential’’ for NMS Stock ATSs to have ‘‘clear and specific expectations’’ on what types of changes would be deemed material and what level of detail should be included in the disclosures.475 Another commenter states that without descriptive and informative commentary from the Commission, there will be uncertainty and disparity as to which changes are actually filed by NMS Stock ATS operators as material changes, and suggests that the Commission provide a clear set of standards that would trigger a Form ATS–N amendment.476 We continue to believe that the Proposal’s guidance regarding whether a change is material is appropriate. In addition, we agree with the comment that a change that falls in one of the categories set forth in the Proposal, including a change to the manner in which the NMS Stock ATS displays orders or trading interest, such as the font size in which orders are displayed,477 would not be a material change if there would not be a substantial likelihood that a reasonable market participant would consider the change important when evaluating the NMS Stock ATS as a potential trading venue. We also do not believe that market participants should be concerned, as suggested by one commenter,478 that the Commission staff may regard ‘‘every change’’ as material and thereby render 472 See KCG Letter at 5. SIFMA Letter at 30–31. 474 See Fidelity Letter at 10. 475 See SIFMA Letter at 5. 476 See UBS Letter at 3. 477 See Liquidnet Letter at 4. 478 See SIFMA Letter at 30–31. 473 See 468 See Proposal, supra note 2, at 81028. BIDS Letter at 3–4; Fidelity Letter at 10; UBS Letter at 3; SIFMA Letter at 31. 470 See SIFMA Letter at 31. 471 See id. 469 See PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 38803 E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38804 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations meaningless the Commission’s materiality guidance. One commenter notes that NMS Stock ATSs may over-file material amendments to avoid risk, and that over-filing would cost substantial time and resources for NMS Stock ATSs, as well as burden the Commission staff that will be processing and reviewing the submissions.479 Another commenter expresses concern that the requirements for amending Form ATS–N would create a reporting regime that is ‘‘overly voluminous’’ and may be less effective for market participants seeking transparency.480 The Commission does not believe that its materiality standard will result in overreporting or underreporting of information by an NMS Stock ATS or create an overly time-consuming and voluminous Form ATS–N amendment filing process for NMS Stock ATSs or the Commission. The Commission recognizes that Form ATS–N will require an NMS Stock ATS to provide more information about its operations and ATS-related activities of the brokerdealer operator and its affiliates than Form ATS. The Commission also recognizes that the structure and complexities of NMS Stock ATS operations have significantly changed since Regulation ATS was adopted, and believes that these changes require enhanced disclosures for subscribers to better understand how NMS Stock ATSs operate. Given the technology advancements and the proclivity for NMS Stock ATSs to enhance the operations of their ATSs, and the fact that market participants search for the best trading venue for their orders, we believe that it is important for an NMS Stock ATS to amend its Form ATS–N as required to ensure disclosures on Form ATS–N are complete and comprehensible. Based on the Commission experience with Form ATS filings, we believe that we have provided reasonable estimates of the time and resources that NMS Stock ATSs will need to expend to ensure that disclosures on amended Form ATS–N are accurate, current, and complete. With regard to the commenter that asks for more specificity about the level of detail that amendments to Form ATS–N require,481 we have revised Parts II and III of adopted Form ATS– N to make requests more explicit and clear about information that would be responsive to form requirements, and in some questions, we are requiring NMS Stock ATSs to provide a ‘‘summary’’ or 479 See BIDS Letter at 3–4. STA Letter at 5. 481 See supra note 475 and accompanying text. 480 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 a ‘‘list’’ of information.482 These changes are designed to provide an NMS Stock ATS with more specificity about the level of detail that is required by the form and to alleviate the burden on NMS Stock ATSs. Further, we revised Form ATS–N to remove certain terms that commenters believe are vague and, in some cases, reduced the scope of information requested, and revised requests in adopted Form ATS–N to make more explicit what we meant by these terms. We believe that the requests in adopted Form ATS–N, as revised from the Proposal, provide NMS Stock ATSs the appropriate level of specificity for them to understand the information that is required by the form. In addition, the Commission will apply the same standard of review for declaring ineffective a Form ATS–N amendment as it will apply for declaring ineffective an initial Form ATS–N. One commenter states that it may be worth considering an approach that leverages the Regulation SCI framework of major changes determined to be material because such an approach would help ensure consistency between different Commission regulations that impact and govern ATSs.483 We are declining to adopt the commenter’s suggestion to apply the Regulation SCI framework for materiality. Regulation SCI does not define material systems changes but requires an SCI entity to establish written criteria for identifying a change to its SCI systems and the security of indirect SCI systems as material and to report to the Commission those changes the SCI entity identified as material in accordance with such criteria.484 Additionally, Form ATS–N is a public reporting form, and we believe the materiality guidance for material amendments to Form ATS–N is more appropriate than the Regulation SCI framework because it provides NMS Stock ATSs, market participants, and the Commission a clearer standard for determining whether a change would be material in the context of public reporting. In addition, one commenter states that because consumers of ATS disclosures vary widely in business models and sophistication, the Commission should not create ‘‘tiers’’ of materiality, and states that although the Commission has always understood that some ‘‘material’’ factors may be more or less important to different market participants, it should 482 See Part II, Items 4, 5, 6, and 7 of adopted Form ATS–N; Part III, Items 2, 3, 5, 6, 11, 13, and 19 of adopted Form ATS–N. 483 See UBS Letter at 3. 484 See Regulation SCI Adopting Release, supra note 76, 79 FR at 72341–42. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 not substitute its priorities and relative rankings of importance for those of diverse market participants.485 We are not adopting ‘‘tiers’’ of materiality or using our own priorities or other relative ‘‘rankings’’ to determine whether a change to an NMS Stock ATS’s operations is material. The materiality of any change is dependent on the specific facts and circumstances, and we believe that creating tiers of materiality would add unnecessary complexity and would be inconsistent with the Commission’s approach to materiality in other contexts. (iii) Order Display and Fair Access Amendments In the Proposal, we stated that if an NMS Stock ATS triggers the Rule 301(b)(3)(i) order display and execution access volume 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.486 We also stated in the Proposal that if an NMS Stock ATS triggers the Rule 301(b)(5)(i) fair access volume 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.487 Under Rule 304(a)(i)(2)(A), an NMS Stock ATS is required to file a material amendment at least 30 calendar days prior to the date of implementation of a material change. We continue to believe that it generally would be a material change to the operations of an NMS Stock ATS if the ATS were to exceed the order display and execution access threshold or become subject to the order display and execution access requirements under Rule 301(b)(3). Likewise, we continue to believe that it generally would be a material change to the operations of an NMS Stock ATS if the ATS were to exceed the fair access threshold or become subject to the order display and execution access requirements under Rule 301(b)(5). We recognize, however, that an NMS Stock ATS may not be able to comply with the 30-calendar day advance notice period for material amendments because the ATS may not be able to foresee when it will exceed the order display and execution access or fair access volume thresholds. To provide market participants with information about when an NMS Stock ATS becomes subject to, or no longer is subject to, the 485 See HMA Letter at 9–10. Proposal, supra note 2, at n.500. 487 See id. at n.506. 486 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations order display and execution access and fair access requirements, while not placing an undue burden on the NMS Stock ATS, we are adding to Rule 304(a)(2)(i) new subparagraph (D) to require an NMS Stock ATS to amend its Form ATS–N no later than seven calendar days after a change to the information required to be disclosed in Part III, Items 24 and 25 on Form ATS– N by an NMS Stock ATS (‘‘order display and fair access amendments’’).488 We believe that requiring NMS Stock ATSs to disclose changes to the information required to be disclosed in Part III, Items 24 and 25 of adopted Form ATS–N no later than seven calendar days from such changes will provide sufficient time for NMS Stock ATSs to comply with the requirement, while providing market participants with timely notice. daltland on DSKBBV9HB2PROD with RULES2 b. Updating Amendments We proposed in Rule 304(a)(2)(i)(B) that an NMS Stock ATS is required to update its 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. We are amending Rule 304(a)(2)(i)(B) to expand the circumstances under which ‘‘updating amendments’’ 489 would be filed. As proposed, NMS Stock ATSs would have been required to file updating amendments to correct information that has become ‘‘inaccurate.’’ 490 We are amending Rule 304(a)(2)(i)(B) also to require that NMS Stock ATSs file updating amendments to correct information that has become ‘‘incomplete.’’ Although we received no comments directly on proposed Rule 304(a)(2)(i)(B), one comment on the amendment process in general expresses the view that an ATS must have the ability to update its filing to address ambiguities in how its rules would apply to different scenarios or uses.491 The commenter also states that if an ATS determines that it can ‘‘make its disclosure clearer, add detail, or improve the organization of the 488 Because order display and fair access amendments generally would be material changes, we are also adding to Rule 304(a)(2)(i)(A) that such amendments must be filed under Rule 304(a)(2)(i)(A) ‘‘except as provided by’’ Rule 304(a)(2)(i)(D). 489 In the Proposal, we referred to these amendments as ‘‘periodic amendments.’’ See Proposal, supra note 2, at 81029. We believe that calling these amendments ‘‘updating amendments’’ reduces any potential ambiguity regarding the timing and purpose of these amendments, which is discussed below. 490 Proposed Rule 304(a)(2)(i)(B). 491 See Liquidnet Letter at 7. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 disclosure, the ATS should be encouraged to do so.’’ 492 We are modifying proposed Rule 304(a)(2)(i)(B) to specify that an NMS Stock ATS will be required to file an updating amendment to revise disclosures that become ‘‘inaccurate or incomplete.’’ Although, as proposed, Rule 304(a)(2)(i) did not explicitly require an NMS Stock ATS to disclose changes (other than material changes under Rule 304(a)(2)(i)(A)) that would render its Form ATS–N incomplete, the Commission stated its intent for Rule 304(a)(2)(i)(B) to provide a ‘‘a mechanism for NMS Stock ATSs to disclose changes to their operations or to update information that does not constitute a material change.’’ 493 We continue to believe that it is important that market participants have access to accurate, current, and complete disclosures on Form ATS–N. Accordingly, the Commission is requiring that an NMS Stock ATS disclose, no later than 30 calendar days after the end of the calendar quarter, changes that would render its Form ATS–N inaccurate or incomplete, but would not be required to be filed as correcting, material, or order display and fair access amendments. We also are revising Rule 304(a)(2)(i)(B) to provide that an updating amendment shall be filed ‘‘no later than’’ 30 calendar days after the end of the calendar quarter. This change allows, but does not require, an NMS Stock ATS to file amendments required by Rule 304(a)(2)(i)(B) earlier than the 30 calendar day window at the end of each calendar quarter. In addition, proposed Rule 304(a)(2)(i)(B) would have required an NMS Stock ATS to file an amendment to correct ‘‘any other’’ information that has not been previously reported as a Form ATS–N amendment. We believe that, as proposed, the phrase ‘‘any other’’ information could be vague and therefore, it could have been unclear when it would be permitted for an NMS Stock ATS to file an updating amendment, as opposed to a material or correcting amendment. To distinguish between what information may be filed pursuant to Rule 304(a)(2)(i)(B), rather than as a material amendment under Rule 304(a)(2)(i)(A), correcting amendment under Rule 304(a)(2)(i)(C), or order display and fair access amendment under Rule 304(a)(2)(i)(D), we are making a change to provide that updating amendments shall be filed to correct information that ‘‘was not required to be reported to the 492 See 493 See PO 00000 id. Proposal, supra note 2, at 81029. Frm 00039 Fmt 4701 Sfmt 4700 38805 Commission as a Form ATS–N amendment pursuant to paragraphs 304(a)(2)(i)(A), (C), or (D) of this section.’’ We believe that requiring NMS Stock ATSs to correct information that has become inaccurate or incomplete for any reason (and was not required to be reported to the Commission as a material amendment, correcting, or order display and fair access amendment) no later than 30 calendar days after the end of each calendar quarter would tailor the reporting burden for filing amendments 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. For example, if an NMS Stock ATS that publishes or otherwise provides to one or more subscribers or persons aggregate platform-wide order flow and execution statistics of the NMS Stock ATS that are not otherwise required disclosures under Rule 605 of Regulation NMS, the NMS Stock ATS could, depending on the facts and circumstances, disclose changes to such statistics in a updating amendment no later than 30 calendar days after the end of the calendar quarter in which the changes occurred.494 We continue to believe that allowing NMS Stock ATSs to implement nonmaterial changes immediately would allow NMS Stock ATSs to make updating changes to their operations and disclosures without delay, while at the same time provide disclosure about those changes to market participants and the Commission within an appropriate time frame. Updating amendments, like all amendments to Form ATS–N, will be subject to Commission review pursuant to Rule 304(a)(2)(ii) and could be declared ineffective if the Commission makes the required findings. c. Correcting Amendments We proposed in Rule 304(a)(2)(i)(C) to require an NMS Stock ATS to amend its Form ATS–N promptly to correct information in any previous disclosure on Form ATS–N after discovery that any information previously filed on Form ATS–N was inaccurate or incomplete when filed. We proposed that such amendments will be subject to 494 See Proposal, supra note 2 at 81084 (stating that to comply with the requirements of Part IV, Item 16 (adopted Part III, Item 26), an NMS Stock ATS would file a Form ATS–N amendment within 30 calendar days after the end of each calendar quarter). See also infra Section V.D.26.a. E:\FR\FM\07AUR2.SGM 07AUR2 38806 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Commission review pursuant to Rule 304(a)(2)(ii).495 We received one comment regarding proposed Rule 304(a)(2)(i)(C) that supports allowing an NMS Stock ATS to file a Form ATS–N amendment to correct information in a previous Form ATS–N disclosure that was inaccurate or incomplete when filed.496 Another commenter is generally concerned about the amount and types of amendment filings required under the Proposal, and the burden that filing such amendments could impose on NMS Stock ATSs.497 To address this concern, we are modifying proposed Rule 304(a)(2)(i)(C) to require that NMS Stock ATSs file correcting amendments after discovery that any information previously filed on Form ATS–N was materially inaccurate or incomplete when filed.498 We believe that it is appropriate to require NMS Stock ATSs to promptly file an amendment only when the information previously filed was materially inaccurate or incomplete because such information is likely to be important to current subscribers and market participants and could impact their decision to use the NMS Stock ATS’s services. Corrections of immaterial inaccuracies and completeness can be made by updating amendments. In determining whether previously filed information is materially inaccurate or incomplete, an NMS Stock ATS should consider the factors it would consider in determining 495 See Proposed Rule 304(a)(2)(ii). Liquidnet Letter at 7. 497 See Fidelity Letter at 10. 498 In addition, we are adopting Rule 304(a)(2)(i)(C) with technical modifications. The rule text of proposed Rule 304(a)(2)(i)(C) stated that an NMS Stock ATS must amend Form ATS–N upon discovery that any information ‘‘filed under paragraphs (a)(1)(i) or (a)(2)(i)(A) or (B)’’ was inaccurate or incomplete when filed. This inadvertently excluded applying the requirement to inaccurate or incomplete information filed under paragraph (a)(2)(i)(C). We believe that deleting the cross-references and simply stating that an NMS Stock ATS must file an amendment when ‘‘any previous disclosure on Form ATS–N’’ was materially inaccurate or incomplete when filed would require that an NMS Stock ATS correct materially incomplete or inaccurate information on initial Form ATS–N and any amendment thereto (including any amendment previously required by Rule 304(a)(2)(C)). We are making this change to correct this error, and to specify that an NMS Stock ATS would have an obligation to promptly correct a materially inaccurate or incomplete disclosure on any initial Form ATS–N or amendment thereto. Generally, we will consider a correcting amendment to be filed ‘‘promptly,’’ if it is filed within five business days after discovery that any material information previously filed on Form ATS–N was materially inaccurate or incomplete when filed. In addition, we are making a technical change by defining the type of amendment described in Rule 304(a)(2)(i)(C) as a ‘‘correcting amendment.’’ daltland on DSKBBV9HB2PROD with RULES2 496 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 whether a change would require a material amendment.499 2. Rule 304(a)(2)(ii): Commission Review Period; Ineffectiveness Determination Rule 304(a)(2)(ii) provides the process through which the Commission would review and declare Form ATS–N amendments to Form ATS–N. Proposed Rule 304(a)(2)(ii) (‘‘Commission review period; Ineffectiveness determination’’) provided 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. The proposed rule also provided that 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. Under proposed Rule 304(a)(2)(ii), the NMS Stock ATS could have, however, continued to operate pursuant to a Form ATS–N that was previously declared effective. In addition, the proposed rule provided that 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. We are adopting Rule 304(a)(2)(ii) with modifications to provide that the Commission will, by order, declare ineffective any Form ATS–N amendment filed pursuant to Rule 304(a)(2)(i)(A) through (D), no later than 30 calendar days from filing with the Commission, if the Commission finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors.500 499 See supra Section IV.B.1.a. are also making several other changes to Rule 304(a)(2)(ii): (1) Reordering some of the language of Rule 304(a)(2)(ii) from the proposed rule text; (2) changing the heading of the paragraph from ‘‘Commission review period’’ to ‘‘Commission review period; Ineffectiveness determination’’; (3) revising the proposed rule text that stated ‘‘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’’ to simply state ‘‘A Form ATS–N amendment declared ineffective shall prohibit the NMS Stock ATS from operating pursuant to the ineffective Form ATS–N amendment’’; (4) deleting references to the defined term ‘‘Form ATS–N Amendment’’; (5) stating that a Form ATS–N amendment declared ineffective ‘‘does’’ not (rather than ‘‘would’’ not) prevent the NMS Stock ATS from subsequently filing a new Form ATS–N 500 We PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 We stated in the Proposal that the Commission could declare ineffective a Form ATS–N amendment if one or more disclosures on an amended Form ATS– N are materially deficient with respect to its accuracy, currency, completeness, or fair presentation.501 We also stated that it could 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 disclosures reveal that, under a ‘‘red flag’’ review, the activity described would not comply with the federal securities laws or the rules or regulations thereunder, including Regulation ATS.502 We further stated that like the review of an initial Form ATS–N, the Commission’s review of a Form ATS–N amendment would focus on the disclosures made on Form ATS– N, and that 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.503 As discussed above in the context of initial Form ATS–N filings, we are not performing a review of the merits of the disclosures on Form ATS–N amendments, such as determining the strengths and weaknesses of the trading platform or a protocol offered by the NMS Stock ATS. The Commission also is not making findings regarding whether the means by which orders will interact on the trading platform are, or are not, consistent with the Exchange Act, as is the case with respect to certain SRO rule filings.504 As with respect to initial filings of Form ATS–N, the Commission could declare a Form ATS–N amendment ineffective if the Commission finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors. The Commission notes that this process will be similar to the review process for initial Form ATS–N. Accordingly, the examples provided above to illustrate scenarios that would cause the Commission to declare an initial Form ATS–N ineffective (e.g., materially deficient disclosures with respect to completeness or comprehensibility) would equally apply in the context of a Form ATS–N amendment filed with the Commission.505 amendment; and (6) referring to amendments filed pursuant to Rule 304(a)(2)(i)(A) ‘‘through (D)’’. 501 See Proposal, supra note 2, at 81029. 502 See id. at 81030. 503 See id. 504 See supra note 359 and accompanying text. 505 See supra Section IV.A.3. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations We received comments regarding the proposed process for reviewing Form ATS–N amendments. One commenter expresses support for the proposal not to require the Commission to affirmatively declare material amendments effective, and states that such a requirement might serve as an impediment to NMS Stock ATSs seeking to introduce a new functionality, would unnecessarily burden Commission staff, and would discourage NMS Stock ATSs from filing changes more than 30 days in advance of implementation.506 This commenter expresses concern that requiring preapproval of changes to Form ATS–N would inhibit informal communication between an NMS Stock ATS and the Commission staff in cases where an ATS may otherwise be willing to share information with the Commission staff in advance of filing.507 We are not adopting a rule to declare a Form ATS– N amendment effective. The Commission’s oversight function of NMS Stock ATSs will be preserved because the Commission will be able to declare ineffective a Form ATS–N if it finds that such action is necessary or appropriate in the public interest and consistent with the protection of investors. This process will be similar to the review process for initial Form ATS–N.508 Accordingly, the examples provided above to illustrate scenarios that would cause the Commission to declare an initial Form ATS–N ineffective (e.g., materially deficient disclosures with respect to completeness or comprehensibility) would equally apply in the context of a Form ATS–N amendment filed with the Commission. One commenter does not object to the Commission having the ability to declare a material amendment ineffective, but hopes the Commission would identify concerns as soon as practical during the review period so an NMS Stock ATS could address any issues.509 The Commission intends to engage in dialogue with an NMS Stock ATS regarding its Form ATS–N amendment disclosures and communicate to the NMS Stock ATS any concerns so the ATS may amend its disclosures, as appropriate or necessary to avoid an ineffective declaration. Such dialogue will benefit market participants by creating more effective disclosures in Form ATS–N amendments that will help enable them to make more informed routing 506 See Liquidnet Letter at 5–6. id. at 6. 508 See supra Section IV.A.3. 509 See Liquidnet Letter at 5. 507 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 decisions. To facilitate this, we are adopting a process for an NMS Stock ATS to file, during the Commission’s review of a material amendment, a correcting or updating amendment pursuant to Rule 304(a)(2)(i)(B) through (C) to the material amendment.510 This process is designed to promote transparency and facilitate complete and comprehensible disclosure. Any updating or correcting amendments to a material amendment filed during the Commission review period will be subject to Commission review under Rule 304(a)(2)(ii).511 Although a correcting or updating amendment is not subject to an implementation delay, Rule 304(a)(2)(i)(A) requires that the NMS Stock ATS delay the implementation of the change subject to the material amendment until 30 calendar days following filing of the material amendment; therefore, any correcting or updating amendment that amends a material amendment during the Commission review could not be implemented before the material amendment that it is amending is effective. In contrast, we believe a material change to a Form ATS–N material amendment could reflect a significant change to the intended operations of the ATS or the ATS-related activities of its broker-dealer operator, which would necessitate a full review period. Therefore, we are modifying Rule 304(a)(a)(2)(ii) to specify that an NMS Stock ATS making material changes to a filed material amendment during the Commission review period shall withdraw its filed material amendment and, if the NMS Stock ATS chooses to pursue the change, must file a new 510 Although we acknowledged in the Proposal that the Commission staff would likely engage in discussions with NMS Stock ATSs during the review period, we did not propose a process for NMS Stock ATSs to amend a material amendment during the Commission review period. See Proposal, supra note 2, at 81035. The adopted process is similar to the process we are adopting to allow non-Legacy NMS Stock ATSs to amend initial Form ATS–N during the Commission review period. See supra Section IV.A.2. 511 Rule 304(a)(2)(ii) states that the Commission will, by order, declare ineffective any Form ATS– N amendment no later than 30 calendar days from filing of such amendment with the Commission. We will have 30 calendar days to declare any amendment ineffective, including updating or correcting amendments to material amendments that are filed during the Commission review period. For example, if an NMS Stock ATS files an updating or correcting amendment to a material amendment on calendar day 25 of the Commission review period of the material amendment, the updating or correcting amendment could be declared ineffective by the Commission up to 25 calendar days after the Commission review period for the material amendment expires—until the Commission’s 30-calendar day review period for the updating or correcting amendment has expired. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 38807 material amendment pursuant to Rule 304(a)(2)(i)(A). Another commenter suggests that similar to the current process for reviewing Form ATS amendments, the Commission should require advanced notice of material changes, but not impose a review process for ineffectiveness.512 The commenter states that requiring NMS Stock ATSs to provide advance notice and receive Commission ‘‘approval’’ before an NMS Stock ATS can implement a material change could incent an NMS Stock ATS to err on the side of submitting ‘‘vague’’ disclosures, which are less helpful to market participants, so that it has ‘‘sufficient operational flexibility’’ to make future changes, or could stifle ATS innovation as NMS Stock ATSs may be reluctant to make changes that would be subject to the ‘‘approval/ disapproval’’ review process.513 The commenter further states that NMS Stock ATS operators should be allowed to furnish universal operations and systems material via a web link, and updates to such materials should not be subject to advance notice and Commission review because requiring an NMS Stock ATS to provide advance notice of changes to operations and systems ‘‘would cause lengthy delays and stifle NMS Stock ATS technical innovation.’’ 514 Another commenter observes that ‘‘approval’’ of Form ATS– N amendments ‘‘would require positive response from the Commission instead of the current passive approval after a certain period of time.’’ 515 We are declining to adopt the commenter’s suggestion to not review Form ATS–N amendments for ineffectiveness because the review process allows the Commission to better fulfill its oversight responsibilities of NMS Stock ATSs and to help ensure that Form ATS–N amendments contain disclosures that are complete and comprehensible. We also disagree with the commenter’s view that the Commission review process will incentivize NMS Stock ATSs to make vague disclosures to allow for operational flexibility. Rather, we believe that without a process to declare ineffective a Form ATS–N amendment, an NMS Stock ATS may have less incentive to provide complete and comprehensible disclosures. While the review process for Form ATS–N amendments may have some 512 See KCG Letter at 5. id. 514 See id. at 7–8. 515 See PDQ Letter at 1. 513 See E:\FR\FM\07AUR2.SGM 07AUR2 38808 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 impact on innovation by ATSs,516 under the rules adopted today and consistent with proposed Rule 304(a)(2)(ii), the Commission will not be declaring Form ATS–N amendments ‘‘effective;’’ if the 30-calendar day review period elapses and the Commission has not declared an amendment ineffective, the NMS Stock ATS may commence operating pursuant to the Form ATS–N amendment. Further, Form ATS–N amendments will not be approved by the Commission and the amendment review process, like the review process for initial Form ATS–N, will not be a merit-based review, but rather will focus on the completeness and comprehensibility of the disclosures. We are declining to adopt the commenter’s suggestion to allow an NMS Stock ATS to change its operations and systems without a review process and by furnishing a web link.517 We believe that it is important that subscribers have advance notice of material changes and that the Commission has the opportunity to review material amendments to the Form ATS–N disclosures. If the NMS Stock ATS makes changes that are not material, the NMS Stock ATS can implement such changes and report them by way of an updating amendment.518 Other commenters express the same concerns with regard to the review process for Form ATS–N amendments as they did for the review process for initial Form ATS–N. These comments are addressed above.519 With respect to determining whether to declare an amendment to Form ATS–N ineffective, the Commission will apply the same standard of review that will be applied to initial filings. C. Rule 304(a)(3): Notice of Cessation Rule 304(a)(3) provides the requirement for NMS Stock ATSs to provide notice if they plan to cease to operate. Proposed Rule 304(a)(3) (‘‘Notice of cessation’’) provided that 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. Proposed Rule 304(a)(3) also provided that a notice of cessation shall cause the Form ATS–N to become ineffective on the date designated by the NMS Stock ATS. We received no comments regarding proposed Rule 304(a)(3). We believe that 516 See infra Section X.C. supra note 514 and accompanying text. 518 See Rule 304(a)(2)(i)(B). 519 Several commenters address our proposed review process for all Form ATS–N filings, rather than specifically addressing the review of Form ATS–N amendments. See supra Section IV.A.3. 517 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 10 business days is a reasonable period within which an NMS Stock ATS will provide notice that it intends to cease operations and will give market participants sufficient time to seek alternative routing destinations for their orders.520 We are adopting Rule 304(a)(3) with non-substantive modifications.521 D. Rule 304(a)(4): Suspension, Limitation, or Revocation of the Exemption From the Definition of Exchange Paragraph (i) of proposed Rule 304(a)(4) (‘‘Suspension, limitation, and revocation of the exemption from the definition of exchange’’) provided 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 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). Further, proposed Rule 304(a)(4)(ii) provided 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 an ‘‘exchange’’ pursuant to Rule 3a1–1(a)(2). In addition, proposed Rule 304(a)(4)(i) provided that if an NMS Stock ATS’s exemption is limited pursuant to proposed Rule 304(a)(4)(i), the NMS Stock ATS shall be prohibited from operating in a manner otherwise inconsistent with the terms and conditions of the Commission order. We are adopting Rule 304(a)(4) with minor modifications.522 We received four comments regarding proposed Rule 304(a)(4).523 One commenter supports the Commission’s proposal to introduce a mechanism for the suspension for a period not 520 After ceasing operations, the broker-dealer operator of an NMS Stock ATS will be required to file Form ATS–R within 10 calendar days as required by Rule 301(b)(9) of Regulation ATS. 521 As proposed, Rule 304(a)(3) states that an NMS Stock ATS shall notice its cessation at least 10 business days ‘‘before’’ the date it ‘‘ceases’’ to operate. As adopted, Rule 304(a)(3) states that an NMS Stock ATS shall notice its cessation at least 10 business days ‘‘prior to the date’’ it ‘‘will cease’’ to operate. We believe these changes enhance the readability of the rule. 522 We made technical, non-substantive changes from the proposed rule by: (1) Replacing references to an ‘‘NMS Stock ATS’s exemption’’ to ‘‘the exemption for an NMS Stock ATS’’ throughout Rule 304(a)(4); and (2) deleting the reference to ‘‘the definition of an ‘exchange’ ’’ in Rule 304(a)(4). 523 See CFA Institute Letter at 4; Liquidnet Letter at 7–8; HMA Letter at 5–6; Better Markets Letter at 7. PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 exceeding 12 months, limitation, or revocation of the exemption provided under Rule 3a1–1(a)(2) because it believes that there must be a clear mechanism for removing non-compliant trading venues from ‘‘the exchangewaiver regime rather than relying on more general enforcement powers.’’ 524 This commenter asserts that considering whether an NMS Stock ATS has accurately and timely filed Form ATS– N in determining whether the ATS qualifies for an exemption ‘‘is necessary to ensure the credibility of these public disclosure documents and the accountability of the entities seeking the exemption.’’ 525 In addition, one commenter states that the Commission ‘‘should be empowered to suspend, limit, or revoke an ATS’s exemption from the definition of an ‘exchange’, irrespective of the assets traded on the ATS.’’ 526 We have determined to apply the additional conditions to the Exchange Act Rule 3a1–1(a) exemption, including Rule 304(a)(4), only to NMS Stock ATSs 527 and are not adopting Rule 304(a)(4) to apply to non-NMS Stock ATSs at this time. We will consider the comment if we propose in the future to apply Rule 304, including Rule 304(a)(4), to nonNMS Stock ATSs. We intend to monitor the implementation of Rule 304 to NMS Stock ATSs, and should we decide to take further action with applying Rule 304, including Rule 304(a)(4), to nonNMS Stock ATSs, we would do so in a separate rulemaking and take into account our experience with Rule 304 and NMS Stock ATSs. One commenter is concerned that the process to suspend, limit, or revoke an NMS Stock ATS’s exemption provided under Rule 3a1–1(a)(2) could result in a sanction (such as suspension or revocation of its exemption) that is ‘‘disproportionate to the alleged violation,’’ and asks the Commission to reconsider such requirement.528 The Rule 304(a)(4) process for the suspension, limitation, or revocation of the Rule 3a1–1(a)(2) exemption is designed in part to help prevent failure by an NMS Stock ATS to adhere to the conditions for the exemption. The conditions of the Rule 3a1–1(a) exemption are designed to, among other things, protect investors.529 We believe 524 See CFA Institute Letter at 4. id. 526 See HMA Letter at 5. 527 See supra Section III.A.2. 528 See Liquidnet Letter at 7–8. 529 In the Regulation ATS Adopting Release, we stated our belief that the enhanced regulation of alternative trading systems that choose to remain registered broker-dealers under Regulation ATS provides more protection for the investors who use 525 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 that it is important to provide a process tailored to the regulatory structure for NMS Stock ATSs for the Commission to use in the event an NMS Stock ATS does not meet the conditions of the exemption as investor protections may be at risk. As proposed, prior to issuing an order suspending, limiting, or revoking an NMS Stock ATS’s exemption pursuant to 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 Rule 304(a)(4)(i), 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. We believe that this process will provide an NMS Stock ATS with adequate opportunity to respond before Commission action, and will provide the Commission with an appropriate tool, subject to notice and hearing safeguards, to protect the public from an NMS Stock ATS that fails to comply with Regulation ATS or otherwise violates any provision of the federal securities laws. The exemption from the definition of ‘‘exchange’’ provided under Rule 3a1– 1(a)(2) is conditional upon initial and ongoing compliance with Regulation ATS. As a result of this rulemaking, the conditions of the Rule 3a1–1(a)(2) exemption are being expanded for NMS Stock ATSs. An ATS that fails to comply with those conditions would fall outside the scope of the exemption. We believe 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 provided under Rule 3a1– 1(a)(2) if the NMS Stock ATS is operating or has operated in a manner such that the exemption for the NMS Stock ATS is not necessary or appropriate in the public interest, or is inconsistent with the protection of investors,530 and are adopting Rule 304(a)(4) substantially as proposed.531 We believe 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, we believe that revocation of the exemption would be appropriate upon the existence of a problem involving the ATS that these systems. See Regulation ATS Adopting Release, supra note 3, at 70857. 530 See Proposal, supra note 2, at 81032. 531 See supra note 522 and accompanying text. In the Proposal, we provided examples of when it would be appropriate to provide for the suspension, limitation, or revocation of an NMS Stock ATS’s exemption pursuant to Rule 3a1–1(a)(2). See Proposal, supra note 2 at 81032. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 significantly impacts the public interest and the protection of investors. Pursuant to Rule 304(a)(4)(ii), an NMS Stock ATS whose exemption has been suspended or revoked would be prohibited from operating pursuant to the Rule 3a1–1(a)(2) exemption; if an NMS Stock ATS were to continue to engage in Rule 3b–16 activity in NMS stocks without the exemption, it would be operating as an unregistered national securities exchange because it would no longer qualify for the exemption.532 If an NMS Stock ATS’s exemption were limited pursuant to Rule 304(a)(4)(i), 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 operated in a manner inconsistent with the terms and conditions of the order, it 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. We believe that the process for suspending, limiting, or revoking an NMS Stock ATS’s exemption, if necessary or appropriate in the public interest, and consistent with the protection of investors, will protect investors in the event of non-compliance by an NMS Stock ATS with the conditions with which the NMS Stock ATS must adhere to continue to qualify for the exemption. We also continue to believe that providing a process by which the Commission can determine to suspend, limit, or revoke an NMS Stock ATS’s exemption will provide appropriate flexibility to address the specific facts and circumstances of an NMS Stock ATS’s failure to comply with Regulation ATS.533 This process will also allow the 532 If the Commission revoked or suspended the exemption of an NMS Stock ATS, the Commission could provide in its order a period of time for the NMS Stock ATS to wind down its operations. Because Commission orders revoking or suspending the exemption would be made public, market participants would also have notice of any wind down period. Additionally, if the Commission revoked the exemption of an NMS Stock ATS and the entity wished to continue operations, the entity could do so only if it were registered as a national securities exchange pursuant to Section 6 of the Exchange Act or were 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 entity would not be prohibited from filing a new Form ATS–N, pursuant to Rule 304(a)(1)(i). 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. 533 See Proposal, supra note 2, at 81033. PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 38809 Commission to consider the nature of the violation of federal securities laws and the potential harm to investors as a result of the non-compliance or violation. The process for the Commission to limit the exemption in Rule 3a1–1(a)(2) will allow flexibility to address specific disclosures or activities that are the cause of the non-compliance with Regulation ATS or that violate federal securities laws.534 We believe 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 operating as an ATS.535 By comparison, we believe 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.536 Additionally, we believe that it could 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 NMS Stock ATS appears to be violating, or to have violated, the antifraud provisions of the federal securities laws.537 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.538 Another commenter requests clarification regarding the process for revoking, suspending, or limiting an NMS Stock ATS’s exemption. The commenter asks the Commission to clarify how an ATS could reestablish its exemption provided under Rule 3a1– 1(a)(2) after it has been revoked. This commenter also questions whether there 534 See id. If the Commission finds 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 ATS to continue to operate as disclosed on its Form ATS–N, but prohibit the ATS from engaging in the undisclosed activity until the ATS properly amends its Form ATS–N in accordance with Rule 304(a)(2). Or, if the Commission finds that an NMS Stock ATS offers 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 ATS to continue to operate but prohibit the ATS from offering the order type, if it finds that doing so is necessary or appropriate in the public interest, and consistent with the protection of investors. 535 See Proposal, supra note 2, at 81033. 536 See id. 537 See id. 538 See id. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38810 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations will be penalties for non-compliance or whether the Commission’s deliberations on the re-submitted Form ATS–N would in any way differ from those on initial Form ATS–N.539 An NMS Stock ATS whose exemption has been revoked cannot operate pursuant to the Rule 3a1–1(a)(2) exemption, and if such entity were to continue to engage in Rule 3b–16 activity, it could be determined to be an unregistered national securities exchange in violation of Section 5 of the Exchange Act.540 To operate as an NMS Stock ATS after revocation, the entity would need to file a new initial Form ATS–N with the Commission. The Commission would review the Form ATS–N without prejudice and would not apply a different standard than it would to any other entity filing Form ATS–N pursuant to Rule 304(a)(1). One commenter also requests clarification regarding the procedure that the Commission will follow for an NMS Stock ATS that has had its exemption suspended for the maximum 12 months.541 Upon the expiration of the suspension period, an NMS Stock ATS could operate pursuant to its initial Form ATS–N, as long as its exemption is not otherwise limited or revoked and the NMS Stock ATS is otherwise in compliance with Rule 304. The suspension period is not to exceed 12 months, and the Commission could order a suspension period of less than 12 months. During the suspension period, the Commission could reevaluate the status of the NMS Stock ATS’s exemption and determine, pursuant to Rule 304(a)(4), to revoke or limit the Rule 3a1–1(a) 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. An additional commenter questions what action the Commission would take in the event that there are ‘‘ambiguous, seemingly incomplete, or otherwise questionable disclosures that do not rise to the level of material deficiency,’’ and suggests that the Commission apply ‘‘intermediate’’ sanctions, such as monetary fines and the temporary suspension of the right to operate as an NMS Stock ATS without notice or hearing.542 The purpose of Rule 304(a)(4) is to prohibit the NMS Stock ATSs from operating in a manner inconsistent with the Rule 3a1–1(a)(2) exemption, which we believe is 539 See CFA Institute Letter at 5. infra note 532 and accompanying text. 541 See CFA Institute Letter at 5. 542 See Better Markets Letter at 7. 540 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 necessary or appropriate in the public interest and consistent with the protection of investors. We do not believe it is appropriate to impose monetary fines or temporarily suspend an NMS Stock ATS’s exemption without such due process, as suggested by the commenter. Any suspension, limitation, or revocation of an NMS Stock ATS’s exemption provided by Rule 3a1–1(a)(2) would not preclude the Commission from using its enforcement authority if the NMS Stock ATS fails to comply with the federal securities laws.543 E. Rule 304(b): Public Disclosure of Form ATS–N and Related Commission Orders 1. Rule 304(b)(1): Form ATS–N ‘‘Report’’ Rule 304(b)(1) provides that every Form ATS–N would constitute a report under the Exchange Act. Paragraph (1) of proposed Rule 304(b) (‘‘Public disclosures’’) provided 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. Proposed Rule 304(b)(1) is nearly identical to current Rule 301(b)(2)(vi),544 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.545 543 See generally Exchange Act Section 21C. The use of the 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 enforcement authority, such as, for example, pursuant to Sections 10(b), 15(b)(4), and 15(c) (15 U.S.C. 78(j)(b), 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 the exemption. For example, if an NMS Stock ATS failed to file a Form ATS–N amendment to disclose material changes to the operation of the ATS, the Commission could invoke the process to suspend, limit, or revoke the ATS’s exemption, but would not be precluded from bringing an action against the broker-dealer operator of the ATS for failing to comply with Rule 304(a)(2), or violating the antifraud provisions of the federal securities laws. 544 See 17 CFR 301(b)(2)(vi). 545 15 U.S.C. 78k–1, 78q(a), 78r(a), and 78ff(a). See 17 CFR 242.301(b)(2)(vi). Section 17(a) of the Exchange Act imposes recordkeeping requirements PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 We received two comments on proposed Rule 304(b)(1).546 One commenter supports that Form ATS–N shall constitute a ‘‘report’’ within the meaning of applicable provisions of the Exchange Act.547 The other commenter expresses concern regarding the potential liability and consequences of the provision that Form ATS–N would constitute a ‘‘report’’ within the meaning of Sections 11A, 17(a), 18(a), and 32(a) of the Exchange Act in light of the increased disclosure requirements under Form ATS–N.548 This commenter states that although this same standard applies to current Form ATS, the potential for an NMS Stock ATS to unknowingly but willfully file a statement that turns out to be false is heightened by the increased amount and scope of disclosure contemplated under Form ATS–N.549 We do not believe that the fact that Form ATS–N requires more detailed disclosures than Form ATS would justify reducing the potential liability for false or misleading statements made in Form ATS–N disclosures. The information required on Form ATS–N is designed to provide the public with transparency into an NMS Stock ATS’s operations and the ATS-related activities of the broker-dealer operator and its affiliates. Although the commenter does not directly object to Rule 304(b)(1), the commenter argues that the Commission should narrow the scope of disclosures and standardize the Form ATS–N format in light of the potential liability this presents.550 In response to the comments, we have modified certain requests on Form ATS–N to remove language that some commenters believe is vague, and in many cases, changed questions to solicit more general information.551 Further, given that Form ATS–N will be made public, we expect that market participants will rely on these disclosures when making routing on national securities exchanges and registered securities associations; Section 18(a) of the Exchange Act imposes liability for false or misleading statements with respect to a material fact in applications, reports, or documents filed pursuant to the Exchange Act or any rule or regulation thereunder; and Section 32(a) of the Exchange Act provides for penalties against any person that willfully violates any provision of, or that willfully and knowingly makes, or causes to be made, any false or misleading statements with respect to a material fact in any application, report, or document required to be filed under the Exchange Act or any rule or regulation thereunder. 546 See Better Markets Letter at 7; SIFMA Letter at 33. 547 See Better Markets Letter at 7. 548 See SIFMA Letter at 33. 549 See id. 550 See id. 551 See infra Section V. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations decisions or assessing their brokers’ routing practices, so it is critical that the disclosures constitute a ‘‘report’’ and are subject to the applicable consequences. We also believe that making Form ATS– N disclosures subject to liability as a ‘‘report’’ under the Exchange Act further will incentivize NMS Stock ATS operators to make truthful statements on Form ATS–N. We are adopting Rule 304(b)(1) as proposed. 2. Rule 304(b)(2): Making Public Form ATS–N Filings and Commission Orders. daltland on DSKBBV9HB2PROD with RULES2 Rule 304(b)(2) provides which Form ATS–N filings and related orders the Commission would make public. Proposed Rule 304(b)(2) provided that we would make public, via posting on the Commission’s website, each (1) order of effectiveness of a Form ATS–N; (2) order of ineffectiveness of a Form ATS–N; (3) effective Form ATS–N; (4) filed Form ATS–N amendment; (5) order of ineffectiveness of a Form ATS– N amendment; (6) notice of cessation; and (7) order suspending, limiting, or revoking the exemption from the definition of an ‘‘exchange’’ pursuant to Exchange Act Rule 3a1–1(a)(2). We are adopting Rule 304(b)(2) with modifications discussed below.552 In 552 To conform to changes that provide that we will not issue orders of effective initial Form ATS– N, we have eliminated proposed Rule 304(b)(2)(i) from adopted Rule 304(b)(2). See supra Section IV.A.1. In addition, the Commission made the following technical, non-substantive modifications to the proposed text of Rule 304(b)(2): (1) Renumbered proposed Rule 304(b)(2)(ii) through (vii); (2) reordered proposed Rule 304(b)(2)(iii) so that ‘‘Effective Form ATS–N’’ is adopted Rule 304(b)(2)(i); (3) changed the proposed language stating that the Commission ‘‘would’’ make public the documents specified in Rule 304(b)(2)(i)–(vii) to the Commission ‘‘will’’ make public the documents specified in Rule 304(b)(2)(i) through (vi); (4) specified that the Commission will publish ‘‘initial’’ Form ATS–N, as amended, under adopted Rule 304(b)(2)(i); (5) changed the proposed language that the Commission will make public each ‘‘Order of ineffectiveness of a Form ATS–N’’ to ‘‘Order of ineffective initial Form ATS–N’’; (6) changed references to uppercase ‘‘Amendment’’ in adopted Rule 304(b)(2)(iii) and (iv) to lowercase; (7) changed the language in adopted Rule 304(b)(2)(iv) from describing an ‘‘Order of ineffectiveness of a’’ Form ATS–N amendment to a ‘‘Order of ineffective’’ Form ATS–N amendment; and (8) modified language in the rule to state that the order suspending, limiting, or revoking the exemption in adopted Rule 304(b)(2)(vi) will apply to the exemption for an ‘‘NMS Stock ATS.’’ We are adopting these changes to simplify and improve the clarity of the rule text and we do not believe that these changes impact the operation of the proposed rules. Because we are providing a process for NMS Stock ATSs to amend their initial Forms ATS–N during the Commission review period, we are also revising proposed Rule 304(b)(2)(iii) (renumbered as Rule 304(b)(2)(i)) to state that the Commission will publish initial Form ATS–N, ‘‘as amended,’’ to specify that the initial Form ATS–N will reflect amendments made during the Commission review period. See supra Section IV.A.2 and Section IV.A.4.b. In addition, in response to comments, we VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 addition, as proposed, we specify that we will make NMS Stock ATS filings public via posting on the Commission’s website. As discussed above, many commenters support making Form ATS–N public, observing that market participants do not currently have access to sufficient, standardized information about the operations and ownership of NMS Stock ATSs.553 Nearly all commenters agree with the Commission’s stated goal of enhancing transparency.554 Although many commenters express general support for public disclosure of Form ATS–N, many commenters recommend certain modifications or clarifications. We continue to believe that making Form ATS–N filings publicly available is important because most market participants have limited access to information that permits them to adequately compare and contrast how an NMS Stock ATS would handle its orders with how a national securities exchange or other NMS Stock ATS would handle its orders.555 Currently, a Form ATS filed with the Commission by an ATS that trades NMS stocks is ‘‘deemed confidential when filed’’ under Rule 301(b)(2)(vii) of Regulation ATS,556 whereas a national securities exchange is required to both (1) make available to the public its entire rulebook and (2) publicly file all proposed rule changes pursuant to Section 19(b) of the Exchange Act.557 The only information the Commission currently makes publicly available regarding ATSs is a list of the names and locations of ATSs with a Form ATS on file with the Commission, which is updated monthly.558 Unless an NMS Stock ATS voluntarily publicizes how are adopting a modified requirement that for material amendments, the cover page of the material amendment will be made public upon filing and the entirety of the material amendment, as amended, will be made public upon the expiration of the Commission review period. See infra Section IV.E.2.c. We are also adding to Rule 304(b)(2)(iii)(B) that the Commission will make public each updating or correcting amendment filed to a material amendment following the expiration of the review period for the material amendment pursuant to Rule 304(a)(2)(ii). See id. We are also adopting Rule 304(b)(2)(iii)(B) to provide that the Commission will make the entirety of order display and fair access amendments, as well as updating amendments and correcting amendments, public upon filing. See id. We are also adopting Rule 304(b)(2)(iii)(A) to specify that the Commission will not make public the entirety of a material amendment that it declares ineffective. See id. 553 See supra note 93 and accompanying text. 554 See supra note 108. 555 See Proposal, supra note 2, at 81035. 556 See 17 CFR 240.301(b)(2)(vii). 557 See 15 U.S.C. 78s(b). 558 See Alternative Trading System (‘‘ATS’’) List, https://www.sec.gov/foia/docs/atslist.htm. PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 38811 its functionalities operate, market participants have limited information to adequately compare and contrast the operation of the ATS with that of a national securities exchange or another NMS Stock ATS. And when NMS Stock ATSs voluntarily make their Forms ATS–N public, the lack of uniformity or standardization makes it difficult to compare disclosures across ATSs. Currently, approximately 20 NMS Stock ATSs voluntarily post a Form ATS on their website. Some commenters, however, observe that in the absence of mandatory and uniform disclosure requirements, Forms ATS vary in content and the level of detail disclosed, and are therefore difficult to compare.559 Accordingly, through Form ATS–N, we are adopting disclosures that will provide information that market participants can use to perform these comparisons as they evaluate the ATS as a potential destination for their orders. We are adopting Rule 304(b)(2), with the modifications to address commenters’ concerns, to mandate greater public disclosure of NMS Stock ATS operations through the publication of Form ATS–N. Adopted Rule 304(b)(2) provides that the Commission will make Form ATS–N and related filings available via posting on the Commission’s website. NMS Stock ATS broker-dealer operators will submit Form ATS–N filings via EDGAR, and the Commission will make such filings available on its website. a. Public Disclosure of Effective Initial Form ATS–N, As Amended Several commenters express support for proposed Rule 304(b)(2)(iii), which would make public an effective Form ATS–N.560 Four commenters agree with the Commission’s approach of making initial Forms ATS–N publicly available once the Commission declared such forms effective.561 One commenter asserts that publishing a filing that is not yet effective, and may ultimately not be ‘‘approved,’’ will cause confusion among market participants regarding the manner of operation of the NMS Stock ATS.562 Another commenter states that requiring disclosure of Forms ATS–N that the Commission has declared ineffective ‘‘may place undue suspicion from market participants on ATSs that fail to gain exemption status on the first 559 See, e.g., Consumer Federation of America Letter at 3; HMA Letter at 2; Morgan Stanley Letter at 1. 560 See supra notes 110–123 and accompanying text. 561 See CFA Institute Letter at 6; BIDS Letter at 3; UBS Letter at 3; LeveL ATS Letter at 7. 562 See LeveL ATS Letter at 7. E:\FR\FM\07AUR2.SGM 07AUR2 38812 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations attempt.’’ 563 The Commission will make only effective Forms ATS–N public because this would be less confusing for market participants. We expect that in the course of reviewing an initial Form ATS–N, Commission staff would likely engage in discussions with the entity regarding its disclosures and could request the entity to revise or augment its disclosures to cure deficiencies and provide market participants with greater clarity regarding the entity’s operations. Accordingly, we continue to believe that it would be premature to make publicly available an initial Form ATS–N filing before it becomes effective because of the potential confusion that may result from making public disclosures on an initial Form ATS–N that is not effective. Therefore, under adopted Rule 304(b)(2)(i), the Commission will make public an effective initial Form ATS–N, as amended. Adopted Rule 304(a)(1)(ii)(B) and Rule 304(a)(1)(iv)(C) provide processes for NMS Stock ATSs to amend their initial Forms ATS–N during the Commission review period. If, for example, the Commission staff provides comments to a broker-dealer operator suggesting modifications designed to enhance the completeness and comprehensibility of its initial Form ATS–N disclosures, the NMS Stock ATS would have the opportunity to file an amendment to respond to such comments during the Commission review period. We believe that it is appropriate to make public initial Form ATS–N, as revised by any such amendments (except for material amendments during the Commission review period),564 when the initial Form ATS–N becomes effective. Accordingly, we are revising proposed Rule 304(b)(2)(iii) (renumbered as Rule 304(b)(2)(i)) to state that the 563 See CFA Institute Letter at 6. amendments filed by Legacy NMS Stock ATSs during the Commission review period are subject to Rule 304(b)(2)(iii)(A), which provides that the entirety of a material amendment will not be made public until the expiration of the Commission’s 30-calendar day review period. Therefore, under Rule 304(b)(2)(iii)(A), material amendments filed during the final 30 calendar days of the Commission review period would not be made public until the 30-calendar day Commission review period for such amendments has expired. For example, if an NMS Stock ATS files a material amendment on calendar day 230 of the Commission review period, and the Form ATS–N becomes effective on calendar day 240, the material amendment would remain subject to the Commission’s review, and not publicly disclosed, for an additional 20 calendar days—until the Commission’s 30-calendar day review period has expired. Under Rule 304(b)(2)(iii)(A), the cover page for any material amendments during the Commission review would be made public when the initial Form ATS–N becomes effective. daltland on DSKBBV9HB2PROD with RULES2 564 Material VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Commission will publish initial Form ATS–N, ‘‘as amended.’’ Some commenters express concerns regarding the timing of publicly disclosing a filed Form ATS–N.565 One commenter states its view that for Legacy NMS Stock ATSs that are filing Form ATS–N for the first time, the Commission should not make any Forms ATS–N public until the date on which the Commission has completed the review of the initial Form ATS–N filings for all Legacy NMS Stock ATSs, so that a Legacy NMS Stock ATS is not disadvantaged by making its Form ATS– N public prior to other Legacy NMS Stock ATSs.566 As we stated in the Proposal, and as many commenters have agreed,567 the public has a strong interest in public disclosure about the operations of NMS Stock ATSs. For some Legacy NMS Stock ATSs, the review period may be extended pursuant to Rule 304(a)(1)(iv)(B). We believe that disclosure of all Legacy NMS Stock ATSs’ Forms ATS–N should not be delayed during any extended review period that may be necessary for the Commission to review any Legacy NMS Stock ATS’s initial Form ATS–N that raises novel or complex issues and therefore requires additional time for review.568 Additionally, some NMS Stock ATSs may not wish to delay public disclosure once their Forms ATS–N become effective, and it is neither in the public interest nor in the interest of those NMS Stock ATSs to withhold effective Forms ATS–N from the public. Several commenters suggest that the Commission should make certain information required by Form ATS–N available only to the Commission.569 Some commenters state that the scope of items required for public disclosure, particularly those related to the administration of the ATS, is too detailed and may not be helpful to market participants in making routing decisions.570 We believe that Form ATS–N, as adopted, solicits the appropriate level of information about NMS Stock ATSs that would be useful to subscribers and market 565 See Liquidnet Letter at 3; SSGA Letter at 2; Fidelity Letter at 7–8; STANY Letter at 3; UBS Letter at 6–8; Luminex Letter at 2,4; PDQ Letter at 2; SIFMA Letter at 4. 566 See Liquidnet Letter at 3. 567 See, e.g., MFA/AIMA Letter at 2; Schneiderman Letter at 2; ICI Letter at 1; CFA Institute Letter at 3; Consumer Federation of America Letter at 6. 568 See Rule 304(a)(1)(ii). 569 See SSGA Letter at 2; Fidelity Letter at 7–8; STANY Letter at 3; UBS Letter at 6–8; Luminex Letter at 2,4; PDQ Letter at 2; SIFMA Letter at 4. 570 See Luminex Letter at 2; SIFMA Letter at 4; KCG Letter at 6. PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 participants.571 In response to commenters, we have revised proposed Form ATS–N to remove certain requests that commenters believe are not relevant to subscribers, limited the scope of certain requests that commenters believe to be too broad, and narrowed certain requests to only require summary information or specific information to avoid the disclosure of commercially sensitive information.572 We nevertheless believe that responses to Form ATS–N requests must be sufficiently detailed for subscribers and market participants to adequately understand the operations of an NMS Stock ATS and the ATS-related activities of the broker-dealer operator and its affiliates. Other commenters express concern that publicly disclosing Form ATS–N could result in the disclosure of an NMS Stock ATS’s proprietary or commercially sensitive information.573 In particular, and as discussed further below, commenters express concern about disclosing information regarding classification of subscribers,574 details about administrative operations of broker-dealer operators,575 and contractual agreements between brokerdealer operators and their clients,576 and NMS Stock ATSs and their vendors.577 One commenter raises concern about customer confidentiality.578 We have determined not to adopt the proposed Exhibit 1 requirements 579 and have revised the Form ATS–N requests to not seek disclosure of certain information that could be proprietary or commercially sensitive, such as routing tables or numerical order flow segmentation metrics.580 We do not believe that the vast majority of information responsive to adopted Form ATS–N would be proprietary or commercially sensitive. Furthermore, we do not believe that the requests of adopted Form ATS–N, as modified, would require NMS Stock 571 See infra Section V. id. 573 See Fidelity Letter at 8; UBS Letter at 7; Luminex Letter at 2–4; SIFMA Letter at 16. 574 See Fidelity Letter at 8; UBS Letter at 7. 575 See Fidelity Letter at 4; Luminex Letter at 2– 4. 576 See UBS Letter at 7. 577 See SIFMA Letter at 16. 578 See PDQ Letter at 2. 579 See infra Section V.B.2. Exhibit 1 would have required NMS Stock ATSs to attach 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. The determination not to adopt this proposed requirement renders irrelevant the comment regarding allowing NMS Stock ATSs to post updated marketing materials on their websites. See infra note 705 and accompanying text. 580 See infra Sections V.D.5, V.D.13, V.D.16. 572 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations ATSs to compromise customer confidentiality when making thorough and accurate disclosures. Some commenters that believe that Form ATS–N disclosures may be too detailed to be helpful to market participants 581 or that they may disclose proprietary or commercially sensitive information suggest that the Commission make only parts of Form ATS–N public, or delay public disclosure of certain parts of Form ATS– N.582 Specifically, one commenter suggests that the Commission require NMS Stock ATSs to submit a full Form ATS–N to the Commission, but only provide that a selected sub-set of fields be publicly disclosed.583 We are not adopting the commenters’ suggestions to limit public disclosures because the vast majority of adopted Form ATS–N will not require the disclosure of proprietary or commercially sensitive information.584 In addition, not making certain items public would undercut the transparency that is the primary purpose of this rulemaking.585 Another commenter suggests that the Commission should consider ‘‘tiering’’ proprietary information by first making it only available to the Commission and subscribers, and after a ‘‘reasonable’’ time lag, further disseminating such information to the general public.586 In response to commenter concerns, the cover page of the filed material amendment will be made public by the Commission upon filing and, unless the Commission declares the material amendment ineffective, the entirety of the material amendment, as amended, will be made public by the Commission following the Commission’s 30-calendar day review period.587 Another commenter states that, although the Commission should not address commenters’ concerns regarding disclosure of sensitive or proprietary information,588 by automatically making any portion of Form ATS–N 581 See SSGA Letter at 2. T. Rowe Price Letter at 2. 583 See SSGA Letter at 2. 584 See infra Sections V.C.6, V.D.6, V.D.13, V.D.23. 585 One commenter believes that an ATS should have the ability to file supplemental materials with the Commission that are not part of the public filing as long as the ATS’s public filing accurately responds to all questions on the Form ATS–N. See Liquidnet Letter at 9. We have determined not to adopt a formal process through which broker-dealer operators can disclose supplemental information for Commission review alone. We believe that the primary purpose of Form ATS–N is to provide the public with critical information regarding NMS Stock ATS operations and affiliate relationships. 586 See T. Rowe Price Letter at 2. 587 See Section IV.E.2.c. 588 See supra notes 574–578 and accompanying text. daltland on DSKBBV9HB2PROD with RULES2 582 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 confidential, if a ‘‘genuine need for confidentiality exists,’’ the broker-dealer can obtain confidential treatment under Commission Rule 24b–2, and suggests that the Commission provide guidance around the use of this limited exception.589 We believe that questions on adopted Form ATS–N, as modified, do not solicit the type of information that typically would constitute confidential information.590 The existing processes for obtaining confidential treatment will remain available to broker-dealer operators.591 Furthermore, the purpose of Form ATS– N is to create a public transparency regime for NMS Stock ATSs, with commensurate benefits, and allowing disclosures to be made only to the Commission would be contrary to the purposes of this rulemaking. In addition, FINRA requests that the Commission require NMS Stock ATSs to file duplicate copies of Form ATS–N submissions with FINRA so that FINRA has access to these filings before they become effective, or in the event that they are deemed ineffective and thus never made public.592 Requiring an NMS Stock ATS to provide Form ATS– N filings to the SRO of which the ATS is a member before the filings become effective or are declared ineffective would place additional administrative burdens on the NMS Stock ATS, particularly in the event the NMS Stock ATS amends its Form ATS–N during discussion with the Commission staff. We continue to believe that making Form ATS–N public will enhance the information available to market participants and benefit the marketplace, and therefore are adopting Rule 304(b)(2)(i), to provide that the Commission will make public each effective initial Form ATS–N, as amended.593 b. Public Disclosure of Orders of an Ineffective Initial Form ATS–N Because the Commission will not issue orders of effective initial Forms ATS–N, adopted Rule 304(b)(2) does not include each ‘‘Order of effectiveness of a Form ATS–N.’’ We continue to believe that it is appropriate to make public each order of ineffective Form ATS–N, substantially as proposed,594 to provide the public with notice regarding the regulatory status of potential trading venues; if a Form ATS–N is declared 589 See Investor Advocate Letter at 10–11. supra note 584 and accompanying text. 591 See 17 CFR. 240.24b–2. 592 See FINRA Letter at 2–3. 593 See supra note 552. 594 We proposed this requirement as Rule 304(b)(2)(i) and are adopting this requirement as Rule 304(b)(2)(ii). 590 See PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 38813 ineffective, the ATS may not operate pursuant to the exemption from the definition of ‘‘exchange,’’ and the public should be aware of such regulatory status. Other than the comment about orders of ineffectiveness relating to a Legacy NMS Stock ATS’s initial Form ATS–N, which is discussed above,595 we received no comments on making public orders of effective or ineffective Form ATS–N. We continue to believe that it is necessary to make public an order of ineffective Form ATS–N for market participants to be informed of the operating status of an NMS Stock ATS. Therefore, we are adopting Rule 304(a)(2)(ii) to provide that orders of ineffective initial Form ATS–N will be made public, with modifications to reduce any potential ambiguity and improve readability of the rule text.596 c. Public Disclosure of Form ATS–N Amendments We proposed, in Rule 304(a)(2)(iv), making all filed amendments to Form ATS–N public; as proposed, Form ATS– N amendments would have been public during the Commission review period and prior to the Commission’s determination of whether a Form ATS– N amendment should be declared ineffective. In the Proposal, we asked whether commenters believe that the Commission should make public on its website upon filing a Form ATS–N amendment for a material change, and whether there should be a delay in when the Form ATS–N for a material change is made public.597 We received several comments on this aspect of the Proposal.598 Although one commenter agrees with our proposal to make Form ATS–N amendments public upon filing because it would keep market participants informed about changes to 595 See supra note 433 and accompanying text. Rule 304(b)(2)(ii) states that this provision applies to each ‘‘[o]rder of ineffective initial Form ATS–N’’ instead of the proposed language, which stated that the provision would apply to each ‘‘[o]rder of ineffectiveness of a Form ATS–N.’’ As discussed above, the Commission will, by order, declare ineffective an initial 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. See supra Section IV.A.3. We believe that the revised rule text reduces any potential ambiguity by specifying that the public disclosure requirement applies to orders related to ‘‘initial’’ Form ATS–N and simplifying the rule language. 597 See Proposal, supra note 2, at 81028. 598 See ICI Letter at 3; Liquidnet Letter at 6; SIFMA Letter at 31; UBS Letter at 3; BIDS Letter at 4; STA Letter at 5; STANY Letter at 2; CFA Institute Letter at 6; LeveL ATS Letter at 7. 596 Adopted E:\FR\FM\07AUR2.SGM 07AUR2 38814 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations potential trading venues,599 several other commenters express concerns about making Form ATS–N amendments public upon filing or argue that the Commission should make amendments public only once the related changes are operative.600 Some of these commenters state that public disclosure of changes to ATS operations at least 30 calendar days before such changes are implemented may burden the ability of NMS Stock ATSs to act competitively, or may reduce the competitive advantage associated with being the first to innovate.601 In addition, commenters assert that making public Form ATS–N amendments that may never be implemented could be confusing or misleading to market participants; 602 one commenter states that publicly disclosing material changes in advance of implementation could cause market participants to not understand current operations of an NMS Stock ATS versus its proposed, future operations.603 One commenter asserts that immediate publication of amendments would stifle dialogue between the NMS Stock ATS and Commission staff.604 Another commenter states that it does not believe that making Form ATS–N amendments public upon filing would provide a benefit to market participants as ‘‘existing documents’’ should be adequate for market participants considering whether to use a particular NMS Stock ATS.605 We are modifying the proposed rules for making Form ATS–N amendments to an effective Form ATS–N public. In response to commenters’ concerns, we are adding new subparagraph (b)(2)(iii)(A) to Rule 304 to provide that, for material amendments (as defined by Rule 304(a)(2)(i)(A)) to an effective Form ATS–N, the cover page of the filed material amendment will be made public by the Commission upon filing and, unless the Commission declares the material amendment ineffective, the 599 See ICI Letter at 3, n.3. Liquidnet Letter at 6; SIFMA Letter at 31; UBS Letter at 3; BIDS Letter at 4; STA Letter at 5; STANY Letter at 2; CFA Institute Letter at 6; LeveL ATS Letter at 7. Some commenters state that an amendment to Form ATS–N should not be made public until it is declared effective. See, e.g., SIFMA Letter at 31; UBS Letter at 3. We, however, did not propose, and are not adopting, a process for declaring amendments to Form ATS–N effective. The Commission will have a 30-calendar day review period to declare amendments to Form ATS–N ineffective. See supra Section IV.B.2. 601 See LeveL ATS Letter at 7–8. See also SIFMA Letter at 31; STANY Letter at 2. 602 See BIDS Letter at 4; UBS Letter at 3; LeveL ATS Letter at 7. 603 See UBS Letter at 3. 604 See Liquidnet Letter at 6–7. 605 See BIDS Letter at 4. daltland on DSKBBV9HB2PROD with RULES2 600 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 entirety of the material amendment, as amended, will be made public by the Commission following the Commission’s 30-calendar day review period. In addition, we are adding new subparagraph (b)(2)(iii)(B) to Rule 304 to provide that, for updating, correcting, and order display and fair access amendments (as defined by Rule 304(a)(2)(i)(B), (C), and (D), respectively) to an effective Form ATS–N, the entirety of the updating, correcting, or order display and fair access amendment will be made public by the Commission upon filing. We are also adding to subparagraph (b)(2)(iii)(B) that an updating or correcting amendment filed to a material amendment will be made public by the Commission following the expiration of the review period for such material amendment pursuant to paragraph (a)(2)(ii) of Rule 304. We share the commenters’ concerns that making public Form ATS–N material amendments before expiration of the Commission’s 30-day calendar review period could be confusing or misleading to the public, particularly in the event the material amendment is declared ineffective and the related change is never implemented. One commenter asserts that advance disclosure of Form ATS–N amendments may burden market participants who feel obligated to review premature disclosures for possible effects on them and their underlying customers.606 We believe that publicly disclosing the cover page to a Form ATS–N material amendment during the review period, and disclosing the entire material amendment following the expiration of 30-calendar day Commission review period, when the related changes can be implemented, will reduce any potential for confusion and will not pose an undue burden on market participants. In addition, we share the commenters’ concerns that providing advance public notice of material changes to NMS Stock ATSs could burden ATSs, which would be required to provide at least 30calendar day advance notice of material changes to all market participants, including their competitors. Requiring such advance public notice of material changes before they are implemented could reduce incentives for NMS Stock ATSs to innovate. However, we continue to believe that market participants that are planning routing strategies would benefit from advance notice that the NMS Stock ATS is planning changes to its operations or conflicts of interest. To minimize the potential competitive harm of advance public notice, while also providing the 606 See PO 00000 SIFMA Letter at 32. Frm 00048 Fmt 4701 Sfmt 4700 benefits of immediate public transparency, the Commission will make public the cover page of a material amendment to an effective Form ATS– N upon filing of such amendment. The cover page will indicate that the NMS Stock ATS has filed a material amendment and provide a brief narrative about the content of the amendment. An NMS Stock ATS is required to indicate the part and item number of Form ATS–N that is subject to the change, state whether or not such change will apply to all subscribers and the broker-dealer operator, and provide a brief summary of the changes. For example, if an NMS Stock ATS is introducing a new order type, the brief narrative might state: ‘‘The ATS is amending Part III, Item 7(a) of Form ATS–N to include a new order type, which will be available to all subscribers.’’ In addition, we are adding, in new subparagraph (b)(2)(iii)(A) to Rule 304, that the Commission will, following the expiration of the 30-calendar day Commission review period pursuant to Rule 304(a)(2)(ii), make public the entirety of the material amendment ‘‘as amended.’’ We are providing a process, under Rule 304(a)(2)(ii), for NMS Stock ATSs to file updating and correcting amendments under Rule 304(a)(2)(i)(B) and (C), respectively, to material amendments during the Commission review period. In addition, Rule 304(b)(2)(iii)(B) provides that an updating or correcting amendment filed to a material amendment will be made public by the Commission following the expiration of the review period for such material amendment pursuant to Rule 304(a)(2)(ii). We believe that disclosing updating and correcting amendments to material amendments before expiration of the Commission’s 30-day calendar review period for the material amendment (and before the material amendment is made public) could be confusing or misleading to the public as the underlying material amendment would not yet be public or operative. We will make public material amendments ‘‘as amended;’’ material amendments will reflect any updating and correcting amendments filed during the Commission review period. Such amended disclosures could provide market participants with more complete and comprehensible information about NMS Stock ATS operations and the activities of their broker-dealer operators and affiliates. Accordingly, Rule 304(b)(2)(iii)(B) provides that an updating or correcting amendment filed to a material amendment will be made public by the Commission following the E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations expiration of the review period for such material amendment pursuant to Rule 304(a)(2)(ii), and Rule 304(b)(2)(iii)(A) provides that a material amendment will be made public, as amended, which would incorporate any amendments that were filed to the material amendment during the Commission review period. The change to delay making the entirety of Form ATS–N material amendments, as amended, public until after the Commission has completed the review will not impact the manner in which we proposed to make public updating, correcting, and order display and fair access amendments. Form ATS–N updating amendments require NMS Stock ATSs to, no later than 30 calendar days after the end of a calendar quarter, correct information that has become inaccurate or incomplete for any reason and was not required to be reported to the Commission as a Form ATS–N amendment pursuant to Rules 304(a)(2)(i)(A), (C), or (D).607 NMS Stock ATSs are required to correct information in any previous disclosure on Form ATS–N through a correcting amendment after discovery that any material information previously filed on Form ATS–N was inaccurate or incomplete when filed.608 Order display and fair access amendments are required to be filed no later than seven calendar days after information required to be disclosed in Part III, Items 24 and 25 on Form ATS–N has become inaccurate or incomplete.609 We proposed that all amendments, which include Form ATS–N updating and correcting amendments (as well as material amendments), be made public upon filing. Two commenters assert that publicly disclosing changes that the Commission could later declare ineffective could create confusion among market participants.610 Although, as adopted, the Commission would not make the entirety of material amendments public until after its 30calendar day review period expires, because correcting, updating, and order display and fair access amendments would be made public upon filing, the Commission could declare such an amendment ineffective after it has been made public. We continue to believe that, even with the risk of some confusion if updating, correcting, and order display and fair access amendments later were declared ineffective, it is appropriate to make updating, correcting, and order display 607 See Rule 304(a)(2)(i)(B) and supra Section IV.B.1.b. 608 See Rule 304(a)(2)(i)(C). 609 See Rule 304(a)(2)(i)(D). 610 See LeveL ATS Letter at 7; UBS Letter at 3. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 and fair access amendments to an effective Form ATS–N public upon filing because the related changes, any inaccurate or incomplete disclosures about the operation of the NMS Stock ATS, or triggering of the order display and execution access and fair access thresholds, may have been implemented at or before the time of filing, and we believe that it is crucial that market participants have updated information about current NMS Stock ATS operations.611 With respect to amendments declared ineffective, one commenter states that such amendments should be returned to the NMS Stock ATS and not be made publicly accessible.612 Under Rule 304(b)(2)(iii)(A), as adopted, the Commission is specifying that it will not make public the entirety of a material amendment that it declares ineffective. The Commission would, however, upon filing, make public on its website the cover page of the material amendment, and subsequently, any order of ineffectiveness related to such material amendment. In addition, because the Commission will make public updating, correcting, and order display and fair access amendments to an effective Form ATS–N upon filing, such amendments will be publicly available even if the Commission declares such amendments ineffective during its 30-calendar day review period. We believe that it is appropriate to make public updating, correcting, and order display and fair access amendments upon filing, even if the Commission could later declare them ineffective, because, unlike material amendments, the disclosures included in updating, correcting, and order display and fair access amendments have been implemented and reflect an NMS Stock ATS’s current operations and affiliate relationships. If the Commission later declares an updating, correcting, or order display and fair access amendment ineffective, it will issue an order of ineffectiveness, which the Commission will make public to notify market participants that such change is no longer in effect. Three commenters state that by making pending amendments public, the Commission may incidentally turn the process into a review, notice, and comment period.613 Under the adopted 611 An updating or correcting amendment to a material amendment during Commission review will not be made public until the material amendment that is amended becomes public. We believe this is appropriate because updating and correcting amendments to a material amendment during Commission review would amend a material amendment that is not yet public or operative. 612 See SIFMA Letter at 31. 613 See SIFMA Letter at 32; Morgan Stanley Letter at 4; KCG Letter at 4. PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 38815 rule, the Commission will not make material amendments to Form ATS–N public until the Commission review period has expired. Further, the Commission does not believe that publicly disclosing the brief description of a material amendment on the cover page of Form ATS–N or publicly disclosing correcting, updating, and order display and fair access amendments upon filing will create a public notice, comment, and review period, as the Commission is not soliciting public comments on amendments.614 This process will be distinct from the proposed rule filing process for national securities exchanges, in which the Commission solicits comment for proposed rule changes and considers whether rule changes are consistent with the Exchange Act. Two commenters suggest that material amendments should be made public after the Commission has completed its review, but prior to implementation.615 We are not adopting this suggestion because doing so would require that, to provide additional time for public disclosure after the end of the Commission review period, either the Commission truncate the period for Commission review from the entire 30calendar day advance notice period, which we believe is necessary for the review,616 to a shorter segment of the total 30-calendar day advance notice period, or require that NMS Stock ATSs disclose changes further in advance, which could potentially be burdensome for NMS Stock ATSs. In addition, we received comments asking for clarification regarding the process for a Legacy NMS Stock ATS to file amendments to its Form ATS while the Commission is reviewing the ATS’s initial Form ATS–N.617 In response, we are requiring that a Legacy NMS Stock ATSs amend only its initial Form ATS– N, and not its Form ATS, during the Commission review period.618 Further, a Legacy NMS Stock ATS’s Form ATS– N will not be made public until the end of the Commission review period under Rule 304(a)(1)(iv)(B). Rule 304(b)(2)(iii) provides that amendments to an effective Form ATS–N will be made public. Accordingly, amendments to a Form ATS–N filed by a Legacy NMS Stock ATS during the Commission review period will not be made public until after the Commission review period has ended and the Form ATS–N 614 See supra Section IV.B.2. UBS Letter at 3; STA Letter at 5. 616 See supra Section IV.A.2. 617 See supra note 438 and accompanying text. 618 See supra Section IV.A.4. 615 See E:\FR\FM\07AUR2.SGM 07AUR2 38816 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations becomes effective. We believe that making Form ATS–N amendments public before the initial Form ATS–N is public would provide little utility, and would likely only confuse market participants. At the end of the Commission review period, a Legacy NMS Stock ATS’s initial Form ATS–N will be made public, along with all filed correcting, updating, and order display and fair access amendments, material amendments for which the Commission’s 30-calendar day review period has expired, and the cover pages to any material amendments during the Commission review period. d. Public Disclosure of Orders of Ineffective Form ATS–N Amendment Under Rule 304(b)(2)(iv), the Commission will make public each order of ineffective Form ATS–N amendment. This would provide notice to market participants that the Commission had declared a Form ATS– N amendment ineffective. We received no comments on making public orders of ineffective Form ATS–N amendments. We are adopting proposed Rule 304(b)(2)(v) as adopted Rule 304(b)(2)(iv).619 daltland on DSKBBV9HB2PROD with RULES2 e. Public Disclosure of Notices of Cessation Under Rule 304(b)(2)(v) (which was proposed as Rule 304(b)(2)(vi)),620 the Commission will make public each notice of cessation of a Form ATS–N filed pursuant to Rule 304(a)(3). One commenter states that it supports our proposal to make notices of cessation publicly available.621 No commenters express opposition to such requirement. We continue to believe that making public each properly filed Form ATS–N notice of cessation will 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 will provide market participants with the date that the NMS Stock ATS will cease operations, as designated by the NMS Stock ATS, and allow them to make arrangements to select alternative routing destinations for their orders. Therefore, we are adopting as proposed the requirement for public disclosure of notices of cessation. 619 See supra note 552. id. 621 See ICI Letter at 11. 620 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 f. Public Disclosure of Each Order Suspending, Limiting, or Revoking the Rule 3a1–1(a)(2) Exemption Under proposed Rule 304(b)(2)(vii), the Commission would make public each order suspending, limiting, or revoking the exemption provided pursuant to Rule 3a1–1(a)(2). We did not receive any comments on this requirement. We believe that it is important for market participants to be aware of whether an NMS Stock ATS is subject to an order suspending, limiting, or revoking the exemption from the definition of ‘‘exchange’’ when they are making their routing decisions because such an order could prevent an NMS Stock ATS from operating, or it could limit its functionality. Therefore, we are adopting substantially as proposed the requirement that the Commission make public each order suspending limiting, or revoking the exemption from the definition of ‘‘exchange,’’ as renumbered Rule 304(b)(2)(vi).622 3. Rule 304(b)(3): Disclosure of Form ATS–N on the NMS Stock ATS’s Website Proposed Rule 304(b)(3) required each NMS Stock ATS to make public via posting on its website a direct URL hyperlink to the Commission’s website that contains the documents enumerated in proposed Rule 304(b)(2). We received two comments on proposed Rule 304(b)(3).623 One commenter supports adding a requirement for NMS Stock ATSs to post the effective Forms ATS–N on their own websites and not simply provide links to the Commission’s website.624 Another commenter requests that rather than requiring materials to be posted centrally through the Commission, the Commission should allow an NMS Stock ATS to post its disclosure materials on its public website.625 We are not adopting a requirement that an NMS Stock ATS post its filings on its own website because it believes that requiring each NMS Stock ATS to provide a link to the Commission’s website, which will link to Form ATS– N filings in EDGAR, will provide market participants easy and uniform access to Form ATS–N filings. The link to the Commission website would provide users with access to all new filings available in EDGAR. We are adopting, with modifications, the requirement that each NMS Stock 622 See supra note 552. We are making one modification to specify that this applies to the exemption ‘‘for an NMS Stock ATS.’’ 623 See CFA Institute Letter at 6; UBS Letter at 3. 624 See CFA Institute Letter at 6. 625 See UBS Letter at 3. PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 ATS make public via posting on its website a direct URL hyperlink to the Commission’s website that contains the documents enumerated in proposed Rule 304(b)(2). We continue to believe that the requirement of posting on the NMS Stock ATS’s website a direct URL hyperlink to the Commission’s website 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 made available through the Commission’s website.626 V. Form ATS–N Disclosures A. Form ATS–N Disclosure Requirements and Definitions 1. Rule 304(c): Disclosure Requirements Proposed Rule 304(c)(1) required 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. Unlike proposed Rule 304(c)(2), reports required under Rule 304 must be filed electronically on Form ATS–N, include all information as prescribed in Form ATS–N and the Instructions thereto, and contain an electronic signature that is authenticated by manual signature. Further, proposed Rule 304(c)(2) required that such document be executed before or at the time Form ATS–N is electronically filed and be retained by the NMS Stock ATS in accordance with Rule 303.627 The proposed Form ATS–N required the signator to represent that the information and statements in the applicable Form ATS–N, including exhibits, schedules, or other documents attached to the Form ATS–N, and other information filed with the Form ATS–N, are current, true, and complete.628 We are adopting Rule 304(c)(2), with technical and non-substantive modifications to reduce redundancy and reduce potential ambiguity about the filing requirements for Form ATS–N.629 626 See Proposal, supra note 2, at 81035. id. 628 See Proposed Form ATS–N, Part V. 629 The Commission is deleting the word ‘‘electronically’’ and the language ‘‘and contain an electronic signature’’ in the first sentence of proposed Rule 304(c)(2). All NMS Stock ATSs are required to file Form ATS–N through EDGAR. Therefore, we believe that referencing the term ‘‘electronic’’ and ‘‘electronic signature’’ is redundant because all filings are electronically submitted through EDGAR. We are deleting the second sentence (regarding manually signing a signature page or document) and instead adding a reference to 232.302 of Regulation S–T, which includes the general rules for electronic filings, including rules governing electronic signatures. We are also modifying the third sentence of Rule 304(c)(2) to state that any report filed under Rule 627 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations In the Proposal, the Commission stated that Regulation ATS requires NMS Stock ATSs to register as broker-dealers with the Commission, which entails becoming a member of an SRO, such as FINRA, and fully complying with the broker-dealer regulatory regime.630 The Commission requested comment on whether the certification under FINRA Rule 3130 would help ensure an NMS Stock ATS’s compliance with proposed Rule 304, including the requirement that disclosures on Form ATS–N be accurate, current, and complete.631 The Commission received two comment letters regarding the requirement that an authorized person certify that the form is ‘‘current, true, and complete.’’ 632 One commenter supports the certification requirement.633 Another commenter expresses concern about immaterial errors being a basis for liability.634 The Commission continues to believe that it is appropriate to require authorized persons to certify that the Form ATS–N is ‘‘current, true, and complete.’’ We believe that market participants will rely on Form ATS–N disclosures to understand the operations of an NMS Stock ATS and ATS-related activities of the broker-dealer operator, and decide whether that trading center would be a desirable venue for their orders. The information contained on Form ATS–N will also be available for Commission use, including as part of its oversight functions. Further, existing Form ATS also requires authorized persons to certify that the information and statements in the form, exhibits, schedules and other documents attached are ‘‘current, true, and complete.’’ 635 In addition, Form 1, the application for registration or exemption from registration as a national securities exchange, requires a similar certification.636 Neither of these certifications includes a materiality qualifier, and the Commission does not believe that it would be appropriate to include a materiality qualifier in Form ATS–N. We are adopting Rule 304(c)(1) with certain modifications.637 Specifically, adopted Rule 304(c)(1) requires that ‘‘[a]n NMS Stock ATS must file a Form ATS–N in accordance with the Instructions therein.’’ 638 The adopted Instructions to Form ATS–N require, among other things, that ‘‘[a]n NMS Stock ATS must provide all the information required by Form ATS–N, including responses to each Item, as applicable, and the Exhibits, and disclose information that is accurate, current, and complete.’’ 639 Similar to the Instructions of proposed Form ATS– N, the Instructions to adopted Form ATS–N asks an NMS Stock ATS to respond to each item ‘‘in detail.’’ In response to comments, we revised some of the requests on Form ATS–N to solicit ‘‘a summary of information’’ to tailor further, as appropriate, the required disclosure or avoid requiring the disclosure of personal or commercially sensitive information.640 Accordingly, we are revising the Instructions to require that ‘‘unless otherwise provided’’ (i.e., where the request indicates that the ATS is required to disclose ‘‘summary’’ information), the NMS Stock ATS respond to each request in detail.641 One commenter suggests that an NMS Stock ATS should be permitted to disclose additional information to its subscribers and potential customers, outside of the Form ATS–N process, or respond to requests for information from market participants.642 Similarly, one commenter states that NMS Stock ATSs should be allowed to separately disclose information, upon request, regarding order segmentation to subscribers who require such information from a ‘‘due diligence perspective’’ and who, due to the nature of their trading, would not present gaming concerns.643 We believe that it would be inconsistent with the goals of this rulemaking were its adoption to chill communication between broker-dealer operators and subscribers about the NMS Stock ATS. The adopted enhanced disclosure daltland on DSKBBV9HB2PROD with RULES2 637 We 304 shall be executed ‘‘at, or prior to,’’ the time the Form ATS–N is filed (instead of ‘‘before or at’’). We are also adding a reference to the Instructions in Form ATS–N, which includes the requirement for NMS Stock ATSs to maintain a paper copy with original manual signatures, instead of including a reference to retaining Form ATS–N in accordance with § 242.303, as proposed. 630 See Proposal, supra note 2, at 81005. 631 See id. at 81037. 632 See SIFMA Letter at 33; Better Markets Letter at 7. 633 See Better Markets Letter at 7. 634 See SIFMA Letter at 33. 635 See Form ATS at 1. 636 See Form 1 at 1. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 changed the heading of proposed Rule 304(c) from ‘‘Form ATS–N filing requirements’’ to ‘‘Form ATS–N disclosure requirements,’’ which we believe more accurately describes the purpose and content of the paragraph. 638 See Rule 304(c)(1). 639 See Instructions to Form ATS–N. 640 See, e.g., Form ATS–N Part III, Item 13(a) (instructing NMS Stock ATS to provide a summary of the parameters for each segmented order category). 641 In addition, to avoid potential confusion, we are removing ‘‘in detail’’ from Rule 304(c)(1) and instead, specifying that the Form ATS–N must be filed ‘‘in accordance with the instructions therein.’’ See Rule 304(c)(1). 642 See T. Rowe Price Letter at 2. 643 See Fidelity Letter at 8. PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 38817 requirements do not prohibit brokerdealer operators from communicating with subscribers and other market participants about information not otherwise required by Form ATS–N in a manner that is consistent with federal securities laws and the rules or regulations thereunder. A broker-dealer operator responding to a request for information from a subscriber or market participant generally should evaluate whether the information provided in response to these requests must be disclosed on Form ATS–N if the information does not already appear in its Form ATS–N. The Commission received several comments on the general format of the Form ATS–N. Several commenters suggest that the Commission modify Form ATS–N so that the requests for information result in disclosures that are more standardized and allow market participants to more easily compare Form ATS–N filings.644 Some commenters express concern that requesting what they characterize as ‘‘extraneous’’ information could obscure the information that market participants would find the most relevant.645 Some of these commenters also express concern that the volume of data that NMS Stock ATSs would provide in response to questions that require narrative responses would make it difficult for participants to understand ATS operations 646 or conduct due diligence.647 Although one commenter expressly agrees with the Commission’s approach of requiring summaries of amendments,648 several commenters state that narrative responses on Form ATS–N are likely to vary widely, and could make comparing multiple platforms difficult.649 Multiple commenters advocate for replacing some of the proposed narrative responses to Form ATS–N with ‘‘yes’’ or ‘‘no’’ responses.650 One commenter states that requiring ATSs to respond in a ‘‘yes’’ or ‘‘no’’ format would support 644 See SSGA Letter at 2–3; BIDS Letter at 4–5; Fidelity Letter at 5; STANY Letter at 5; UBS Letter at 2–3; KCG Letter at 8–9, 11; Morgan Stanley Letter at 1; STA Letter at 2; SIFMA Letter at 9; LeveL ATS Letter at 6–7. 645 See STANY Letter at 3; Luminex Letter at 4; KCG Letter at 4; SSGA Letter at 2; SIFMA Letter at 7. 646 See STA Letter at 2; KCG Letter at 3–4; SIFMA Letter at 9. 647 See SSGA Letter at 2. 648 See Liquidnet Letter at 18. 649 See SSGA Letter at 2; Fidelity Letter at 5; STA Letter at 2; BIDS Letter at 4–5; KCG Letter at 8–9; Morgan Stanley Letter at 1. 650 See SSGA Letter at 2; BIDS Letter at 4; STANY Letter at 5; STA Letter at 2; UBS Letter at 2–3; KCG Letter at 8–11; SIFMA Letter at 9; LeveL ATS Letter at 6. E:\FR\FM\07AUR2.SGM 07AUR2 38818 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations more fulsome disclosure and create a universal standard of review, as allowing narrative responses may allow ATSs to disclose only the information that they deem appropriate.651 Some commenters recognize that ‘‘yes’’ or ‘‘no’’ information may need to be supplemented by short narrative responses.652 One commenter suggests introducing a tabular format, where reasonable, to capture the disclosures required by Forms ATS–N would facilitate comparison of Forms ATS– N.653 The Commission has revised the format of proposed Form ATS–N to further standardize the form’s requests, better organize questions by subject matter, reduce redundancy, reduce ambiguity, make more explicit requests on Form ATS–N to facilitate complete responses, and achieve the appropriate balance between yes/no and narrative responses. For instance, the adopted format of Form ATS–N changes several questions from proposed Form ATS–N for certain subject matters (e.g., order display, co-location services, and segmentation) to require ‘‘yes’’ or ‘‘no’’ responses with further narrative disclosure required in connection with ‘‘yes’’ responses. We believe that adding more ‘‘yes’’ or ‘‘no’’ questioning in Form ATS–N will help standardize responses and address commenters’ concerns about facilitating market participants’ review and comparisons of Form ATS– N disclosures. We continue to believe, however, that narrative responses enable market participants to understand the operations of the NMS Stock ATS and the ATS-related activities of the broker-dealer operator, particularly in light of the different trading functionalities, options, and procedures that are offered across NMS Stock ATSs, and provide NMS Stock ATSs with the flexibility to communicate required information to the public that is required by the form. Also, certain requests have been amended to only require summary information. We believe that requiring summaries for certain disclosures could help reduce potential extraneous information. 2. Terminology a. Definitions for Form ATS–N daltland on DSKBBV9HB2PROD with RULES2 (i) Proposed Defined Terms As proposed, Form ATS–N would have set forth definitions of the following terms: (1) Affiliate; (2) 651 See LeveL ATS Letter at 7. BIDS Letter at 4; SIFMA Letter at 12; LeveL ATS Letter at 7. 653 See BIDS Letter at 5. 652 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 alternative trading system; (3) brokerdealer operator; (4) control; (5) NMS security; (6) NMS Stock; (7) NMS Stock ATS; (8) order; (9) person; and (10) subscriber. The Commission received several comments regarding the proposed definitions of ‘‘affiliate.’’ The Commission is adopting the definition of the term ‘‘affiliate,’’ with a technical change,654 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.’’ One commenter states that the proposed definition of ‘‘affiliate’’ would include, among others, owners of the ATS operator, without regard for whether the affiliate is separately registered as a broker-dealer and therefore subject to the Commission’s jurisdiction.655 The commenter notes that the definition of ‘‘affiliate’’ would include persons ‘‘under common control with’’ the NMS Stock ATS operator, with control meaning at least 25% ownership, such that the threshold would capture entities that operate independently from one another.656 Similarly, another commenter points out that although the Proposal contains a customary definition of the term ‘‘affiliate,’’ the definition is not limited in any way that focuses on direct interactions or relationships with the NMS Stock ATS.657 We do not believe that the status of an affiliate’s registration with the Commission should limit the scope of the disclosures about that affiliate in Form ATS–N. However, the adopted Form ATS–N conflicts-of-interest disclosures are tailored to inform market participants about how affiliates of the broker-dealer operator trade on the NMS Stock ATS and how the use of the ATS by affiliates may affect the handling and execution of orders from unaffiliated parties. While the definition of ‘‘affiliate’’ in Form ATS–N may encompass a large number of entities for some ATSs, Form ATS–N is designed to solicit information that is relevant to a 654 The Commission is making one technical change to the proposed term ‘‘affiliate’’ by capitalizing the defined term ‘‘Person.’’ This change is meant to identify the term Person as a defined term for purposes of the Form ATS–N. 655 See LeveL ATS Letter at 3, n.5. 656 See id. at 4, n.7. 657 See UBS Letter at 4. This commenter states that the broker-dealer operator of its ATS has well over 300 global affiliates under the definition set forth in the Proposal, and that not all such affiliates are users of the ATS; only orders routed by a small number of affiliates end up in its ATS. See id. The commenter also points out that as proposed, it would need to disclose every affiliate regardless of whether it has any interactions with the ATS. See id. PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 market participant’s evaluation of an NMS Stock ATS as a potential trading venue. Therefore, while we have not amended the proposed definition of ‘‘affiliate,’’ the disclosures about affiliate activity on an NMS Stock ATS are not designed to require information about affiliates that the Commission and commenters believe would be extraneous to a market participant’s evaluation of conflicts of interest and information leakage on the ATS. We received two comments regarding the proposed definition of ‘‘control.’’ After carefully considering these comments, we are adopting the definition of ‘‘control,’’ as proposed, to 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. One commenter expresses support for the Commission’s proposal that the definition of control contain a 25% ownership threshold that the commenter states currently serves as a presumption of control and is consistent with that used in other areas of the securities laws.658 Another commenter states, however, that the proposed definition of ‘‘control’’ provides that certain persons are presumed to control the broker-dealer operator of an NMS Stock ATS, but that there is no corresponding safe harbor whereby persons are presumed not to control an NMS Stock ATS.659 Accordingly, the commenter opines that an NMS Stock ATS operator may feel obligated to provide overly broad disclosures, which could confuse subscribers regarding potential conflicts.660 Disclosures related to affiliates extend to persons that control, are controlled by, or are under common control with the broker-dealer operator, and, as a result, parallel the disclosures related to ‘‘control affiliates’’ that broker-dealer 658 See HMA Letter at 15. LeveL ATS Letter at 3, n.6. 660 See id. 659 See E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations operators must make on Form BD.661 The Commission disagrees that an NMS Stock ATS operator may feel obligated to provide unnecessarily broad disclosures regarding potential conflicts of interest due to the proposed definition of ‘‘control.’’ The presumed control tests set forth in the adopted definition of ‘‘control’’ are meant to provide clarity to NMS Stock ATSs as to when an entity and the broker-dealer operator are defined as ‘‘affiliated,’’ which would trigger the NMS Stock ATSs’ disclosure duties under Part II of adopted Form ATS–N. We believe that the enumerated circumstances under which there is presumed control involve factors (such as a shared executive or 25% ownership) that would likely result in one entity or person having the power, directly or indirectly, to direct the management or policies of the broker-dealer operator of an ATS. Therefore, in such situations, a presumption of control is appropriate. On the other hand, because control can manifest itself in several ways under the adopted definition, the Commission does not feel that there are certain facts that would warrant a presumption of no control. For example, the unique facts and circumstances of several different ownership structures could result in different conclusions regarding control, even though the various structures contain some similarities. Accordingly, the Commission has not added provisions setting forth circumstances under which there would be a presumption of no control. The Commission is adopting as proposed the changes to the definition of ‘‘control’’ under Rule 300(f) in Regulation ATS. The definition of the term control being adopted herein contains the additional 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.662 As discussed in the Proposal, the purpose of this difference 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 brokerdealer 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.663 The disclosures of ATS-related activities of the broker-dealer operator’s 661 See Form BD at 2 (defining ‘‘control affiliate’’). CFR 242.300(f). 663 See Proposal, supra note 1, at 81044. 662 17 VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 affiliates in Part II of adopted Form ATS–N are designed to provide subscribers and market participants with a comprehensive understanding of the 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 adopted definitions of ‘‘affiliate’’ and ‘‘control,’’ any affiliate of the broker-dealer operator of the NMS Stock ATS would be an affiliate of the NMS Stock ATS. These definitions are designed to cover entities that have a close relationship with the broker-dealer operator and whose activities could raise conflicts of interest concerns, or could otherwise be relevant to market participants when evaluating an NMS Stock ATS. Furthermore, in Part III, Item 1 of proposed Form ATS–N, the Commission used the term ‘‘non-ATS trading center.’’ A commenter requests that the Commission define the term ‘‘non-ATS trading center’’ so that broker-dealer operators can better focus on making proper disclosures.664 As further explained below, in response to comments, the Commission is reorganizing and changing Part III, Item 1 of proposed Form ATS–N to request information about the trading activities of the broker-dealer operator and its affiliates, irrespective of whether the broker-dealer operator’s business units and/or affiliates are non-ATS trading centers.665 Given the revisions the Commission is making to Part III, Item 1, we believe that the defined term is no longer necessary, and the Commission is, therefore, eliminating the term from adopted Form ATS–N. Another commenter agrees with the goal of highlighting potential conflicts of interest faced by broker-dealer operators of NMS Stock ATSs and their affiliates in connection with the ATS.666 The commenter endorses the proposed requirement to identify non-ATS trading centers managed by the ATS operator or its affiliates that interact with the ATS. The commenter also states that disclosures related to non-ATS trading centers should be limited to non-ATS trading centers that interact with or exchange information with the ATS.667 664 See SIFMA Letter at 10. infra Section V.C.1. 666 See KCG Letter at 8. 667 See id. at 8–9. This commenter also asserts that it is imperative for the Commission to clarify that the interaction between the NMS Stock ATS and any non-ATS trading center may be subject to change and the ATS operator does not need file and receive Commission approval before implementation. See id. We note that the materiality of any changes to the interaction and coordination between non-ATS trading centers and the NMS Stock ATS that would require disclosure 665 See PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 38819 The Commission also believes that public disclosure of non-ATS trading centers managed by the broker-dealer operator or its affiliates that interact with the ATS furthers the stated goal of helping market participants evaluate potential conflicts of interest on an NMS Stock ATS. The requests in Part II of adopted Form ATS–N are tailored to elicit such information without burdening NMS Stock ATSs with a requirement to list the non-ATS trading centers of the broker-dealer operator or its affiliates that do not interact with the NMS Stock ATS. (ii) New Defined Terms The Commission is adding the term ‘‘trading center’’ to the definitions set forth in the Instructions to adopted Form ATS–N to define that term for purposes of its use in Part II and Part III of adopted Form ATS–N. The term ‘‘trading center’’ was used in proposed Form ATS–N with regard to arrangements with other trading centers—Part III, Item 4 of proposed Form ATS–N—and is used in adopted Form ATS–N’s requests regarding the routing of orders from the NMS Stock ATS to business units or affiliates of the broker-dealer operator (adopted Part II, Items 1 and 2) and the NMS Stock ATS’s arrangements with other trading centers (adopted Part II, Item 4). The definition of the term ‘‘trading center’’ used for purposes of adopted Form ATS–N is the same as that currently set forth in Regulation NMS Rule 600(b)(78).668 The adopted definition is ‘‘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.’’ While we believe that the scope of the term ‘‘trading center’’ in Form ATS–N would likely be understood by NMS Stock ATSs, we believe that adding a definition to the Form ATS–N will reduce any potential ambiguity with regard to those requests in Part II, Items 1, 2, and 4 of adopted Form ATS–N. One commenter states that the Commission should add additional definitions for certain terms to promote consistency throughout Forms ATS–N, which the commenter believes could ultimately facilitate comparison among on Form ATS–N should be evaluated based on the facts and circumstances related to each change. 668 See 17 CFR 242.600(b)(78). E:\FR\FM\07AUR2.SGM 07AUR2 38820 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 Forms ATS–N.669 Another commenter emphasizes that the Commission should establish fundamental uniformity in the way information is defined and disclosed.670 We have structured adopted Form ATS–N to allow market participants to better compare disclosures among NMS Stock ATSs. We do not, however, believe that it should establish standardized terms to be used by NMS Stock ATSs when completing their disclosures on Form ATS–N. We do not desire to impose substantive standards for how disclosures should be written by adopting and defining terms to be used by all NMS Stock ATSs to describe the functionalities, operations, or procedures of their systems. The operations of NMS Stock ATSs vary, and, apart from some common terms, many NMS Stock ATSs use different terminology to describe their operations and functionalities. Based on our review of Form ATS filings, we believe that NMS Stock ATSs may use differing terms and definitions to describe functionalities, operations, or procedures, even if a particular function, operation, or procedure on one ATS may resemble that on another. We do not believe that it would be very helpful to define terms for functionalities, operations, or procedures across NMS Stock ATSs because doing so may not result in complete or comprehensible disclosures due to these substantive and semantical differences in the operations of NMS Stock ATSs. We believe that adopting standardized, substantive terms for Form ATS–N disclosures may limit the ability of an NMS Stock ATS to completely and clearly describe its system, which we believe could reduce the utility of Form ATS–N disclosures for market participants. We also believe that such defined terminology would limit the flexibility of NMS Stock ATSs to name or market new services of the ATS. b. Comments on the Definition of ‘‘Subscriber’’ When seeking disclosures regarding how an NMS Stock ATS operates and the ATS-related activities of the brokerdealer operator and its affiliates, proposed Form ATS–N used the terms ‘‘subscriber’’ and ‘‘person(s).’’ One commenter believes that Form ATS–N should instead focus on the term ‘‘user’’ rather than ‘‘subscriber.’’ 671 This commenter states that the term ‘‘subscriber’’ can be disparately 669 See BIDS Letter at 5. UBS Letter at 2. 671 See Morgan Stanley Letter at 4. interpreted and applied by broker-dealer operators of ATSs and would inhibit uniform application across ATSs in terms of disclosure, access, priority, and other purposes. This commenter further states that the current definition in Regulation ATS fails to adequately define ‘‘subscriber’’ in the case of an ATS that is part of a larger broker-dealer operation, leading to inconsistencies in the application of the requirements applicable to subscribers across ATSs. The commenter believes that disclosures in Form ATS–N should not depend on whether a broker-dealer operator has a contractual agreement with a user for accessing the ATS, but should be consistent for all users that access an ATS whether such users are internal or external and whether such users access the ATS directly or indirectly. Similarly, another commenter believes the phrase ‘‘subscriber orders or other trading interest’’ as used in proposed Part III, Item 1—which would have required the NMS Stock ATS to disclose information about the interaction and coordination between non-ATS trading centers operated by the broker-dealer operator or its affiliates and the NMS Stock ATS—should be read as ‘‘subscriber orders or subscriber trading interest.’’ 672 This commenter believes that the alternative reading would potentially capture all trading interest sent to the broker-dealer operator of the NMS Stock ATS. We agree that responses to questions in Form ATS–N should be uniformly applied by NMS Stock ATSs regardless of the source of orders (e.g., principal trading desks of the broker-dealer operator, third parties using direct connectivity, affiliates of the brokerdealer operator, customers of the brokerdealer operator whose orders are submitted to the ATS through a functionality of the broker-dealer operator, such as a smart order router (‘‘SOR’’)). We have revised several requests on proposed Form ATS–N to help facilitate a uniform application of responses by NMS Stock ATSs and, in response to commenters’ concerns, are providing guidance regarding the definition of ‘‘subscriber’’ under Regulation ATS and in the context of Form ATS–N disclosures. First, we believe that the term ‘‘subscriber’’ sufficiently captures the vast majority of market participants whose orders or trading interest are submitted to and executed in an NMS Stock ATS. Regulation ATS defines subscriber ‘‘[a]s any person that has entered into a contractual agreement 670 See VerDate Sep<11>2014 21:26 Aug 06, 2018 672 See Jkt 244001 PO 00000 UBS Letter at 5. Frm 00054 Fmt 4701 Sfmt 4700 with an ATS to access such ATS for the purpose of effecting transactions in securities or submitting, disseminating, or displaying orders on such ATS, including a customer, member, user, or participant in an ATS.’’ 673 In the Proposal, as the Commission discussed, the broker-dealer operator of an NMS Stock ATS is legally responsible for, and controls all aspects of, the ATS operation, including, among other things, providing access to the ATS.674 Based on our experience, persons seeking to use an ATS’s services enter into agreements with the broker-dealer operator, and these agreements could cover services in addition to the ATS services. These agreements may take a variety of forms, and may or may not be written.675 If a market participant has an agreement—written or unwritten—with a broker-dealer that allows the market participant to enter orders directly into an ATS operated by the broker-dealer, that market participant is a subscriber of the ATS for purposes of Regulation ATS and Form ATS–N. Another example of a subscriber would include a customer of the brokerdealer operator whose orders are submitted to the ATS by the brokerdealer operator. Many NMS Stock ATSs are operated by broker-dealers that offer their customers a wide range of order handling and execution services in addition to the execution services of their NMS Stock ATSs.676 These services typically involve functionality such as an SOR or other types of trading algorithms. In cases where a customer uses this wider range of services of the broker-dealer, the customer would not 673 17 CFR 242.300(b) (emphasis added). Additionally, the definition of the term ‘‘subscriber’’ under Regulation ATS states that a subscriber shall not include a national securities exchange or national securities association. See id. 674 See Proposal, supra note 2, at 81041 (discussing the relationship between the brokerdealer operator’s operation of the NMS Stock ATS and its other operations). 675 For example, third-party market participants— including, potentially, affiliates and non-affiliates of the broker-dealer operator—may enter into subscriber agreements or some other form of contract with the broker-dealer operator to connect directly to the ATS to submit or display orders. We note that a determination as to who may be a ‘‘subscriber’’ to the ATS would depend upon the facts and circumstances of the relationship between the ATS and the broker-dealer operator, so the preceding examples are not exhaustive. 676 See UBS Letter at 5 (noting that market participants may maintain a commercial relationship with the broker-dealer operator for purposes other than accessing the broker-dealer operator’s ATS, such as to use the broker-dealer’s high touch block trading desk or to use the brokerdealer’s trading algorithms); Morgan Stanley Letter at 1–2 (explaining that full service broker-dealers may provide clients with a broad, integrated electronic offering of trading services, which might include ATS services). E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 send its orders directly to the ATS, but rather, send its orders to some functionality external to the ATS, which could be the SOR or algorithm itself or a client service desk that submits the customer orders into the broker-dealer’s SOR or trading algorithms. A SOR or trading algorithm typically has the capability to route customer orders to a number of execution venues, including the broker-dealer operator’s own ATS. We note that such commercial relationships may be governed by formal or informal agreements. To the extent a person enters into a contract, written or unwritten, to use the brokerdealer operator’s order routing and execution services, and those services could include routing to and executing in the broker-dealer operator’s own ATS, that agreement would fall within the contractual agreements under the definition of ‘‘subscriber’’ under Regulation ATS and the person would be a subscriber to the ATS. On the other hand, a customer’s order routed by the broker-dealer operator’s SOR or trading algorithm to an external market for execution would not be a subscriber order because the order was not destined or entered into the ATS.677 Second, as noted above, a commenter believes that Regulation ATS does not adequately define the term ‘‘subscriber’’ in the case of an ATS that is part of a larger broker-dealer operation, which the commenter believes could lead to inconsistencies in the application of the requirements applicable to subscribers across ATSs.678 While we believe that the term ‘‘subscriber’’ sufficiently captures the vast majority of market participants whose orders or trading interest are submitted to and executed in an NMS Stock ATS, we also acknowledge that business units of multi-service broker-dealer operators, in many cases, participate in the ATS of that broker-dealer operator and submit principal orders to the ATS. Despite participating in the ATS, these business units might not always meet the definition of ‘‘subscriber’’ because an ATS may not have a contractual agreement with a business unit that is part of the same entity. Adopted Form ATS–N uses the term ‘‘subscriber’’ throughout, and, in certain Items, specifically states the type of 677 We do not intend for Form ATS–N to require disclosures about aspects of a market participant’s other commercial relationships with a broker-dealer operator that do not pertain to the NMS Stock ATS. We believe that the adopted Form ATS–N disclosure requests are tailored so that operations of the broker-dealer operator not housed within the NMS Stock ATS—and that do not otherwise pertain to the functions of the ATS—would not be subject to disclosure on Form ATS–N. 678 See Morgan Stanley Letter at 4. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 ATS-related activities of, or information about, the broker-dealer operator that must be disclosed. For example, Part III, Item 5(b) of adopted Form ATS–N requires the NMS Stock ATS to state whether the terms and conditions to directly enter orders and trading interest into the NMS Stock ATS are the same for all subscribers and the broker-dealer operator. We believe that drafting the Form ATS–N requests in this manner will help ensure that the scope of information solicited encompasses all relevant users of the ATS services (i.e., subscribers, and to the extent such users do not meet the definition of ‘‘subscriber,’’ the business units of the broker-dealer operator). We believe that adopted Form ATS–N is not designed to solicit disparate disclosures among NMS Stock ATS due to varying interpretations of the term ‘‘subscriber’’ by individual ATSs. B. Cover Page and Part I of Form ATS–N: Identifying Information 1. Cover Page In response to concerns from commenters that the public may be led to believe that the Commission is conducting a merit-based review of Form ATS–N disclosures filed with the Commission, we are including on the cover page of Form ATS–N a legend stating that the Commission has not passed upon the merits or accuracy of the disclosures in the filing. On the cover page of adopted Form ATS–N, the responding entity is required to identify the type of filing 679 by marking the appropriate checkbox.680 We are also adopting, as proposed, a requirement that NMS Stock ATSs file a notice of cessation of operations on Form ATS–N and provide the date that the NMS Stock ATS will cease to operate. We are also adopting a check box that allows a Form ATS–N filer to withdraw a previously filed Form ATS– 679 Proposed Form ATS–N would have required NMS Stock ATSs to check the ‘‘Submission Type.’’ Adopted Form ATS–N requires NMS Stock ATSs to check the ‘‘Type of Filing.’’ This is a nonsubstantive change. 680 Adopted Form ATS–N’s cover page provides that a filing may be an initial Form ATS–N, or a Form ATS–N material amendment, updating amendment, correcting amendment, or order display and fair access amendment. Proposed Form ATS–N included a check box above the ‘‘Submission Type’’ menu, where an NMS Stock ATS could indicate if the filing was an ‘‘Initial Form Filing.’’ In addition, in the proposed Form ATS–N ‘‘Submission Type’’ menu, an NMS Stock ATS could check whether its submission was a ‘‘Form ATS–N.’’ Adopted Form ATS–N does not include a check box to indicate whether the filing is an ‘‘Initial Form Filing,’’ and revises the proposed check box under the ‘‘Type of Filing’’ menu to state ‘‘Initial Form ATS–N’’ (emphasis added). PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 38821 N filing.681 The Instructions to Form ATS–N state that an NMS Stock ATS may withdraw an initial Form ATS–N or an amendment before the end of the applicable Commission review period. Because its initial Form ATS–N supersedes and replaces a Legacy NMS Stock ATS’s Form ATS for purposes of the exemption and the initial Form ATS–N can be amended, a Legacy NMS Stock ATS may not withdraw its initial Form ATS–N at any time. Once the Commission review period has expired or a Legacy NMS Stock ATS has filed its initial Form ATS–N, the Legacy NMS Stock ATS cannot withdraw the filing and must file a notice of cessation pursuant to Rule 304(a)(3) if it intends to cease to operate or file an amendment to its Form ATS–N, as appropriate. In addition, an NMS Stock ATS may withdraw a notice of cessation of operations at any time before the date that the NMS Stock ATS had indicated it intended to cease operating. In the cover page of proposed Form ATS–N, the Commission sought a brief narrative description for Form ATS–N amendments so market participants could quickly understand the nature of the amendment.682 We are modifying this requirement to be more specific as to what information is required in this narrative. Adopted Form ATS–N requires the NMS Stock ATS to indicate 681 Proposed Form ATS–N included a check box, above the ‘‘Submission Type’’ menu, where an NMS Stock ATS could indicate that a filing was a ‘‘Withdrawal of Initial Form Filing.’’ Adopted Form ATS–N relocates this check box to the ‘‘Type of Filing’’ menu and revises it to say ‘‘Withdrawal of Form ATS–N filing’’ so that such check box can accommodate withdrawals of different types of filings, and not just a withdrawal of an initial Form ATS–N. Adopted Form ATS–N provides a space for the EDGAR accession number for the Form ATS– N filing to be withdrawn, which will enable market participants to identify the prior filing that is being withdrawn. 682 An NMS Stock ATS is required to attach a document marked to indicate changes for a Form ATS–N amendment to Form ATS–N Part, I, Part II, and Part III, as applicable, and to highlight changes to ‘‘yes’’ or ‘‘no’’ answers or additions or deletions from its prior Form ATS–N filing. We believe that marked documents will help market participants and the Commission review Form ATS–N amendments in an efficient manner. We have changed the marked document requirement that was proposed. In the proposal the marked document was referred to a redline. We proposed for an NMS Stock ATS to submit two redlines— Exhibit 3A to show changes to Part III of proposed Form ATS–N and Exhibit 4A to show changes to Part IV of proposed Form ATS–N. We are adopting a requirement that ATSs provide a single exhibit, Exhibit 3, that contains a marked document to indicate changes to Parts I, II, and III. We believe that only requiring a single document may reduce the filing burden on ATSs. We believe that the marked documents will be helpful for market participants to review changes to Part I. In addition, to reflect the use of ‘‘yes’’ or ‘‘no’’ questions in adopted Form ATS–N, we are specifying that the marked document would be required to indicate changes in ‘‘yes’’ or ‘‘no’’ answers. E:\FR\FM\07AUR2.SGM 07AUR2 38822 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations the part and item number of the Form ATS–N that is the subject of the change, provide a brief summary of the changes, and state whether or not the changes apply to all subscribers and the brokerdealer operator.683 In addition, the NMS Stock ATS is required to provide the EDGAR accession number for the Form ATS–N filing to be amended, which will allow market participants to identify the filing that is being amended. Furthermore, in response to comments, we are adopting Rule 304(b)(2)(iii), which provides that it will make public the cover page of a filed Form ATS–N material amendment upon filing and then make public the entirety of the material amendment following the expiration of the review period pursuant to Rule 304(a)(2)(ii).684 In connection with this change, we are adopting Instructions that we believe will better solicit information that will notify market participants of the general subject matter of a Form ATS–N amendment, as well as the subscribers that would be affected by the amendment. For updating and correcting amendments, which will be made public upon filing, we believe that the information in the narrative can assist market participants in understanding the general nature of the change that the NMS Stock ATS is implementing. In addition, we are making a technical change to relocate the check box indicating whether an initial Form ATS–N is being filed by a Legacy NMS Stock ATS operating pursuant to a Form ATS.685 2. Part I of Form ATS–N: Identifying Information a. Part I: Identifying Information daltland on DSKBBV9HB2PROD with RULES2 Part I of adopted Form ATS–N combines the requests set forth in Parts I and II of proposed Form ATS–N, which covered, among other things, the name of the NMS Stock ATS and the NMS Stock ATS’s broker-dealer operator’s registration and contact information.686 We are adding to Part I, 683 Accordingly, the adopted Instructions have been enhanced from the proposed Instructions so that they provide more guidance to an NMS Stock ATS drafting the narrative. The proposed Instructions would have asked an NMS Stock ATS to ‘‘[p]rovide a brief narrative description of the Amendment.’’ See Proposal, supra note 2, at 81138. 684 See supra Section IV.E.2.c. 685 Proposed Form ATS–N set forth this check box in Part I, Item 4, whereas adopted Form ATS– N sets forth this check box on the cover page. 686 The subsequent sections of adopted Form ATS–N have been renumbered accordingly. The disclosures regarding the ATS-related activities of the broker-dealer operator and its affiliates on the NMS Stock ATS are contained in Part II, the manner of operations disclosures are contained in VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Item 1 of adopted Form ATS–N, a new requirement, which was not proposed, that the filer check a box indicating whether the filer is a registered brokerdealer with the Commission to readily notify the Commission whether the filer is eligible to operate as an NMS Stock ATS pursuant to Regulation ATS. To assist the Commission in more easily assessing whether the NMS Stock ATS has registered as a broker-dealer pursuant to Rule 301(b)(1) of Regulation ATS, we are adopting the proposed requirement that the NMS Stock ATS provide 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 2 of adopted Form ATS–N. To the extent that a commercial or ‘‘DBA’’ (doing business as) name or names 687 are used to identify the NMS Stock ATS to the public, the Commission, or its SRO, or if a registered broker-dealer operates multiple NMS Stock ATSs, adopted Form ATS–N would require the full name(s) of the NMS Stock ATS under which business is conducted, if different,688 in Part I, Item 3 of adopted Form ATS–N. We are also adopting Part II, Items 2 and 3 of proposed Form ATS–N as Part I, Item 4 689 of adopted Form ATS–N to require the NMS Stock ATS to provide the broker-dealer operator’s SEC File Number and Central Registration Depository (‘‘CRD’’) Number. We are not, however, including in adopted Part I the proposed requests that the NMS Stock ATS provide the effective date of its broker-dealer operator’s registration with the Commission, the broker-dealer operator’s legal status (e.g., sole proprietorship, corporation), information about its date and place of formation if the broker-dealer operator is other than a sole proprietor, and the mailing address of the NMS Stock ATS (if not the same as the physical address). This identifying information is Part III, and the contact information, signature block, and consent to service are contained in Part IV of adopted Form ATS–N. 687 In some instances, an NMS Stock ATS may have several commercial or doing-business-as names, such as a name the ATS uses in its filings to the Commission, or to FINRA pursuant to FINRA Rule 6110. Adopted Form ATS–N requires the ATS to list all names under which it conducts business in Part I, Item 2. 688 Part I, Item 2 of proposed Form ATS–N would have required an NMS Stock ATS to disclose the full name of the NMS Stock ATS under which its business is conducted, ‘‘if any.’’ Part I, Item 3 of adopted Form ATS–N only requires this disclosure ‘‘if different.’’ 689 The requirements of Part II, Items 2 and 3 of proposed Form ATS–N are consolidated into Part I, Item 4 of adopted Form ATS–N, and divided into two subparts. PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 disclosed on Form BD or otherwise made available to the public and the Commission.690 We do not believe that it is necessary to require the NMS Stock ATS to provide this information on Form ATS–N because other information requests about the registration status of the broker-dealer operator will inform the Commission about whether the NMS Stock ATS has met the condition of Rule 301(b)(1) of Regulation ATS. We are adopting Part II, Item 4 of proposed Form ATS–N as Part I, Item 5 of adopted Form ATS–N to require the NMS Stock ATS to provide the full name of the national securities association of the broker-dealer operator and the effective date of the brokerdealer operator’s membership with the national securities association. We are adding to Part I, Item 4 of adopted Form ATS–N the proposed requirement for an NMS Stock ATS to provide its Market Participant Identifier (‘‘MPID’’).691 Providing the name of the NMS Stock ATS or DBAs and its MPID would identify the ATS to the public and Commission. One commenter states that the name, identity of the broker-dealer operator, any ‘‘doing business as’’ name, and the ATS’s MPID are basic information critical to market participants and should be disclosed.692 Also, as was proposed, adopted Form ATS–N requires the NMS Stock ATS to provide a URL address for the website of the ATS, and in the signature block in Part IV of adopted Form ATS–N, the representative of the broker-dealer operator will also be required to provide his or her business contact information, including the person’s name and title, telephone number, email address, and primary street address and mailing address (if different) of the NMS Stock ATS.693 This information will facilitate 690 The mailing address for registered brokerdealers is available to the Commission via EDGAR. The mailing address, type of entity, and date when established for each broker-dealer is available to the public through FINRA. 691 This requirement was previously a stand-alone request and has been moved to Part I, Item 5 of adopted Form ATS–N, which asks the NMS Stock ATS to disclose its national securities association, which would issue the MPID to the ATS. 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 when reporting trade information to FINRA. See FINRA ATS Reporting Approval, supra note 15. 692 See HMA Letter at 10. 693 Contact information of the broker-dealer operator’s representative in Part IV of Form ATS– N will not be made public. In addition, consistent with the requirements of proposed Form ATS–N, the signature block in Part IV of adopted Form ATS–N requires the NMS Stock ATS to consent that E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 communication with the broker-dealer operator during the Commission review period of a Form ATS–N and later as necessary as part of the Commission’s ongoing monitoring of the NMS Stock ATS. We are modifying the proposed request for the physical street address of the NMS Stock ATS to also require the ATS to provide the physical street address, if any, of a secondary location for the ATS that may be used in the event that the primary physical location is not available. The location of an NMS Stock ATS, including its matching system, may differ from the main physical or mailing address of the broker-dealer operator. We believe that it is important for both the Commission and market participants to know where the NMS Stock ATS is located in the event of, for instance, a natural disaster that could impact market participants’ ability to trade on the ATS and potential latency that could be experienced due to the location of the secondary site of the NMS Stock ATS. Also, we are concerned that market participants could be harmed from systems problems that necessitate a suspension or halt to trading at an NMS Stock ATS. Thus, we believe it is important to fully understand what, if any, trading procedures an NMS Stock ATS would follow if trading is suspended or stopped, which would be disclosed under Part III, Item 20 of adopted Form ATS–N. We believe that knowing any secondary location(s) for the NMS Stock ATS would be relevant to both the Commission’s and market participants’ understanding of how the ATS handles certain contingencies. The main physical address and mailing address of the broker-dealer operator are provided on Form BD, so we do not believe it is necessary to publicly disclose this information on Form ATS–N.694 Part II, Item 6 of proposed Form ATS–N provided that the NMS Stock ATS could indicate by check box that the broker-dealer operator is a sole proprietor and that the physical street address is a private residence, and that in such case, the private residential address would not be included in the publicly available 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 to the contact employee at the primary street address or mailing address, if different, of the NMS Stock ATS, or via email, at the addresses provided on this Form ATS–N. 694 Part IV of adopted Form ATS–N, which will not be made public, requires the primary street address and mailing address of the NMS Stock ATS in order to facilitate the Commission contacting the NMS Stock ATS. See supra note 693. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 version of the form.695 One commenter asserts that Form ATS–N should require disclosure of all relevant addresses, and states its view that we should eliminate the proposed exception for NMS Stock ATSs out of a personal residence.696 In light of this comment, we are not including in adopted Form ATS–N the proposed check box noting that the physical address of the matching system is at a sole proprietor’s private residence. We agree that market participants should be aware of the physical addresses of the matching systems for all NMS Stock ATSs, regardless of whether they are at a sole proprietor’s private residence. In addition, based on Commission experience, NMS Stock ATSs generally do not operate out of a sole proprietor’s residence, and the Commission does not believe that the exception is necessary. We will therefore make the physical address of the matching system available for every Form ATS–N.697 Also, as was proposed, the Part I, Items 8 and 9 require an NMS Stock ATS to attach its most recently filed or amended Schedule A of the brokerdealer operator’s Form BD disclosing information related to direct owners and executive officers, and its most recently filed or amended Schedule B of the broker-dealer operator’s Form BD disclosing information related to indirect owners as Exhibits 1 and 2, respectively. In lieu of attaching those schedules, the NMS Stock ATS can indicate, via a checkbox, that the information under those schedules is available on its website and is accurate as of the date of the filing of the Form ATS–N. We continue to believe that these exhibits will help market participants identify the persons and entities that directly and indirectly own the broker-dealer operator and any potential associated conflicts of interest. We are requiring the NMS Stock ATS to provide this information on Form ATS– N, even though the same information is provided on Form BD, because information about ownership of the broker-dealer operator will enable market participants to better understand conflicts of interest that may arise therefrom, which is one of the central purposes of the form. As such, an NMS Stock ATS must file this information on Form ATS–N. We also continue to believe that it is appropriate for an NMS Stock ATS to provide this information using a URL address for these documents in lieu of attaching the actual documents to their Form ATS–N 695 See Part II, Item 6 of proposed Form ATS–N. HMA Letter at 11. 697 Part I, Item 7 of adopted Form ATS–N. 696 See PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 38823 filings because the ATS’s disclosures on Form ATS–N will provide the public with the required information. Part I, Item 10 of adopted Form ATS–N requires the NMS Stock ATS, for filings made pursuant to Rule 304(a)(2)(i) (i.e., Form ATS–N amendments), to attach as Exhibit 3 a marked document to indicate changes to ‘‘yes’’ or ‘‘no’’ answers or additions or deletions from any item in Part I, Part II, Part III, as applicable. b. Comments on Proposed Exhibit 1 We proposed to require that NMS Stock ATSs provide, in Exhibit 1 to Form ATS–N, a copy of any materials currently provided to subscribers or other person related to the operations of the NMS Stock ATS or the disclosures on Form ATS–N (e.g., FIX protocol procedures, rules of engagement/ manuals, frequently asked questions, marketing materials). We received several comments regarding Exhibit 1.698 We are not adopting the proposed Exhibit 1 requirements to Form ATS–N. Commenters express concerns that the requirements of Exhibit 1 are broad,699 not relevant for purposes of facilitating ATS comparisons by market participants,700 and would require unnecessarily cumbersome amount of disclosure.701 Three commenters express concern about the requirement to make subscriber materials attached to Form ATS–N as exhibits public on the grounds that such documents may include confidential information.702 Commenters propose that as an alternatives to the Exhibit 1 requirements, the Commission could make exhibits public only when they are responsive to certain categories of documents made available to users (such as FIX protocol procedures, rules of engagement, user manuals, frequently asked questions, and marketing materials) or are required to accurately respond to the questions on Form ATS– N,703 or not make public certain 698 See SIFMA Letter at 7; Liquidnet Letter at 8; KCG Letter at 6; HMA Letter at 11; STANY Letter at 3; UBS Letter at 3; Level ATS Letter at 5. 699 See SIFMA Letter at 7; Liquidnet Letter at 8; KCG Letter at 6. 700 See KCG Letter at 6. 701 See SIFMA Letter at 7. 702 See Liquidnet Letter at 8; KCG Letter at 6; Level ATS Letter at 5. One of these commenters also expresses concern that the proposed requirement would require disclosure of subscriber agreements, which are individually negotiated and confidential. See Level ATS Letter at 5–6. Another one of these commenters is concerned that NMS Stock ATS operators would limit the amount of information shared with subscribers in order to avoid sharing that information with the public and its competitors. See Liquidnet Letter at 8. 703 See Liquidnet Letter at 8. E:\FR\FM\07AUR2.SGM 07AUR2 38824 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations information (such as electronic trading protocols or other customer agreements) and provide other ‘‘proprietary’’ information only to regulators upon request.704 Another commenter suggests that rather than requiring formal amendments to Form ATS–N every time an ATS wishes to change or enhance marketing materials and similar disclosures, the Commission should allow an NMS Stock ATS to post the most recent versions of its marketing materials on its website.705 We are not adopting the proposed requirement that NMS Stock ATSs 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. We recognize that some of such materials could contain proprietary or other information that NMS Stock ATSs would not wish to make public due to confidentiality or competitive concerns. With respect to the comments in support of requiring subscriber materials to be made public,706 or in support of a limited version of the Exhibit 1 requirements,707 we believe that Form ATS–N is designed to elicit meaningful disclosures about how the NMS Stock ATS operates and the ATSrelated activities of the broker-dealer operator and its affiliate. We believe that the vast amount of information that would have been contained in the Exhibit 1 materials will be disclosed in response to the request in Form ATS– N and that no longer requiring NMS Stock ATSs to produce these materials will reduce their burden and the potential disclosure of redundant information to the public. One commenter states that while it does not support a requirement for public filing of exhibits, it supports requiring these exhibits to be filed with the Commission.708 We are not adopting this suggestion. As discussed above, the purpose of this rulemaking is to expand the public transparency of NMS Stock ATSs; providing the proposed Exhibit 1 information to only the Commission would not serve this purpose. Another commenter states that to the extent that ATSs would disclose 704 See SIFMA Letter at 7–8. UBS Letter at 3. 706 See HMA Letter at 12 (supporting the adoption of a revised Exhibit 1 because it would enhance consistency of information to subscribers and the public and would be valuable to those seeking to evaluate NMS Stock ATSs). See infra note 709. 707 See KCG Letter at 5–6 (supporting a requirement that information be made available to all market participants, and not selectively disclosed, but asserting that as drafted, Exhibit 1 is overly broad). 708 See Liquidnet Letter at 9. daltland on DSKBBV9HB2PROD with RULES2 705 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 statistics or data that had been requested by firms to help with their cost and best execution analysis, such an approach would be less helpful than a greatly enhanced, comprehensive disclosure for this information.709 The commenter states that this information is essential. However, this commenter expresses concern that as a consequence of the Exhibit 1 requirements, NMS Stock ATSs may cease to provide subscribers with information and statistics to avoid having to make such information public. This commenter suggests that Exhibit 1 be revised to include all marketing materials, manuals, and fee information, but not customized statistics and information, provided that such statistics and information are otherwise publicly disclosed. We are not expanding market statistics that NMS Stock ATSs are currently required to disclose as part of this rulemaking. c. ATS Governance Structure and Compliance Programs and Controls In the Proposal, we asked if NMS Stock ATSs should be required to provide disclosure about their governance structure and compliance programs and controls to comply with Regulation ATS.710 In response, we received one comment, which states that governance structures are likely to vary materially among ATSs, and that the Commission’s goals in this area would best be served through the Commission’s Office of Compliance Inspections and Examination’s regular examination efforts.711 We did not receive comments supporting a request for such information. We believe that it is appropriate to take an incremental approach to this topic and intends to monitor the effectiveness of the disclosures on adopted Form ATS–N. Should the Commission decide to take further action with regard to Form ATS– N’s disclosure requirements, including adding requests about NMS Stock ATS governance structure and compliance programs and controls, the Commission would do so in a separate rulemaking in the future. C. Part II of Form ATS–N: ATS-Related Activities of the Broker-Dealer Operator and Affiliates We believe that the interests of the broker-dealer operator or its affiliates sometimes compete against the interest of those that use the ATS’s services. These competing interests, at times, may give rise to conflicts of interests for the broker-dealer operator and its affiliates 709 See HMA Letter at 12. Proposal, supra note 2, at 81041. 711 See UBS Letter at 4. 710 See PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 or the potential for information leakage of subscribers’ confidential trading information. As such, Part II of Form ATS–N is designed to provide subscribers and market participants with information about these competing interests, and in doing so, inform them about: (1) The operation of the NMS Stock ATS—regardless of the corporate structure of the NMS Stock ATS—and 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) ATS-related activities of the broker-dealer operator and its affiliates that may give rise to conflicts of interest for the broker-dealer operator and its affiliates or the potential for information leakage of subscribers’ confidential trading information. Commenters generally support disclosing information about potential conflicts of interest and information leakage, and we did not receive any comments opposing the principle that information related to conflicts of interest or information leakage on an NMS Stock ATS should be publicly disclosed.712 Several commenters, however, state general concerns that the scope of the requests in Part III of proposed Form ATS–N is too broad.713 A number of commenters believe that the requests regarding affiliates should be limited to descriptions of how the broker-dealer operator and its affiliates or business units directly interact with or affect the operations of the NMS Stock ATS.714 For example, one commenter argues that proposed Form ATS–N would have required disclosures that are not meaningful to market participants and could possibly inhibit useful comparison of NMS Stock ATSs.715 Furthermore, a commenter argues that the proposed conflicts of interest requests regarding affiliates of the broker-dealer operator would have placed a significant burden on multiservice broker-dealers with a large number of affiliates, sometimes numbering in the hundreds.716 Similarly, another commenter states that an NMS Stock ATS’s broker-dealer operator may not be privy to certain 712 As discussed further below, several commenters suggest how to refine the specific requests proposed for Part III of Form ATS–N. 713 See, e.g., STA Letter at 4; KCG Letter at 8–9; SIFMA Letter at 4–8; Luminex Letter at 2–3; Fidelity Letter at 5; STANY Letter at 5; UBS Letter at 6; Morgan Stanley Letter at 5. 714 See Fidelity Letter at 2 and 4; UBS Letter at 2–4; SIFMA Letter at 4, 8; Luminex Letter at 3; Markit Letter at 7–8. 715 See Morgan Stanley Letter at 5. 716 See UBS Letter at 2–5. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations information about its affiliates for valid compliance reasons.717 As outlined below in more detail— and in response to both these general commenter concerns and commenter concerns that are more specific to particular disclosure requests, which are explained below—we are modifying the conflicts of interest requests to focus on: (1) The ability of business units or affiliates of the broker-dealer operator to enter, or direct the entry of, orders into the NMS Stock ATS and whether such business units or affiliates actually trade on the NMS Stock ATS; and (2) whether those business units and affiliates that do trade on the NMS Stock ATS receive any preferential treatment with respect to the services offered by the NMS Stock ATS. We continue to believe that disclosures regarding the ATS-related activities of the broker-dealer operator and its affiliates will help enable market participants to assess potential conflicts of interest that may impact their trading on the ATS and assess the potential for information leakage. At the same time, we also believe that Form ATS–N should not require public disclosure of activities or affiliate relationships of the broker-dealer operator that do not relate to the NMS Stock ATS and thus, do not present a potential conflict of interest. We believe that the revisions to the proposed disclosure requests are responsive to commenters’ concerns about the scope of the form’s affiliate disclosures. Furthermore, the burden of responding to the affiliate requests has been reduced from that which was proposed. First, the adopted affiliate disclosure requests focus on substantive information about how affiliated entities interact with the ATS and differences in how the ATS treats affiliates’ orders. As such, frequent updates to Part II for ministerial or minor administrative changes by the ATS would not normally be necessary.718 To the extent a ministerial or administrative change affects a disclosure on Form ATS–N in a non-material way, the NMS Stock ATS would, in most instances, only be required to file a quarterly updating amendment. Additionally, an NMS Stock ATS likely already has the necessary information about the services that it offers affiliates that trade on the ATS because of its current recordkeeping requirements,719 and we believe that maintaining up-to-date Part II disclosures is justified by the benefit 717 See Fidelity Letter at 4. amendments for non-material changes may be required, as appropriate. 719 See 17 CFR 242.302. 718 Updating VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 to market participants from public disclosure of conflicts of interest information. Another commenter expresses concern that the proposed conflicts of interest requests would seek public disclosure of proprietary or confidential information that would pose unintended consequences or security risks to ATS operators.720 We are sensitive to concerns about the burden of providing disclosures of potentially commercially sensitive information. In response to these commenter concerns, we have revised the wording of relevant requests to mitigate such concerns or provided guidance regarding the scope of certain disclosure requests, as further explained below.721 We believe that in the vast majority of cases, the level of detail required by Form ATS–N should not require the public disclosure of commercially sensitive information. In the Proposal, we did not intend to require NMS Stock ATSs to publicly disclose such information. We also note that the disclosure requests on Form ATS–N seek information that the Commission and some commenters believe to be important to market participants when evaluating an NMS Stock ATS as a potential trading venue. We believe that the disclosures on adopted Form ATS– N will provide market participants with information necessary to evaluate potential conflicts of interest and information leakage while not requiring NMS Stock ATSs to provide granular details about aspects of the ATS that it might consider to be commercially sensitive. Accordingly, to the extent an NMS Stock ATS believes that Form ATS–N requires the disclosure of what it believes to be commercially sensitive information, we believe that such disclosure is justified by the public benefit of the information required on Form ATS–N becoming publicly available. On the other hand, one commenter expresses a specific concern that narrowing the universe of affiliates subject to disclosure could result in less relevant information being provided to the Commission and the public, as NMS Stock ATSs could structure their legal affiliations and operations to take advantage of unanticipated gaps in the rule.722 This commenter states that the Commission should draw exemptions for certain affiliate relationships very 720 See SIFMA Letter at 6, 9. example, in the request under Part II, Item 5 of adopted Form ATS–N, an NMS Stock ATS is only required to provide a summary of the terms and conditions for the use of products or services offered by the ATS. 722 See Investor Advocate Letter at 8. 721 For PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 38825 narrowly and provide ‘‘bright lines’’ to help ensure that the requirements are clear and unambiguous, so that ATSs would not be permitted to determine whether to disclose an affiliate. This commenter also states that it recognizes that information on certain affiliates required by Form ATS–N may have little relevance to the Commission’s review of the broker-dealer operator’s Form ATS–N.723 This commenter believes that rather than modifying the Proposal, this issue could be addressed by an NMS Stock ATS seeking relief tailored to its unique facts and circumstances pursuant to Section 36(a)(1) of the Exchange Act,724 which permits the Commission to grant exemptions from any provision of a rule, to the extent such exemption is necessary or appropriate in the public interest and consistent with the protection of investors.725 We agree with this commenter that Form ATS–N requests regarding the ATS-related activities of the brokerdealer operator and its affiliates should provide clear and unambiguous requirements for NMS Stock ATSs. We also agree that Form ATS–N should be comprehensive enough to preclude an NMS Stock ATS from finding ‘‘unanticipated gaps’’ in the language to avoid disclosing critical aspects of its operations. We believe that the refinements to adopted Form ATS–N, as outlined above and further explained below, strike the appropriate balance between providing market participants with relevant information about potential conflicts of interest information and information leakage and the burden that Form ATS–N will place on NMS Stock ATSs. We do not believe that it is necessary to adopt all of the conflicts of interest requests as proposed and require NMS Stock ATSs to seek exemptive relief from certain disclosure requirements. Furthermore, the adopted definitions of ‘‘affiliate’’ and ‘‘control’’ are intended to encompass all relevant affiliate relationships between the broker-dealer operator and other entities that we believe would help market participants’ evaluation of potential conflicts of interest. 1. Broker-Dealer Operator and its Affiliate Trading Activities on the NMS Stock ATS a. Proposed Requests and Response to Comments Part III, Item 1 of proposed Form ATS–N would have required disclosures 723 See id. at 9. 15 U.S.C. 78mm(a)(1). 725 See Investor Advocate Letter at 9. 724 See E:\FR\FM\07AUR2.SGM 07AUR2 38826 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations regarding non-ATS trading centers operated or controlled by the NMS Stock ATS’s broker-dealer operator or any of its affiliates. Part III, Item 2 of proposed Form ATS–N would have required disclosures about the operation of any other NMS Stock ATSs operated by the broker-dealer operator or any of its affiliates. Part III, Item 5 of proposed Form ATS–N would have required disclosures regarding the broker-dealer operator’s and its affiliates’ trading activity on the NMS Stock ATS. As discussed above, we received general comments on Part III of proposed Form ATS–N.726 Additionally, we received comments specifically addressing the requests in Part III, Items 1, 2, and 5, of proposed Form ATS–N. In this section, we outline and address these more specific comments not previously outlined above. In Section V.C.1.b., we outline how we have consolidated much of the subject matter set forth in in Part III, Items 1, 2, and 5 of proposed Form ATS–N into Part II, Items 1 and 2 of adopted Form ATS–N.727 First, in addition to the general comments regarding the scope of the affiliate disclosure requests that are explained above, some commenters provide comments specific to proposed Part III, Item 1 and Part III, Item 5.728 One of these commenters states that the scope of the proposed requests in Part III, Item 1 with regard to non-ATS trading centers of the broker-dealer operator or its affiliates could have prejudiced commercial strategy.729 We believe that a list containing business units or affiliates of the broker-dealer operator that do not use the trading services of the NMS Stock ATS would not be as helpful to market participants as would a list of only those that trade on, or otherwise use the trading services of, the ATS.730 Accordingly, we have revised these disclosures so that Part II, Items 1(a) and 2(a) of adopted Form ATS–N ask whether business units of the broker-dealer operator or its affiliates, respectively, are permitted to enter or direct the entry of orders into 726 See supra notes 712–715 and accompanying daltland on DSKBBV9HB2PROD with RULES2 text. 727 We also note that because Parts I and II of proposed Form ATS–N have been consolidated into a single section of adopted Form ATS–N, the disclosure requests about the ATS-related activities of the broker-dealer operator and its affiliates on the NMS Stock ATS are set forth in Part II of adopted Form ATS–N. 728 See STA Letter at 4–5; UBS Letter at 5; SIFMA Letter at 10; LeveL ATS Letter at 4. 729 See UBS Letter at 5. 730 In the Proposal, the term ‘‘non-ATS trading center’’ was a defined term, but as explained above, adopted Form ATS–N will not use the term ‘‘nonATS trading center.’’ See supra Section V.A.2.a. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 the ATS. This disclosure is designed to inform market participants about whether the ATS permits the brokerdealer operator or its affiliates to trade on the NMS Stock ATS. If the ATS permits the broker-dealer operator or its affiliates to trade on the ATS, the NMS Stock ATS will be required to only list the business units or affiliates that actually enter or direct the entry of orders into the NMS Stock ATS. Furthermore, with regard to Part III, Item 5 of proposed Form ATS–N, one commenter states that affiliates or business units that indirectly send orders to an NMS Stock ATS through another entity or through services provided by another entity are not ‘enter[ing]’ orders ‘‘on the NMS Stock ATS.’’ 731 We believe that if a business unit or affiliate of the broker-dealer operator enters or directs the entry of orders into the ATS, market participants would find it useful to know that they may be trading against those business units, affiliates, or client orders entered by those entities. For example, if a principal trading desk of the brokerdealer operator or an affiliate uses a direct connection to the NMS Stock ATS or the broker-dealer operator’s SOR to submit orders or trading interest into the ATS, the NMS Stock ATS must list that desk or affiliate on adopted Form ATS–N under Part II, Item 1(a) or 2(a), respectively. Likewise, if an affiliated asset manager of the broker-dealer operator uses the services of a thirdparty broker-dealer to route directed orders to the NMS Stock ATS (i.e., the asset manager instructs the third-party broker-dealer to send its orders to the NMS Stock ATS), the NMS Stock ATS would be required to list that affiliated asset manager under Item 2(a). However, if that affiliated asset manager submits orders to a third-party broker-dealer, and that third-party broker-dealer using its own discretion, routes the orders of the asset manager into the affiliated NMS Stock ATS (e.g., the third-party broker-dealer’s SOR decides where to route the affiliated asset manager’s orders using its routing table), the NMS Stock ATS would not be required to list the affiliated asset manager under Item 2(a); under such circumstances, the affiliate would not be ‘‘directing’’ orders to the ATS because the third-party broker-dealer is using its discretion to route the affiliate’s orders and thus, not required to be listed under Item 2(a). The adopted requests also specify the type of information that must be provided with regard to business units or affiliates of the broker-dealer operator. Specifically, Item 1(a) requires 731 See PO 00000 UBS Letter at 6. Frm 00060 Fmt 4701 Sfmt 4700 the NMS Stock ATS to name and describe each type of business unit of the broker-dealer operator that enters or directs the entry of orders and trading interest into the ATS (e.g., NMS Stock ATS, type of trading desks, market maker, sales or client desk) and, for each business unit, to provide the applicable MPID and list the capacity of its orders and trading interest (e.g., principal, agency, riskless principal). Item 2(a) requires the NMS Stock ATS to name and describe each type of affiliate that enters or directs the entry of orders and trading interest into the ATS (e.g., broker-dealers, NMS Stock ATS, investment company, hedge fund, market maker, principal trading firm) and, for each of those affiliates, provide the applicable MPID and list the capacity of its orders and trading interest (e.g., principal, agency, riskless principal). We believe that market participants will find it more relevant to know both the types of broker-dealer operator business units and affiliates that can trade in the NMS Stock ATS, and their trading activities, rather than, as proposed, having a potentially voluminous list of entities that might include some that cannot send or direct orders or trading interest to the ATS. We also believe that the revised requests will reduce the burden on NMS Stock ATSs when completing the form because they will only require the NMS Stock ATS to list entities that trade on the ATS. The narrative responses to Items 1(a) and 2(a) could typically be kept up-to-date via Updating Amendments to Form ATS–N, which the ATS could file on a quarterly basis. However, we also note that in most cases, if the ‘‘yes’’ or ‘‘no’’ response to Items 1(a) or 2(a) changes (e.g., the NMS Stock ATS changes its operations to allow affiliates to trade whereas they could not do so prior, or vice versa), the NMS Stock ATS would be required to file a material amendment. Accordingly, we believe that the scope of the requests in Part II, Items 1(a) and 2(a) of adopted Form ATS–N present a reasonable disclosure requirement for NMS Stock ATSs, particularly multi-service brokerdealers with many affiliates, without eliminating the requirements for the NMS Stock ATS to provide information about the NMS Stock ATS-related trading activities of broker-dealer operator and its affiliates, which we believe will be helpful for market participants. Another commenter recommends that the Commission take a progressive approach of ‘‘yes’’ or ‘‘no’’ questioning for disclosures concerning affiliates of the broker-dealer operators that initially targets whether the affiliate directly E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations routes orders to the NMS Stock ATS.732 The commenter recommends that the Commission require NMS Stock ATSs to state whether the ATS directly receives any order flow from an affiliated party, and if so, if the affiliated party is treated exactly the same as every other party with access to the ATS.733 If the ATS answers in the affirmative, the commenter suggests that the ATS be required to identify the affiliated parties with access and the procedure for treatment of their orders, and if the ATS answers in the negative, the ATS would be required to identify parties with access and specifically articulate differences in treatment. The disclosure requests in Part II of adopted Form ATS–N are all structured in a ‘‘yes’’ or ‘‘no’’ format with follow-on narrative (as necessary), and we believe that the information this commenter recommends to be included in Form ATS–N is presented in a format that resembles that recommendation.734 Several commenters also opine that terms such as ‘‘describe,’’ ‘‘any interaction or coordination,’’ ‘‘circumstances,’’ and ‘‘otherwise made known’’ in the conflicts of interest requests might result in overbroad or lengthy responses that contain information which would not be helpful for market participants.735 Another commenter cites Part III, Item 5 of proposed Form ATS–N as an example of a request that should be tailored to elicit information based on which ATS users can make informed decisions.736 This commenter states that full-service broker-dealers often have hundreds of affiliates and business units that meet the definition of entities that may trade on the subject ATS, and that keeping such information current and accurate on an ongoing basis would bring additional burden with very little, if any, benefit to ATS users; the commenter believes that the request 732 See Fidelity Letter at 5. id. at 5–6. 734 Specifically, Item 2(a) requires the NMS Stock ATS to answer ‘‘yes’’ or ‘‘no’’ as to whether affiliates of the broker-dealer operator are permitted to enter or direct the entry of orders and trading interest into the NMS Stock ATS, and if the answer is ‘‘yes’’, the ATS must provide specific information about those affiliates and the capacity of the orders and trading interest that the affiliates enter onto the ATS. Item 2(b) then requires the NMS Stock ATS to answer ‘‘yes’’ or ‘‘no’’ as to whether the services that the NMS Stock ATS offers and provides to the affiliates identified in Item 2(a) are the same for all subscribers, and if the NMS Stock ATS answers no, it must explain any differences. We also note that the requests in Item 1(a) of adopted Form ATS–N with regard to trading activity of the broker-dealer operator on the NMS Stock ATS follow the same format as that in Item 2 of adopted Form ATS–N. 735 See KCG Letter at 8–9; STA Letter at 4; SIFMA Letter at 10–11; 14. See also SIFMA Letter at 4, 8. 736 See Morgan Stanley Letter at 5. daltland on DSKBBV9HB2PROD with RULES2 733 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 regarding trading on the ATS by the broker-dealer operator or its affiliates should be focused on whether they receive any preferential or differentiated treatment. In response to these comments, we are eliminating the terms ‘‘interaction and coordination,’’ ‘‘circumstances,’’ and ‘‘otherwise made known’’ from these requests to reduce any potential ambiguity.737 The adopted requests are closely tailored to solicit information that market participants find relevant to evaluating potential conflicts of interest on an NMS Stock ATS.738 Further, both Part II, Items 1(a) and 2(a) of adopted Form ATS–N enumerate the type of information that an NMS Stock ATS must provide if it answers in the affirmative that the broker-dealer operator or its affiliates, respectively, is permitted to trade on the NMS Stock ATS.739 737 While the terms ‘‘interaction and coordination’’ are no longer used in this disclosure request, many, if not all, Form ATS–N requests are designed to provide insight into how the brokerdealer operator, its affiliates, or third-parties interact or coordinate their activities with the NMS Stock ATS. Two examples of this include Part II, Items 3 and 5 of adopted Form ATS–N. Part II, Item 3 of adopted Form ATS–N requests specific information about how subscribers can opt out from interacting with orders of the broker-dealer operator or its affiliates. Likewise, Item 5 of adopted Form ATS–N requests specific information about how the ATS interacts with affiliates by requiring certain disclosures about products and services offered by the broker-dealer operator. 738 Because we are replacing the term ‘‘interaction and coordination’’ with these enumerated points of information, aspects of the requests set forth in Part III, Items 1(b)(ii)–(iii) and 2(b)(i), (iii) of proposed Form ATS–N—which addressed the transmission of subscriber orders to other trading centers operated by the broker-dealer operator or its affiliates—are being either narrowed or eliminated from adopted Part II, Items 1 and 2. As explained further below, to the extent information that would have been required by Part III, Items 1(b)(ii)–(iii) and 2(b)(i), (iii) of proposed Form ATS–N is responsive to Part II, Item 4 of adopted Form ATS–N—which requests information about the NMS Stock ATS’s arrangements with unaffiliated or affiliated trading centers—the NMS Stock ATS is required to provide that information in response to Item 4. See infra Section V.C.3. 739 Another commenter suggests that the Commission’s goals would be served more simply by requiring ATSs to categorize and disclose to their subscribers the nature of a counterparty (i.e., agent, principal (including affiliates of the brokerdealer operator)) rather than using the term ‘‘proprietary’’ in the disclosures regarding trading activities of the broker-dealer operator and its affiliates. See UBS Letter at 6. The commenter believes that this type of disclosure would succinctly inform a subscriber about what type of counterparty was on the other side of a trade. See id. This commenter also notes that in the Proposal, the Commission discussed disclosures and potential additional regulations related to ‘‘proprietary trading.’’ See id. The commenter states that federal regulators have encountered challenges in defining this term as part of the ‘‘Volcker Rule’’ under the Dodd Frank Act. See id. In response to this comment, the Commission has, in the language of Part II, Items 1 and 2, listed several examples of PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 38827 Furthermore, while the term ‘‘describe’’ is still used in Items 1(a) and 2(a), we are adding specific examples to each respective request to better explain the type of description that would necessary, such as ‘‘NMS Stock ATS,’’ ‘‘trading desks,’’ ‘‘market maker,’’ ‘‘sales’’ or ‘‘client desk.’’ Also, Items 1(b)–(d) and 2(b)–(d) specifically state that the NMS Stock ATS must explain (1) any differences between the treatment of those business units or affiliates of the broker-dealer operator and other subscribers regarding services offered and provided by the NMS Stock ATS; (2) whether any of those business units or affiliates of the broker-dealer operator have formal or informal arrangements with the NMS Stock ATS to provide liquidity to the NMS Stock ATS; and (3) how orders and trading interest in the NMS Stock ATS can be routed to a trading center of the brokerdealer operator or affiliate.740 Additionally, a commenter expresses concern that it may not be privy to some the information that proposed Form ATS–N would have required.741 We note that ATSs are currently obligated to make and keep records of, among other things, subscribers to the ATS and daily summaries of trading, including the identity of the parties to the transactions.742 We believe that the specific information sought in these requests with regard to affiliate trading activity on the ATS in adopted Form ATS–N should be maintained as part of the ATS’s recordkeeping obligation without the ATS having to breach any information barriers or other compliance protections. To the extent that a business unit or affiliate of the broker-dealer operator triggers a disclosure obligation on Form ATS–N by directing the entry of orders into the NMS Stock ATS through a third-party broker-dealer, we believe that the broker-dealer operator should have—or be able to obtain—such information through appropriate internal compliance procedures to be responsive to Form ATS–N. the capacity in which the broker-dealer operator and its affiliates enter or direct the entry of orders (principal, agency, or riskless principal) to provide more guidance about the type of information sought by Form ATS–N. The Commission has also removed references to ‘‘proprietary trading’’ from Form ATS–N, and the adopted form’s disclosure requirements refer to, when applicable, ‘‘principal trading’’ of the broker-dealer operator and its affiliates. 740 With regard to the latter two of these items, adopted Form ATS–N requests that the description be provided in the applicable Part III item to reduce redundancy on the Form ATS–N, as further explained below. 741 See supra note 717 and accompanying text. 742 See 17 CFR 242.302. E:\FR\FM\07AUR2.SGM 07AUR2 38828 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 We have also revised the requests in proposed Form ATS–N to reduce redundant disclosure requirements. First, Part II, Items 1 and 2 of adopted Form ATS–N now require the NMS Stock ATS to provide any narratives about differences in treatment between the broker-dealer operator, its affiliates, and other subscribers in Part III of the adopted form, and only cross reference those narratives in Part II (as opposed to providing a separate, likely redundant narrative in Part II). Second, Part II, Items 1 and 2 of adopted Form ATS do not require the NMS Stock ATS to disclose whether subscriber orders or other trading interest sent to the NMS Stock ATS are displayed or otherwise made known to a non-ATS trading center or another NMS Stock ATS operated by the broker-dealer operator or an affiliate.743 Rather, any narrative with regard to order display (including a description about differences in services) is only required to be set forth in Part III, Item 15 of adopted Form ATS–N, which contains the order display requests of adopted Form ATS–N. Finally, Part II, Items 1 and 2 of adopted Form ATS–N do not require the NMS Stock ATS to disclose how the business units and affiliates of the broker-dealer operator connect to the ATS, such as through a Financial Information Exchange (‘‘FIX’’) protocol.744 Rather, any narrative about order entry in the NMS Stock ATS (including a description about differences in services) is only required by Part III, Item 5 of adopted Form ATS–N (Means of Entry). Accordingly, Part II of adopted Form ATS–N is designed to provide market participants with information about how the NMS Stock ATS interacts with the business units and affiliates of the broker-dealer operator so they can assess potential conflicts of interest, while minimizing disclosure requests that would be redundant with those contained in Part III.745 743 This information would have been required under Part III, Item 1(b)(i) and 2(b)(ii) of proposed Form ATS–N. 744 This information would have been required under Part III, Item 5(c) of proposed Form ATS–N. 745 One commenter also recommends limiting the requests related to order routing from proposed Part III, Item 2 (Multiple NMS Stock ATS Operations) to the functions of ATS operation, as distinguished from other algorithmic or routing functions housed within the broker-dealer operator or an affiliate, which the commenter states appear to be addressed in Part III, Item 3 of proposed Form ATS–N, as well as asking what it means to ‘‘remove’’ an order. See SIFMA Letter at 11. See infra Section V.D.7. for a discussion of the required disclosures related to the removal of trading interest. Furthermore, this commenter recommends that Commission state whether the ATS operator should distinguish VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Another commenter believes that the information requested under proposed Part III, Item 5 of proposed Form ATS–N was too granular, duplicative of information required by Form BD, and that some of the prompts (e.g., ‘‘business unit,’’ ‘‘describe the circumstances’’) were too open-ended, which could lead to non-standardized responses that would not be helpful to market participants.746 This commenter recommends: (i) Eliminating proposed Item 5 and replacing the proposed disclosure requirements with yes/no prompts or short-answer responses that are more focused or narrowly tailored and (ii) eliminating or further clarifying and limiting the request for information of affiliates and business units. As explained above, Part II, Items 1(a) and 2(a) of adopted Form ATS–N provide more specificity about the information requested about the ATSrelated activities of business units and affiliates of the broker-dealer operator by providing examples of what we intend to solicit from these requests. To the degree that some information solicited by adopted Form ATS–N is duplicative of information sought on Form BD, the duplicative information is straightforward for the broker-dealer to reproduce on Form ATS–N, and we believe that market participants will derive greater benefit from this information being disclosed on a single form (Form ATS–N) as opposed to being spread across multiple forms filed with the Commission. Similarly, another commenter cites the proposed requirement to provide the names of specific business units and algorithms that trade in NMS Stock ATS as an example of requested information that it believes is unnecessary to risk assessment.747 We believe that some market participants may find it very helpful to know the identities and number of the broker-dealer operator’s business units or affiliates that trade on the NMS Stock ATS. As indicated by commenters, some market participants may, for example, view trading on an ATS by a principal trading desk of the broker-dealer operator as presenting a between parent and child orders for the disclosures related to Part III, Item 2 of proposed Form ATS– N. See id. Adopted Part III, Item 16(b) requires the NMS Stock ATS to either describe the affirmative instructions from a subscriber that must be obtained to route outside of the NMS Stock ATS or, if no instructions are required, the ATS must explain when orders in the ATS can be routed from the NMS Stock ATS. If the NMS Stock ATS breaks up a parent order into child orders or otherwise uses the fact that an order is a parent order or child order to make routing decisions, such information must be disclosed under Item 16(b). 746 See SIFMA Letter at 14. 747 See STANY Letter at 5. PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 potential conflict of interest for the broker-dealer operator, even if the ATS does not give any preference to the orders from that desk.748 We also received comments supporting the original requests under Part III, Items 1, 2, and 5 of proposed Form ATS–N. One commenter believes that these proposed disclosure requests are essential to alerting market participants about potentially significant advantages of the brokerdealer operator and its affiliates and to allow market participants to obtain a reasonable understanding of the conflicts of interest posed by the brokerdealer operator’s or its affiliates’ trading activities on the ATS.749 In addition, a commenter states that the requests under Part III, Item 5 of proposed Form ATS–N would help investors better understand the relationship between the NMS Stock ATS, its broker-dealer operator, and any affiliates.750 One commenter asserts that market participants would want to know the specific advantages afforded to the ATS operator or its affiliate, and urges the Commission to adopt proposed Part III, Item 5.751 While we have refined the scope of certain subject matter in response to comment, we still believe that the disclosure requests in adopted Form ATS–N about the trading activities of the broker-dealer operator and its affiliates will allow for a high degree of transparency by capturing information that these commenters believe is important to market participants. In addition, one commenter states that it supports the disclosure of potential trading activity on the NMS Stock ATS by the broker-dealer operator and its affiliates, but asserts that the disclosure requirement should be revised to allow for a series of progressive ‘‘yes’’ or ‘‘no’’ responses.752 The commenter also notes that as proposed, it would be difficult for NMS Stock ATSs to maintain this disclosure on an on-going basis. As is 748 See Consumer Federation of America Letter at 7–8; HMA Letter at 13. 749 See HMA Letter at 15–18. Another commenter states its support for the goal of a fulsome disclosure of circumstances where subscriber orders or other trading interest could leave an NMS Stock ATS and be made available to other areas of the broker-dealer operator. See UBS Letter at 5. The commenter states that market participants are entitled to know such information, but also states that the Commission’s goal could be achieved through simplified disclosures. The commenter states that the proposed requirement to list the nonATS trading centers controlled by the broker-dealer operator or its affiliates should only be required if orders are routed to the NMS Stock ATS from such trading centers or from the NMS Stock ATS to those trading centers. 750 See MFA/AIMA Letter at 5. 751 See HMA Letter at 16. 752 See KCG Letter at 10. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations explained above, we do not believe that maintaining up-to-date disclosures regarding the ATS-related trading activities of the broker-dealer operator and its affiliates will impose an unreasonable administrative burden on the NMS Stock ATS. b. Adopted Part II, Item 1 and 2 of Form ATS–N; ATS-Related Trading Activities of the Broker-Dealer Operator and its Affiliates As noted above, we reorganized and relocated the subject matter requested in Part III, Items 1, 2, and 5 of proposed Form ATS–N to Part II, Items 1 (‘‘Broker-Dealer Operator ATS Trading Activities’’) and 2 (‘‘Affiliates ATS Trading Activities’’) of adopted Form ATS–N. We have also revised the content of the proposed disclosure requests in response to public comment.753 Part II, Item 1(a) of adopted Form ATS–N requires the NMS Stock ATS to disclose whether business units of the Broker-Dealer Operator are permitted to enter or direct the entry of orders and trading interest (e.g., quotes, conditional orders, or indications of interest) into the NMS Stock ATS. This request will be in the form of a ‘‘yes’’ or ‘‘no’’ question, and if the NMS Stock ATS answers ‘‘yes,’’ it will be required to name and describe each type of business unit of the Broker-Dealer Operator that enters or directs the entry of orders and trading interest into the ATS (e.g., NMS Stock ATS, type of trading desks, market maker, sales or client desk) and, for each type of business unit, it must provide the applicable MPID and list the capacity of its orders or trading interest (e.g., principal, agency, riskless principal). This request is designed to encompass the information request in Part III, Items 5(a) and (b) of proposed Form ATS–N and capture elements of Part III Items 1(a) and (b) and Items 2(a) and (b) of proposed Form ATS–N. The subject matter covered by Part III, Item 1(b)(i) and (ii) is no longer included in the disclosure request contained in Part II, Item 1 of adopted Form ATS–N.754 Likewise, the subject matter covered by Part III, Item 2(b)(i) and (ii) is no longer included in the disclosure request contained in Part II, daltland on DSKBBV9HB2PROD with RULES2 753 The subject matter covered in Part III, Item 5.d of proposed Form ATS is now addressed in Part II Item 3 of adopted Form ATS–N. See infra Section V.C.2. 754 These proposed requests would have required disclosures regarding the display of subscriber orders to a non-ATS trading center operated by the broker-dealer operator (proposed Part III, Item 1(b)(i)) and the execution of subscriber orders in a non-ATS trading center operated by the brokerdealer operator (proposed Part III, Item 1(b)(ii)), respectively. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Item 1 of adopted Form ATS–N.755 Part II, Item 1 of adopted Form ATS–N focuses on the trading activity of the broker-dealer operator in the NMS Stock ATS, so those proposed disclosure requests are outside the scope of adopted Part II, Item 1. However, to the extent that information about the subjects in those proposed disclosure requests are responsive to other disclosure requests in adopted Form ATS–N—such as Part II, Item 3 (‘‘Arrangements With Trading Centers) and Part III, Item 15 (‘‘Display’’)—the NMS Stock ATS must respond to those items accordingly. Next, Part II, Item 1(b) of adopted Form ATS–N requires an NMS Stock ATS to disclose whether the services that the NMS Stock ATS offers and provides to the business units required to be identified in Item 1(a) are the same for all subscribers. This request will be in the form of a ‘‘yes’’ or ‘‘no’’ question, and if the NMS Stock ATS answers ‘‘no,’’ it will be required to explain any differences in response to the applicable Item number(s) in Part III of adopted Form ATS–N and list the applicable Item number(s). If there are differences that are not applicable to Part III of adopted Form ATS–N, the NMS Stock ATS must explain those differences in detail under Part II, Item 1. Next, Part II, Item 1(c) of adopted Form ATS–N requires NMS Stock ATSs to disclose the broker-dealer operator’s role as a liquidity provider on the NMS Stock ATS, if applicable.756 This item requires the NMS Stock ATS to disclose—in the form of a ‘‘yes’’ or ‘‘no’’ question—whether there are any formal or informal arrangements with any of the sources of orders or trading interest of the broker-dealer operator identified in Item 1(a) to provide orders or other trading interest to the NMS Stock ATS (e.g., undertaking to buy or sell continuously, or to meet specified thresholds of trading or quoting activity). If the NMS Stock ATS answers ‘‘yes,’’ it must identify the business unit(s) and respond to the request in Part III, Item 12, which sets forth the requests for liquidity providers on the NMS Stock ATS.757 We believe that highlighting, in Part II of adopted Form 755 These proposed requests would have required disclosures about sending subscriber orders to another NMS Stock ATS operated by the brokerdealer operator in lieu of the NMS Stock ATS filing the form (proposed Part III, Item 2(b)(i)) and the display of subscriber orders to another NMS Stock ATS operated by the broker-dealer operator (proposed Part III, Item 2(b)(ii)), respectively. 756 The requirement to disclose liquidity providers and the terms and condition of any arrangements with liquidity providers was set forth under Part IV, Item 1(d) of proposed Form ATS–N. 757 See infra Section V.D.12. PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 38829 ATS–N, whether the broker-dealer operator acts as a liquidity provider on the NMS Stock ATS will be helpful to market participants when evaluating the potential for conflicts of interest or information leakage on the trading platform. However, to reduce duplicative requests on adopted Form ATS–N, we are not requiring the NMS Stock ATS to provide a narrative in Part II of adopted Form ATS–N regarding the broker-dealer operator’s liquidity provider activities because that information will be disclosed under Part III, Item 12 of adopted Form ATS–N. Finally, Part II, Item 1(d) of adopted Form ATS–N requires the NMS Stock ATSs to disclose information about the routing of orders and trading interest to trading centers operated or controlled by the broker-dealer operator. This Item will require the NMS Stock ATS to disclose—in the form of a ‘‘yes’’ or ‘‘no’’ question—whether orders and trading interest in the NMS Stock ATS can be routed to a trading center of the brokerdealer operator. If the NMS Stock ATS answers ‘‘yes,’’ it must respond to the requests in Part III, Item 16 of adopted Form ATS–N, which sets forth the requests for disclosures about routing orders and trading interest out of the NMS Stock ATS. We continue to believe that disclosures regarding the routing of orders will provide subscribers with information about how their orders would be handled if they are not executed on the ATS and allow them to assess whether such routing could result in the leakage of confidential information, particularly if those orders are being routed to a trading center of the broker-dealer operator. Similar to Part II, Item 1(c) of adopted Form ATS– N, the request in Part II, Item 1(d) will not require a narrative because Part IV, Item 16 of adopted Form ATS–N requires disclosures about routing.758 Part II, Item 2(a) of adopted Form ATS–N requires an NMS Stock ATS to disclose whether affiliates of the brokerdealer operator are permitted to enter or direct the entry of orders and trading interest into the NMS Stock ATS. This request will be in the form of a ‘‘yes’’ or ‘‘no’’ question, and if the NMS Stock ATS answers ‘‘yes,’’ it must name and describe each type of affiliate that enters or directs the entry of orders and trading interest in the ATS (e.g., broker-dealers, NMS Stock ATS, mutual fund, hedge fund, market maker) and, for each affiliate that trades on the NMS Stock ATS, the NMS Stock ATS must provide the applicable MPID and list the capacity(ies) of its orders and trading interest (e.g., principal, agency, riskless 758 See E:\FR\FM\07AUR2.SGM id. 07AUR2 38830 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 principal). As with Item 1, these requests are designed to encompass the information that would have been required under Part III, Items 5(a) and (b) of proposed Form ATS–N and is designed to capture elements of Part III Item 1(a) and Item 2(a) of proposed Form ATS–N.759 Next, Part II, Item 2(b) of adopted Form ATS–N requires an NMS Stock ATS to disclose whether the services that the NMS Stock ATS offers and provides to the affiliates required to be identified in Item 2(a) are the same for all subscribers. This request is in the form of a ‘‘yes’’ or ‘‘no’’ question, and if the NMS Stock ATS answers ‘‘no,’’ it will be required to explain any differences in response to the applicable Item number(s) in Part III of adopted Form ATS–N, as required, and list the applicable Item number(s). If there are differences that are not applicable to Part III of adopted Form ATS–N, the NMS Stock ATS must explain those differences in detail under Part II, Item 2.760 Part II, Item 2(c) of adopted Form ATS–N requests information about the role of the broker-dealer operator’s affiliates as liquidity providers on the NMS Stock ATS, if applicable. This item requires the NMS Stock ATS to disclose—in the form of a ‘‘yes’’ or ‘‘no’’ question—whether there are there any formal or informal arrangements with affiliates of the broker-dealer operator identified in Item 2(a) to provide orders or other trading interest to the NMS Stock ATS (e.g., undertaking to buy or sell continuously, or to meet specified thresholds of trading or quoting activity). If the NMS Stock ATS answers ‘‘yes,’’ it must identify the affiliates and respond to the request in Part III, Item 12, which sets forth the required disclosures for liquidity providers on the NMS Stock ATS. Finally, Part II, Item 2(d) of adopted Form ATS–N requires an NMS Stock ATS to disclose information about routing orders and trading interest out of the NMS Stock ATS to a trading center operated and controlled by 759 Also like Part II, Item 1(a) of adopted Form ATS–N, Item 2(a) does not contain the subject matter covered by Part III, Item 1(b)(i) and (ii) and Part III, Item 2(b)(i) and (ii) of proposed Form ATS–N, but to the extent that information about the subjects in those proposed requests are responsive to other requests in adopted Form ATS– N, the NMS Stock ATS must respond to those items accordingly. 760 We have incorporated the requests of proposed Part III, Item 9 of proposed Form ATS–N into individual Part II requests in adopted Form ATS–N, and thus, there is no longer a standalone question addressing differences among the services provided to the broker-dealer operator or its affiliates and other subscribers. See supra Section V.C.7. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 affiliates of the broker-dealer operator. This item will require the NMS Stock ATS to disclose—in the form of a ‘‘yes’’ or ‘‘no’’ question—whether orders and trading interest in the NMS Stock ATS can be routed to a trading center operated or controlled by an affiliate of the broker-dealer operator. If the NMS Stock ATS answers ‘‘yes,’’ it must respond to request in Part III, Item 16, which sets forth the required disclosures for routing orders and trading interest out of the NMS Stock ATS. 2. Order Interaction With Broker-Dealer Operator; Affiliates Part II, Item 3 of adopted Form ATS– N requests information about the interaction of orders of between unaffiliated subscribers to the ATS and orders of the broker-dealer operator and its affiliates in the NMS Stock ATS. Part II, Item 3(a) of adopted Form ATS–N requires an NMS Stock ATS to disclose whether a subscriber can opt out of interacting with orders and trading interest of the broker-dealer operator in the NMS Stock ATS, and Part II, Item 3(b) requires an NMS Stock ATS to disclose whether a subscriber can opt out of interacting with the orders and trading interest of an affiliate of the broker-dealer operator in the NMS Stock ATS.761 Part II, Item 3(c) of adopted Form ATS–N requires the NMS Stock ATS to disclose whether the terms and conditions of the opt-out processes for the broker-dealer operator and affiliates required to be identified in Items 3(a) and (b) are the same for all subscribers. The content of these requests are intended to cover the subject matter contained in Part III, Item 5(d) of proposed Form ATS–N.762 We believe that is helpful to market participants for the subject matter covered by proposed Part III, Item 5(d) to be a stand-alone question in adopted Form ATS–N. Such information is important to unaffiliated market participants trading on an ATS because some unaffiliated subscribers may not wish to interact with the order flow of the broker-dealer operator or its affiliates. This disclosure will help 761 For example, if a broker-dealer operator uses its SOR or algorithms to submit subscriber orders into the ATS, any steps that either the broker-dealer operator or the subscriber would have to take so that those orders are opted-out of trading with the broker-dealer operator or its affiliates would be required disclosures under Items 3(a) and 3(b), respectively. 762 Part III, Item 5(d) of proposed Form ATS–N would have required the NMS Stock ATS to 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. PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 market participants understand whether and how they may avoid trading with the broker-dealer operator and its affiliates should they elect to use the services of the NMS Stock ATS. As explained above, we received several comments about the proposed requests addressing ATS-related activities of the broker-dealer operator and its affiliates, including the request set forth in Part III, Item 5. In addition to these comments, one commenter opines that if a subscriber desires to opt out of trading with the broker-dealer operator’s principal orders, the brokerdealer operator should be obliged to follow and implement the stated instruction.763 This rulemaking addresses enhanced disclosure requirements for NMS Stock ATSs, and not regulations to require certain actions by NMS Stock ATSs outside of the disclosures and other requirements specifically enumerated herein. 3. Arrangements With Trading Centers Part III, Item 4 of proposed Form ATS–N requested disclosures about arrangements the broker-dealer operator, or any of its affiliates, has with unaffiliated trading centers. The subject matter covered in Part III, Item 4 of proposed Form ATS–N is under Part II, Item 4 of adopted Form ATS–N. The Commission received several comments regarding disclosure requests about arrangements with unaffiliated trading centers. Three commenters support the public disclosure of preferential arrangements with third parties.764 One of these commenters, while supporting the disclosure of preferential arrangements in principle, believes the requests in Part III, Item 4 of proposed Form ATS–N could be too exhaustive and should be narrowed to focus on preferential arrangements.765 Similarly, another commenter believes the central concern around affiliate relationships should focus on whether a third-party entity has differentiated or unique access to an ATS.766 Another commenter believes that the brokerdealer operators of NMS Stock ATSs should not be required to provide proprietary information to the public under this disclosure, stating that in instances where SORs operate outside of the NMS Stock ATS and make routing decisions independent of the NMS Stock ATS, the appropriate source of information sought by the Commission 763 See UBS Letter at 6. HMA Letter at 16; UBS Letter at 5; SIFMA Letter at 13. 765 See SIFMA Letter at 13. 766 See UBS Letter at 5. 764 See E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations is the operator of the SOR, not the operator of the NMS Stock ATS.767 We have not limited the disclosures required under adopted Part II, Item 4 of adopted Form ATS–N to preferential arrangements or other unique access given to unaffiliated third parties, as suggested by these commenters. We believe that some market participants may consider other arrangements with third parties relevant to their evaluations of an NMS Stock ATS as a potential trading venue. For example, if an NMS Stock ATS has a mutual access agreement with another ATS, a market participant may take into account the fact that its order may eventually route to another ATS, even if orders from the other ATS do not receive preferential treatment on the ATS. The disclosure requests in Part II, Item 4 of adopted Form ATS–N will provide market participants with information necessary to evaluate potential conflicts of interest or sources of information leakage. For example, Part II, Item 4 of adopted Form ATS–N requires the disclosure of an arrangement between the NMS Stock ATS and an unaffiliated NMS Stock ATS under which the NMS Stock ATS would route orders or other trading interest to the unaffiliated NMS Stock ATS for possible execution before routing to any other destination. By way of further example, Item 4 also requires 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; it also requires a summary of the terms and conditions of the arrangement such as, for example, whether the NMS Stock ATS is providing monetary compensation or some other brokerage service to the unaffiliated NMS Stock ATS. In response to the above commenter concerns, however, Part II, Item 4 of adopted Form ATS–N includes some modifications. First, the adopted disclosure request in Part II, Item 4 replaces the proposed phrase ‘‘describe the terms of the arrangement’’ with the phrase ‘‘provide a summary of the terms and conditions of the arrangement.’’ We believe that replacing the term ‘‘describe’’ with a requirement to ‘‘provide a summary’’ will make it clear that the scope of the adopted request should not typically require the NMS Stock ATS to provide granular details about its arrangements that the ATS might consider to be commercially sensitive. 767 See STANY Letter at 4. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Second, Part II, Item 4 of adopted Form ATS–N does not use the phrase ‘‘person(s), or affiliate(s) of such person(s) that operates a trading center’’ when establishing the scope of the request, as was proposed. Rather, the adopted request focuses on arrangements with trading centers themselves. One commenter argues that to the extent a third-party entity solely has access to functionality disclosed elsewhere in proposed Form ATS–N, proposed Part III, Item 4 would not be necessary.768 We did not intend for the proposed request to encompass, for example, a subscriber agreement between a third-party broker-dealer, who happens to also operate a trading center, and the NMS Stock ATS under which the third-party broker-dealer submits orders to the ATS in the same manner as all other subscribers. Rather, the purpose of the request in Part II, Item 4 is to publicly disclose any arrangement with another trading center that may be relevant to a conflicts of interest analysis, such as one under which the NMS Stock ATS and a thirdparty NMS Stock ATS send their respective subscriber orders to one another. Additionally, we are including in Part II, Item 4 of adopted Form ATS–N examples of the types of arrangements that would be responsive to the disclosure request, such as mutual or reciprocal access arrangements 769 and preferential access arrangements 770 to clarify that the disclosures required by Part II, Item 4 of adopted Form ATS are not so broad as to require the NMS Stock ATS to list each unaffiliated subscriber that accesses its system. We are also revising the request in Part III, Item 4 of proposed Form ATS–N to only require disclosures about arrangements with trading centers to access the NMS Stock ATS’s services in adopted Form ATS–N. For example, an NMS Stock ATS must provide details about how it disseminates orders or trading interest submitted by a trading center under a unique arrangement with that trading center such a reciprocal access agreement; these types of arrangements would typically be different than the ATS’s standard contract with subscribers to access the services of the ATS. We believe that this change will 768 See UBS Letter at 5. or reciprocal access arrangements may be, for example, an NMS Stock ATS that allows another broker-dealer operator to access its ATS for liquidity in return for the ability to access the liquidity of the other broker-dealer’s ATS. 770 Preferential routing arrangements may be, for example, an NMS Stock ATS being the first routing destination on the routing table of a third party’s algorithm. 769 Mutual PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 38831 better define the scope of information responsive to the Part II, Item 4 of adopted Form ATS–N while not removing any proposed disclosure requirements. Likewise, the Commission is modifying the wording of the proposed disclosure requests to require the NMS Stock ATS to disclose formal or informal arrangements for a trading center ‘‘to access the NMS Stock ATS services.’’ Adding the word ‘‘services’’ clarifies that the disclosure must explain the services provided to the unaffiliated trading center after it connects to the ATS. An NMS Stock ATS can provide various types of services to subscribers and the request, as revised, is tailored for those ATSs services that a subscriber may use. Next, the scope of Part III, Item 4 of proposed Form ATS–N only encompassed arrangements with unaffiliated trading centers, but Part II, Item 4 of adopted Form ATS–N encompasses arrangements with both unaffiliated and affiliated trading centers. As explained above, the requests set forth in Part III, Items 1(b)(ii)–(iii) and 2(b)(i), (iii) of proposed Form ATS–N—which addressed the transmission of subscriber orders to other trading centers operator by the broker-dealer operator or its affiliates— have either been narrowed or eliminated from Part II, Items 1 and 2 of adopted Form ATS–N. However, to the extent that an NMS Stock ATS has an arrangement with a trading center operated by the broker-dealer operator or an affiliate, we believe that market participants are still likely to consider information about such arrangements relevant to their evaluation of an NMS Stock ATS as a potential trading venue and such an arrangement may raise concerns about conflicts of interest or information leakage.771 Additionally, Part III, Item 4 of proposed Form ATS–N would also have required the disclosure of mutual access arrangements between an NMS Stock 771 For example, a potential conflict of interest could arise where an NMS Stock ATS has a preferred routing arrangement with an affiliated, non-ATS trading center wherein all orders sent to the NMS Stock ATS would first be routed to the affiliated, 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 because the nonATS trading center would know that any unexecuted orders would then be routed to the NMS Stock ATS. Alternatively, if an arrangement between the NMS Stock ATS and affiliated trading center provides that any subscriber orders routed out of the NMS Stock ATS would be first routed to the affiliated, non-ATS trading center, the NMS Stock ATS may have an incentive to remove subscribers’ orders from the NMS Stock ATS and allow the affiliated non-ATS trading center the opportunity to execute those orders. E:\FR\FM\07AUR2.SGM 07AUR2 38832 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations ATS and other trading centers whereby, for example, a broker-dealer operator, or its affiliate, may offer access to the broker-dealer operator’s NMS Stock ATS in exchange for access to another NMS Stock ATS of operated by another broker-dealer. Accordingly, Part II, Item 4 of adopted Form ATS–N is designed to inform subscribers about these arrangements as such information may impact a subscriber’s experience on the NMS Stock ATS and allow them to evaluate potential conflicts of interest of the broker-dealer operator and its affiliates.772 Finally, in Part II, Item 4 of adopted Form ATS–N, the Commission has divided the request into two subparts— one subpart addressing the brokerdealer operator’s arrangements, and another subpart addressing its affiliates’ arrangements. This is a technical edit so that the format of Part II, Item 4 of Form ATS–N is consistent with the format of Part II, Items 1–3 above. daltland on DSKBBV9HB2PROD with RULES2 4. Other Products and Services Part III, Item 3 of proposed Form ATS–N would have required disclosures about products and services offered to subscribers used in connection with trading on the NMS Stock ATS. We are adopting Part III, Item 3 of proposed Form ATS–N as Part II, Item 5 of adopted Form ATS–N; however, we are modifying the proposed disclosure request in response to commenter concerns. One commenter states that the proposed requests would have helped investment funds assess an NMS Stock ATS as a potential execution venue by improving their ability to understand all functionality offered by the brokerdealer operator and whether the brokerdealer operator makes all services available in a fair and impartial manner.773 Some commenters, while not opposing the general category of disclosure requested in proposed Part III, Item 3, believe the scope of the requests regarding products and services should be narrowed.774 One commenter agrees with the Commission’s approach, 772 See Proposal, supra note 2, at 81049. Furthermore, as discussed in the Proposal, 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. 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. See id. at 81049, n.401. 773 See ICI Letter at 7. 774 See HMA Letter at 16; KCG Letter at 9; SIFMA Letter at 11–13; UBS Letter at 5; STANY Letter at 4. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 but states that the disclosure requirement should be refined to cover products or services used in connection with trading NMS stocks, not just trading on the NMS Stock ATS.775 Another commenter believes that distinct products and services provided by an affiliate of the broker-dealer operator to a client—who happens to be an ATS subscriber—but which are not directly linked to the ATS subscription should not be captured by this requirement, particularly, when the client/subscriber ultimately may or may not use those services to trade on the ATS.776 Another commenter suggests only requiring an ATS to list or outline broad categories of products or services rather than requiring the NMS Stock ATS to ‘‘describe’’ its products or services.777 Another commenter states that each relationship and customer experience is different and free-standing in certain respects, and believes that the proposed request would potentially require the disclosure of a whole array of products or services, the enumeration of which would add little value and be burdensome to maintain/update.778 Broker-dealer operators of NMS Stock ATSs may, directly or indirectly through an affiliate, offer products or services to subscribers for the purpose of, for example, submitting orders, or receiving information about displayed interest, in the ATS.779 We continue to believe that subscribers would want to know the products or services that the broker-dealer operator or its affiliates may offer for the purpose of effecting transactions, or submitting, disseminating, or displaying orders and trading interest on the NMS Stock ATS because such products or services may impact the subscribers’ access to, or trading on, the ATS. We note that many broker-dealer operators are multi-service brokerdealers and provide routing and execution services in NMS stocks 775 See HMA Letter at 16. KCG Letter at 9. The commenter states that, in many cases, an ATS operator may be unaware of products and services separately provided by an affiliate to a customer that are entirely independent from and may pre-exist the client’s ATS subscription. See id. 777 See SIFMA Letter at 12. 778 See UBS Letter at 5. The commenter also states that a forced public listing of a broker-dealer’s products and services may be inconsistent with the broker-dealer’s traditional approach and preferences for marketing. See id. 779 See Proposal, supra note 2 at 81048. 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 its 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 to the NMS Stock ATS. 776 See PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 separate from their ATS services. We further note that customers of a brokerdealer operator could be both subscribers to its ATS and customers of the broker-dealer operator that use trading products and services outside of the ATS. To the extent that a customer is a subscriber to the NMS Stock ATS and is offered use of products and services by the broker-dealer operator or its affiliate for the purpose of effecting transactions or submitting, disseminating, or displaying orders and trading interest in the NMS Stock ATS, Part II, Item 5 of adopted Form ATS–N would require disclosures about those products or services. However, the adopted requests in Part II, Item 5 would not encompass trading products or services offered by the broker-dealer operator to customers that are not for the purpose of effecting transactions or submitting, disseminating, or displaying orders and trading interest in the NMS Stock ATS. Two commenters express opinions about how the scope of the proposed requests relate to the scope of an NMS Stock ATS’s operations. One commenter states that the Proposal does not draw sufficient distinction between the operations of the NMS Stock ATS and other products and services of the broker-dealer operator, including agency execution services, market making and algorithms.780 Another commenter states that the Commission should clarify the terminology used in this item because it appears to conflate the NMS Stock ATS itself with routing and algorithmic functions.781 Whether a product or service is part of the ATS requires a facts and circumstances analysis. Based on Commission experience, broker-dealers generally offer various products and services to customers, which include execution and routing services, such as a SOR. These products and services are generally independent of each other, and how such products and services may be used by a subscriber to an NMS Stock ATS varies. However, to the extent that a SOR (or similar functionality) or algorithm performs a function of the ATS by bringing together the orders for securities of multiple buyers and sellers using established nondiscretionary methods, the SOR (or similar functionality) or algorithm may be part of the NMS Stock ATS.782 Another commenter states that Form ATS–N should only require disclosure 780 See STANY Letter at 4. SIFMA Letter at 12–13. 782 For a further discussion about when a brokerdealer operator’s SOR (or similar functionality) or algorithm may operate as part of its NMS Stock ATS, see Section V.D.5 below. 781 See E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations of products or services at a high level and that commercially sensitive or proprietary information should not be required to be publicly disclosed.783 As noted above, we are sensitive to concerns about the potential disclosure of commercially sensitive information. The proposed request stated that NMS Stock ATSs must ‘‘[d]escribe the products or services.’’ To address commenter concerns regarding the potential disclosure of commercially sensitive information in this disclosure request, the adopted disclosure request requires the NMS Stock ATS to provide only a summary of the terms and conditions for the products and services disclosed and to explain how the product or service is used with the ATS in the applicable Item number in Part III of adopted Form ATS–N. As explained above, we believe that requiring only a summary narrative would normally not require the broker-dealer operator to disclose commercially sensitive information.784 To reduce redundancy and streamline disclosures, we are requiring NMS Stock ATSs to provide a narrative explaining the use of the product or service required to be disclosed in Part II, Item 5 in the relevant item in Part III of adopted Form ATS–N. We are also adding to Part II, Item 5 of adopted Form ATS–N the language ‘‘for the purpose of’’ before effecting transactions, or submitting, disseminating, or displaying orders and trading interest on the NMS Stock ATS to make clear that this Item requests information about those products or services offered by the broker-dealer operator or its affiliate that have a nexus to the ATS services. We believe that the disclosure requests in Part III of adopted Form ATS–N are limited to information that we believe is necessary for market participants to understand the operation of the ATS, without requiring a level of detail that would normally require the disclosure of commercially sensitive information. In summary, we are modifying the proposed requests being adopted as Part II, Item 5 of Form ATS–N to clarify that the NMS Stock ATS is only required to provide information about products and services offered to subscribers for the purpose of effecting transactions, or submitting, disseminating, or displaying orders and trading interest on the NMS Stock ATS. Specifically, we have 783 See STANY Letter at 4. note that, as part of our review of Form ATS–N responses, we intend to monitor the level of summary information provided on the form for completeness to help ensure that such information is responsive to the form and is not designed to avoid meaningful disclosure. 784 We VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 modified the proposed language to state that the broker-dealer operator must disclose any products or services offered to subscribers for the purpose of effecting transactions or for submitting, disseminating, or displaying orders and trading interest in the NMS Stock ATS (e.g., algorithmic trading products that send orders to the ATS, order management or order execution systems and market data feeds). We believe that this language makes a sufficient distinction between products and services that relate to the functions of the ATS and those that do not; disclosures about the latter would not be required.785 In addition, we have divided the disclosure requests into four subparts: (i) One subpart addresses the products or services that the broker-dealer operator offers to subscribers for the purpose of effecting transactions or for submitting, disseminating, or displaying orders and trading interest in the NMS Stock ATS; (ii) another subpart addresses products or services that the broker-dealer operator’s affiliates offer to subscribers for the purpose of effecting transactions or for submitting, disseminating, or displaying orders and trading interest in the NMS Stock ATS; and (iii) the other two subparts address any differences between the terms and conditions of the services or products required to be identified in Item 5 among the broker-dealer operator, affiliates, and unaffiliated subscribers.786 This is a technical edit to the proposed disclosures so that the format of Part II, Item 5 is consistent with the format of Part II, Items 1–4 above. 5. Activities of Service Providers a. Shared Employees Part III, Item 7 of proposed Form ATS–N would have required disclosures about employees of the broker-dealer operator that service the operations of the NMS Stock ATS and also service other business units of the broker-dealer operator or any of its affiliates (‘‘shared employees’’). We received several comments on Part III, Item 7 of proposed Form ATS–N. We are 785 The revised wording for this request also provides examples of the types of services that would be encompassed by this question, such as algorithmic trading products that send orders to the ATS, order management or order execution systems, and market data feeds. 786 For example, if a broker-dealer operator offers subscribers alternative algorithms to handle orders, including sending such order to the NMS Stock ATS, and there is a difference in the speed or latency in which each of the alternatives transmits information, such differences in speed or latency would need to be disclosed in Part II, Item 5 of adopted Form ATS–N. PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 38833 adopting Part III, Item 7 of proposed Form ATS–N with modifications in response to commenters’ concerns, as further explained below, and we are also renumbering Part III, Items 7 of proposed Form ATS–N as Part II, Item 6(a) of adopted Form ATS–N. One commenter recommends eliminating the requests related to shared employees because the commenter believes that keeping the item up-to-date would be too burdensome and unnecessary as employee roles and responsibility shift periodically.787 Similarly, another commenter believes that while accountability for the safeguarding of customer information is essential, the commenter is uncertain as to why the disclosures regarding shared employees under Part III, Item 7 of proposed Form ATS–N need to be public, particularly in light of the proposal’s other reforms regarding the safeguarding of customers’ confidential information.788 We continue to believe that disclosures about shared employees with access to confidential trading information from the NMS Stock ATS would help market participants evaluate circumstances under which a conflict of interest may arise for the NMS Stock ATS or when there is the potential for information leakage involving shared employees. For example, we believe that market participants would likely want to know if an employee of the broker-dealer operator that is responsible for the operations of a system containing confidential subscriber trading information from the NMS Stock ATS is also responsible for supporting the principal trading activity of the brokerdealer operator. As discussed further below, however, we are modifying the proposed request about shared employees on Form ATS–N to more narrowly tailor the request in response to comments, which should reduce the proposed reporting burden. Some commenters believe that the Commission should narrow the scope of the shared employee request to shared employees who may have access to or knowledge of confidential subscriber information or orders.789 One commenter states that market participants would need to dedicate resources to determine which employees actually could pose risks of information leakage without limiting the disclosure in this manner.790 Another commenter also opines that it would be more useful to limit the information 787 See SIFMA Letter at 16. HMA Letter at 17. 789 See ICI Letter at 5–6; STANY Letter at 4. 790 See ICI Letter at 5–6. 788 See E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38834 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations about shared employees to those with access to confidential information.791 We acknowledge that for some brokerdealer operators—particularly multiservice broker-dealers for which the NMS Stock ATS is one of many business units—some employees provide purely administrative services or other support services to multiple business units that would not make them privy to confidential subscriber trading information of the NMS Stock ATS. In response to these comments, the adopted request requires disclosures only about shared employees with access to confidential trading information on the ATS. Furthermore, some commenters state that information about shared employees should not contain certain personal information about the employee, such as the employees name, title, or position.792 Several of these commenters believe that such public disclosures would provide little benefit to market participants because, for example, titles change frequently, lack standard meaning across firms and businesses, and do not provide meaningful information about potential information leakage on the ATS.793 In response to these comments, we have eliminated the requirement that the NMS Stock ATS identify the name and position or title of shared employees because we agree that any benefit to providing personally identifiable information about shared employees would not be justified by the potential negative effects to the individual whose personally identifiable information has been posted. We also agree that such information could become stale or change frequently, resulting in an increased burden on NMS Stock ATSs to keep that information up-to-date. One of the above commenters also states that, while it supports disclosure to the Commission of relevant information concerning individuals responsible for ATS functions, it believes that the request concerning shared employees should be limited to ‘‘categories of service’’ as opposed to individual positions and titles.794 As explained above, we have removed the proposed requirement that the disclosures regarding shared employees contain the name and position or title of all shared employees, and Form ATS–N only requires a summary of the role and responsibilities of a shared employee 791 See STANY Letter at 4. ICI Letter at 5–6; STANY Letter at 4–5; Liquidnet Letter at 9; STANY Letter at 4–5; UBS Letter at 6. 793 See ICI Letter at 5–6; STANY Letter at 4–5; UBS Letter at 6–7. 794 See UBS Letter at 6. 792 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 that has access to confidential trading information.795 While these changes reduce the proposed burden on filers, disclosures responsive to Part II, Item 6(a) of adopted Form ATS–N should also provide market participants with sufficient information to evaluate whether a shared employee’s role with the NMS Stock ATS may create a potential for information leakage. We do not believe that market participants would benefit from even broader, or more general, disclosures, such as ‘‘categories of service’’ for shared employees because such information would likely not provide market participants with relevant information to assess the potential for information leakage. Two commenters express support for Part III, Item 7 of proposed Form ATS–N by noting that current Form ATS Exhibit E calls for the disclosure of other entities relevant to the operation of the ATS, which the commenters believe would be helpful in determining whether there are apparent conflicts of interest that could come into play in terms of how orders are executed in the ATS.796 Another commenter recommends that the Commission ensure that the requests provide meaningful narrative information about the role and duties of each shared employee, both at the NMS Stock ATS and the other business unit or affiliate of the broker-dealer operator.797 This commenter states that, to better equip funds and other market participants to assess the roles and expertise of shared employees, an NMS Stock ATS should also disclose whether any shared employees are registered with the Commission or the Financial Industry Regulatory Authority and whether they hold one or more securities licenses.798 Because we have amended the proposed requests to reduce the potential for the public disclosure of personally identifiable information, we will not incorporate this commenter’s recommendation to require an NMS Stock ATS to disclose whether any shared employees are registered with the Commission or FINRA and whether they hold one or 795 As guidance for this request, the summary of the shared employees’ role and responsibilities generally should include sufficient detail to provide market participants with a comprehensive understanding of the full range of the shared employee’s responsibilities with the NMS Stock ATS and each relevant entity, including responsibilities that could enable the employee to view confidential trading information of the NMS Stock ATS. 796 See Luminex Letter at 2; see also PDQ Letter at 1 (agreeing with Luminex’s letter). 797 See ICI Letter at 5–6. 798 See id. PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 more securities licenses. The details solicited in Part II, Item 6(a) of adopted Form ATS–N are designed to provide market participants with information to assess whether an NMS Stock ATS’s use of shared employees poses a risk of information leakage or other conflicts of interest that could affect a market participant’s decision of whether or not to trade on the ATS. Requiring an NMS Stock ATS to disclose information about a shared employee’s credentials would be contrary to the Commission’s intent to limit the amount of personally identifiable information that is required by Form ATS–N. b. Third-Party Service Providers Part III, Item 8 of proposed Form ATS–N would have required disclosures about third-party service providers to the NMS Stock ATS. The Commission received several comments on Part III, Item 8 of proposed Form ATS–N. The Commission is adopting Part III, Item 8 of proposed Form ATS–N with modifications in response to commenters’ concerns, as further explained below, and is renumbering Part III, Item 8 of proposed Form ATS–N as Part II, Items 6(b), 6(c), and 6(d) of adopted Form ATS–N. Two commenters support the Commission’s proposal to require the disclosure of information related to third-party service providers because such disclosures would provide information related to potential information leakage on the NMS Stock ATS.799 One of those commenters further opines that while shared employees are likely subject to increased oversight and it supports the proposed requests related to shared employees, the oversight of third-parties is significantly less formidable and may result in greater risk for information leakage.800 As they did for Part III, Item 7 of proposed Form ATS–N, two other commenters express support for Part III, Item 8 of proposed Form ATS–N by noting that current Form ATS Exhibit E calls for the disclosure of other entities relevant to the operation of the ATS, which the commenters believe would be helpful in determining whether there are apparent conflicts of interest that could come into play in terms of how orders are executed in the ATS.801 Several commenters believe that aspects of the request under Part III, Item 8 of proposed Form ATS–N related to third-party service providers are unnecessary to evaluating an NMS 799 See HMA Letter at 17; ICI Letter at 5. HMA Letter at 17. 801 See Luminex Letter at 2; see also PDQ Letter at 1 (agreeing with Luminex’s letter). 800 See E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Stock ATS as a potential trading venue. Two commenters state that information about certain shared personnel for vendors or certain support functions, such as back-office or technology resources, are not necessary for risk assessment of an ATS.802 Similarly, another commenter believes that the disclosures could, in fact, inhibit useful comparison of ATSs and create unnecessary and burdensome disclosure obligations.803 Specifically, this commenter cites the proposed requirements to provide detailed information regarding persons, including natural persons, providing services for the ATS, but who are unaffiliated with the broker-dealer. We disagree that the proposed request regarding third party service providers to the NMS Stock ATS is unnecessary, would not be meaningful to market participants, or, when compared to the current requirements on Form ATS, would be overly burdensome. As noted in the Proposal,804 the request related to service providers is intended to expand on the current disclosure requirement of Exhibit E of 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.805 We continue to believe that subscribers and market participants would be interested in whether services performed by a third-party may or may not be under the control of the brokerdealer operator for the purposes of evaluating the potential information leakage. Some commenters recommend clarifying or more narrowly tailoring the scope of the requests in Part III, Item 8 of proposed Form ATS–N related to service providers so as not to capture information about vendors that only provide administrative services to the ATS or other overhead, such as utility companies.806 We believe that the scope of the third-party service provider requests should not encompass purely administrative items—such as human resources support—or basic overhead items—such as phone services and other utilities. The information solicited in this disclosure is meant to provide information about the extent to which a third-party may be able to influence or 802 See Luminex Letter at 4; STANY Letter at 5. Morgan Stanley Letter at 5. Proposal, supra note 2, at 81055. 805 See Item 7 of Form ATS (describing the requirements for Exhibit E of Form ATS). 806 See ICI Letter at 6; UBS Letter at 6; SIFMA Letter at 16. 803 See 804 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 control the operations of the ATS through involvement with its operations (such as operating the ATS’s proprietary data feeds sent to subscribers). As indicated by commenters, information about the roles and responsibilities of service providers to the ATS is important because it could inform market participants about the potential information leakage on the NMS Stock ATS. A commenter also states that it is very difficult for a broker-dealer to know the structure of all of its vendors, much less whether the vendor has an affiliate that may enter orders in the subject ATS.807 This commenter believes that requiring an ATS to disclose information regarding whether any such persons, or any of their affiliates, may enter orders or other trading interest on the NMS Stock ATS would be unduly burdensome. We believe that the benefit to market participants from the public disclosure of information concerning the use of ATS services by third-party service providers and their affiliates justifies the potential burden on the NMS Stock ATS to provide those disclosures in Form ATS–N. Service providers have business relationships outside of simple subscriber-ATS arrangements, which may give those service providers or their affiliates access to confidential trading information of other subscribers. As such, market participants should be aware of how those service providers utilize the ATS as a trading venue or for any other services. Furthermore, the adopted requests under Part II, Items 6(c)–(d) require the NMS Stock ATS to disclose whether any service providers or their affiliates use the services of the NMS Stock ATS and if they do, the ATS is required to identify the service providers, the service(s) used, and whether there is any disparate treatment between those service providers and other subscribers. Thus, an NMS Stock ATS would only be required to obtain and disclose information about third-party vendors and their affiliates that actively use the services of the ATS; the ATS should be aware of all parties the use its services under its current recordkeeping obligations.808 Additionally, because the ATS has already established a relationship with its service providers, we do not believe that it would impose a significant burden on ATSs to require its service providers to inform them about any affiliates that use the services of the ATS. Accordingly, to the extent that an affiliate of a service provider 807 See 808 See PO 00000 Morgan Stanley Letter at 5. supra note 742 and accompanying text. Frm 00069 Fmt 4701 Sfmt 4700 38835 uses the services of the ATS, we believe that the burden to obtain the information required by Form ATS–N is justified by the above-explained benefits to market participants from these disclosures. This commenter also states that if the Commission’s concern is whether a service provider is receiving preferential treatment from an ATS, the Proposal should have mandated disclosure of whether there is any preferential and/or differentiated treatment.809 We believe market participants would find it very useful to understand whether potential counterparties with whom they are trading, and who also service the operation of the NMS Stock ATS, have access to different or unique ATSrelated services when analyzing potential conflicts of interest or information leakage on the venue. We have added a request to Part II, Item 6 of adopted Form ATS–N to expressly require the ATS to identify and explain any differences in ATS services to a service provider and all other subscribers. One commenter questions the feasibility of providing ‘‘a detailed description of information technology services, including both hardware and software’’ in Part III, Item 8 of proposed Form ATS–N, which the commenter opines can be taken to the extreme of requiring an ATS operator to disassemble a server to enumerate the manufacturer of various components. The commenter believes that a general— but thorough—description of the information technology services would be more practical.810 We did not intend for the adopted disclosures to require the level of granular detail to which this commenter cites in its comment letter. To clarify the scope of the required disclosure about services provided by third parties, adopted Form ATS–N no longer requires the NMS Stock ATS to ‘‘describe’’ the operation, service, or function provided by the third party service provider. Instead, it requires an NMS Stock ATS to provide a ‘‘summary’’ of the service provider’s role and responsibilities.811 809 See Morgan Stanley Letter at 5. UBS Letter at 7. 811 As guidance for this request, the Commission would view, for example, an NMS Stock ATS simply stating that a third-party provides technology or hardware to the ATS as insufficient. See Proposal, supra note 2, at 81055. In this example, the summary generally should provide market participants with an understanding of the types of technology or hardware provided, and how that hardware or technology is used by the NMS Stock ATS. This information is meant to provide market participants with a better understanding about whether the service provider could access confidential trading information. 810 See E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38836 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations As guidance for this request, we would view, for example, an NMS Stock ATS simply stating that a third-party provides technology or hardware to the ATS as not responsive to the required summary of the service provider’s role. But we would not expect the ATS to provide information about the manufacturer of certain components of its hardware. This request for summary information is designed to provide market participants with a general understanding of the types of technology or hardware provided by the service provider as part of its responsibilities, and how that hardware or technology is used by the NMS Stock ATS. The purpose of this disclosure is to provide market participants with information to better understand whether the service provider might be able to access confidential trading information, so NMS Stock ATSs should draft its disclosure with the goal of conveying such information. Furthermore, to reduce redundant disclosures on Form ATS–N, adopted Form ATS–N will only require this in Part III, unless there are no disclosure requests in Part III that would encompass these types of services. The disclosure requests in Part III will likely require the NMS Stock ATS to describe the services provided by third-parties, and we believe that a summary narrative about the roles and responsibilities of third-party service providers will likely be included in that description of the services. We do not believe that it is not necessary to also provide a redundant summary narrative of the roles and responsibilities of service providers in Part II. A commenter also recommends eliminating the disclosures of thirdparty service providers from the publicly available Form ATS–N and requiring that the information requested be made available only to the Commission on a confidential basis.812 We are not changing the nature of the third-party service provider request to require the disclosures to be filed on a confidential basis with the Commission. We have narrowed the scope of the request so that the information provided is tailored to address the concerns of market participants and NMS Stock ATSs clarify the level of detail required by these disclosures. We believe that requiring only a summary description of the roles and responsibilities of thirdparty service providers would not require the type of details that could be subject to confidentiality concerns or otherwise put either the NMS Stock 812 See SIFMA Letter at 16. VerDate Sep<11>2014 21:26 Aug 06, 2018 ATS or the service provider at a competitive disadvantage. Finally, we are replacing the proposed word ‘‘person’’ with the word ‘‘entity’’ in Part II, Item 6(b) of adopted Form ATS–N. The Commission does not believe that an NMS Stock ATS is likely to contract with a natural person who is not associated with a legal entity (e.g., a corporation or an LLC) to provide services to the ATS. Furthermore, the Commission does not intend for the service provider request to disclose details about natural persons providing services to the ATS when those natural persons are employees of, or independent contractors hired by, a third party. 6. Protection of Confidential Trading Information Part III, Item 10 of proposed Form ATS–N would have required an NMS Stock ATS to provide disclosures about its confidential treatment of trading information. One commenter states its belief that the proposed requests under Part III, Item 10 of proposed Form ATS– N seemed appropriate given the risk of misuse of confidential information.813 This commenter believes the requests fit well within the framework of the new requirement that all ATSs maintain written safeguards and procedures to protect confidential trading information. We are adopting Part III, Item 10 of proposed Form ATS–N with modifications in response to commenter concerns, as further explained below, and renumbering the proposed request as Part II, Item 7 of adopted Form ATS–N. Part II, Item 7(a) of adopted Form ATS–N requires an NMS Stock ATS to describe its written safeguards and written procedures to protect the confidential trading information of subscribers to the NMS Stock ATS, including: (i) Written standards controlling employees of the ATS that trade for employees’ accounts; and (ii) written oversight procedures to ensure that the safeguards and procedures described above are implemented and followed. The protection of confidential trading information is a bedrock component of the regulation of ATSs and is essential to ensuring the integrity of ATSs as an execution venue. If such information is not protected, 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 in large positions) are eliminated. In cases where the confidential trading information of a subscriber is 813 See Jkt 244001 PO 00000 HMA Letter at 18. Frm 00070 Fmt 4701 Sfmt 4700 impermissibly shared with the personnel of the broker-dealer operator or any of its affiliates (e.g., persons who are not responsible for the operation of the ATS or compliance with applicable rules), such an abuse is also 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. Accordingly, we believe that disclosures informing market participants about broker-dealer operators’ written safeguards and procedures to protect confidential trading information are necessary 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.814 We are adopting Part II, Items 7(b) and (c) to require an NMS Stock ATS to disclose whether a subscriber can consent and withdraw consent, respectively, to the disclosure of its confidential trading information to any person (not including those employees of the NMS Stock ATS who are operating the system or responsible for its compliance with applicable rules). Subscribers should be able to give consent if they so choose to share their confidential trading information.815 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 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).816 For this example, Part II, Items 7(b) and 7(c) of adopted Form ATS–N 814 If an NMS Stock ATS has disclosed information on its Form ATS–N about the written safeguards and procedures that it has established to protect the confidential trading information of subscribers, including oversight procedures to ensure that such safeguards and procedures are followed, but those disclosures materially differ from the actual means by which the NMS Stock ATS protected the confidential trading information of subscribers, the ATS would be required to file an amendment pursuant to Rule 304(a)(2) to revise its Form ATS–N to accurately describe such safeguards and procedures. 815 See Regulation ATS Adopting Release, supra note 3, at 70879. 816 See Proposal, supra note 2, at 81058. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 would require the NMS Stock ATS to describe the means by which a 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.817 Part II, Items 7(b) and 7(c) contain requests similar to those in Part III, Item 10(a) of proposed Form ATS–N, but we are modifying the format of these requests so that they are in the form of a ‘‘yes’’ or ‘‘no’’ question, and if the NMS Stock ATS answers ‘‘yes,’’ the NMS Stock ATS must explain how and under what conditions consent can be given and withdrawn. We are also adding the phrase ‘‘not including those employees of the NMS Stock ATS who are operating the system or responsible for its compliance with applicable rule’’ to Part II, Item 7(b) of adopted Form ATS–N. This change is to clarify that the request does not cover such employees that may need access to such information in the course of their responsibilities to service the system. As noted above, Regulation ATS requires that access to confidential subscriber information be available only to those employees of the ATS that operate the ATS’s system or are responsible for the ATS’s compliance with applicable rules.818 Finally, we are adopting Part II, Item 7(d) to require an NMS Stock ATS to provide a summary of the roles and responsibilities of any persons that have access to confidential trading information, the confidential trading information that is accessible by them, and the basis for the access. Part III, Item 10(b) of proposed Form ATS–N would have required the NMS Stock ATS to identify the position or title of any person who has access to confidential trading information, describe the confidential information to which the person has access, and describe the circumstances under which the person can access confidential trading information. Some commenters express concerns regarding the potential disclosure of personally identifiable information under proposed Part III, Item 10(b).819 We have eliminated the 817 See id. We believe 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 7(a). See id., n.437. 818 See Regulation ATS Adopting Release, supra note 3, at 70879; 17 CFR 242.301(b)(10)(i)(A). 819 See MFA/AIMA Letter at 6 (expressing concern that requiring disclosure of the positions or titles of persons who have access to confidential trading information would paint a target on such VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 proposed requirement to publicly disclose the positions or titles of persons with access to confidential trading information and part II, Item 7(d) of adopted Form ATS–N requires only a summary of the roles and responsibilities of any persons that have access to confidential trading information, the confidential trading information that is accessible by them, and the basis for the access. We believe that any benefit of providing personally identifiable information is not justified by the potential negative effects of publicly posting personally identifiable information; a summary of the information required under Item 7(d) will buttress the existing obligations on ATSs to restrict access only to permitted personnel (e.g., those responsible for its operation or compliance).820 7. Differences in Availability of Services, Functionalities, or Procedures Part III, Item 9 of proposed Form ATS–N would have required an NMS Stock ATS to disclose information regarding the differences in the availability of services, functionalities, or procedures of the NMS Stock ATS that are available or apply to the brokerdealer operator or its affiliates that are not available or do not apply to other subscribers. In general, several commenters support requests for information about differences between subscribers and the broker-dealer with respect to their use of the NMS Stock ATS.821 A commenter also states that the proposed requests in Part III, Item 9 of proposed Form ATS–N are reasonable.822 One commenter, however, expresses concern that the proposed disclosures that would have been required under Part III, Item 9 of proposed Form ATS–N were too broad and could result in the disclosure of either proprietary information or other information that could pose a cybersecurity risk.823 We continue to believe that the disclosure about differences in treatment are important to market participants and will better allow them persons and could increase their security risks and risks of receiving phishing attacks); SIFMA Letter at 17–18 (stating that the public disclosure of information under Part IV, Item 10 of proposed Form ATS–N would have raised privacy, security, and proprietary information concerns). 820 See Regulation ATS Adopting Release, supra note 3, at 70879; 17 CFR 242.301(b)(10)(i)(A). 821 See SIFMA Letter at 6; Consumer Federation of America Letter at 9–10. See also Fidelity Letter at 5 (stating it should be disclosed when subscribers are not treated the same way); UBS Letter at 7 (suggesting the Commission request should highlight differences among subscribers). 822 See HMA Letter at 17–18. 823 See SIFMA Letter at 17. PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 38837 to decide whether submitting order flow to that NMS Stock ATS aligns with their trading or investment objectives. To more closely tailor the Form ATS–N disclosures about differences in treatment to the subject matter covered in relevant conflicts-of-interest requests, we are removing Part III, Item 9 of proposed Form ATS–N as a stand-alone question and incorporating the request into Part II, Items 1, 2, 3, and 6 of adopted Form ATS–N. We believe that under this format, disclosures regarding the differences in the availability of services, functionalities, or procedures of the NMS Stock ATS will relate to the specific subject matter covered by each of the aforementioned disclosure requests that relate to services, functionalities, or procedures that may differ among subscribers or the brokerdealer operator and subscribers. The requests in Part II of adopted Form ATS–N focus on the ATS-related activities of the broker-dealer operator and its affiliates and are designed to inform market participants about the competing interests between the brokerdealer operator or its affiliates and other subscribers and the potential for information leakage of subscribers’ confidential trading information. In response to a commenter’s concern,824 we note that we did not intend for these requests to require descriptions of technologies or other aspects of the NMS Stock ATS that could pose a cybersecurity risk or are otherwise disclose commercially sensitive information. 8. Other Recommendations From Commenters The Commission received comments recommending additional regulation or disclosures for NMS Stock ATSs related to conflicts of interests. In the Proposal, the Commission considered alternatives to address conflicts of interests between the broker-dealer operator and the NMS Stock ATS. One alternative the Commission considered was to eliminate any potential conflicts of interest by requiring the NMS Stock ATS to operate with a single business function—operating the NMS Stock ATS—and by eliminating any other function of the broker-dealer, such as principal trading.825 The Commission also considered continuing to allow broker-dealer operators 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 of 824 See 825 See E:\FR\FM\07AUR2.SGM id. Proposal, supra note 2, at 81043. 07AUR2 38838 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations interest.826 In the Proposal, the Commission requested comment about whether certain conflicts of interest arising out of the broker-dealer’s operation of the NMS Stock ATS should be prohibited.827 Several commenters recommend that the Commission prohibit conflicts of interest altogether on NMS Stock ATSs, which would include a prohibition on trading on the NMS Stock ATS by the broker-dealer operator and its affiliates, rather than simply increasing the disclosure requirements for conflicts of interest.828 However, we continue to believe that prohibiting conflicts of interest for the broker-dealer operator related to its operation of an NMS Stock ATS would be significantly more intrusive relative to requiring additional disclosures about the operations of the broker-dealer operator and its affiliates, and therefor did not propose these alternatives.829 We also believe that such a prohibition would substantially affect or limit the current operations of ATSs that trade NMS stocks. Part II of adopted Form ATS–N is designed to provide disclosures to market participants about ATS-related activities of a broker-dealer operator and its affiliates that might give rise of potential conflicts of interest or information leakage, and thus, should better enable market participants to evaluate whether they want to use the services of that NMS Stock ATS. Also, one commenter recommends that, for any conflicts of interest that are permitted, at a minimum Form ATS–N should include clear disclosures of conflicts of interest under a section titled ‘‘conflicts of interest.’’ 830 We decline the commenter’s request to title Part II ‘‘conflicts of interest.’’ We believe that it is more helpful to market participants for Form ATS–N to provide the information market participants need to individually evaluate whether there is a conflict of interest on a given 826 See id. id. 828 See Consumer Federation of America Letter at 7–8 (asserting that certain conflicts of interest are so acute and pernicious that they cannot be mitigated or absolved merely by disclosing them; the commenter provides principle trading by the broker-dealer operator as an example); HMA Letter at 13–18 (advocating for: (1) The Commission to prohibit what the commenter considers to be the deeply troubling conflicts of interest attendant with allowing an ATS operator or affiliate to trade in the ATS; or (2) alternatively if the Commission would not adopt such a prohibition, for the Commission to affirmatively restrict how the broker-dealer operator or its affiliates interact with the ATS); Better Markets Letter at 5–6 (advocating that the Commission ban material conflicts of interest rather than relying on disclosure alone). 829 See Proposal, supra note 2, at 81043. 830 See Better Markets Letter at 6. daltland on DSKBBV9HB2PROD with RULES2 827 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 NMS Stock ATS rather than relying on the ATS to determine when a conflict exits. We also received a comment requesting the Commission to require NMS Stock ATSs to disclose in Part II of Form ATS–N any proceeding within the last 10 years against the NMS Stock ATS, the broker-dealer operator or officers or employees of the brokerdealer operator that relates to the handling of equity orders or the operation of the NMS Stock ATS.831 Form ATS–N is designed to provide market participants with public disclosures about the current operations of an NMS Stock ATS and the current ATS-related activities of the brokerdealer operator and its affiliates. We believe that this information will help market participants assess the NMS Stock ATS as potential venue for their orders. We believe that disclosures about past proceedings, or other disciplinary matters, of the NMS Stock ATS, its broker-dealer operator, or officers and employees of the brokerdealer operator—even those that relate to the handling of equity orders or the operation of the NMS Stock ATS— would not provide additional transparency into the current operations of the NMS Stock ATS. To the extent that such information is publicly available, a market participant may review details about past and pending proceedings involving the NMS Stock ATS, its broker-dealer operator, or the officers and employees of the brokerdealer operator via, for example, public databases maintained by the Commission or FINRA. D. Part III Form ATS–N: Manner of ATS Operations Part III of adopted Form ATS–N is designed to provide public disclosures to help market participants understand, among other things, how subscribers’ orders and trading interest are handled, matched, and executed on the NMS Stock ATS. In response to comments, we are revising the format of several requests in Part IV of proposed Form ATS–N (renumbered as Part III in the adopted Form) to help NMS Stock ATSs provide disclosures that would be useful to market participants. For example, in response to commenters that believe the Commission’s use of the term ‘‘describe’’ is vague and would lead to discursive disclosures and obscure key information, we are revising requests to be more explicit, adding specificity to clarify the meaning of the requests, and providing non-exhaustive examples for NMS Stock ATSs to better 831 See PO 00000 ICI Letter at 6, n.14. Frm 00072 Fmt 4701 Sfmt 4700 understand what would be responsive to the Form ATS–N.832 In addition, we have added ‘‘yes’’ or ‘‘no’’ questions, and converted proposed Items into ‘‘yes’’ or ‘‘no’’ questions, throughout Part III of Form ATS–N, which we believe will allow market participants to find information more efficiently and facilitate their comparisons across NMS Stock ATSs.833 Moreover, we have separated the requests for information in Part III of adopted Form ATS–N into more items (and renumbered the items) and discrete topics to help readers more easily find information and compare that information among NMS Stock ATSs. In addition, we are combining or removing certain requests to reduce redundancy within Part III, and between Parts II and III, and separating certain requests for information into new items or subparts that focus the information required in response to commenter suggestions and concerns. Finally, we are adding a requirement to identify and explain any differences in the treatment of subscribers and the broker-dealer operator to several items that did not require this information as proposed.834 We intended that these differences be explained for all of the subject matter covered by Form ATS–N, and several commenters support requests for information about differences between subscribers and the broker-dealer operator with respect to their use of the NMS Stock ATS.835 Differences in the treatment among subscribers and the broker-dealer operator and its affiliates 832 The topics and examples provided on Form ATS–N are designed to help NMS Stock ATS consider the scope of the request and information potentially responsive to the form requirements. While we use the term ‘‘including’’ to denote topics responsive to an Item and have provided examples in many of the requests, these topics or examples are not an exhaustive list of what may be responsive to a Form ATS–N request. See, e.g., Items 4, 6, 7, 9, 10, 11, 13, 19, 21, and 23 of Part III of adopted Form ATS–N. 833 See e.g., SSGA Letter at 2; SIFMA Letter at 9; STANY Letter at 5; LeveL ATS Letter at 6–7; KCG Letter at 10. See also Section V.A.1. (discussing the format of items in Part II and III of Form ATS–N). 834 Specifically, this requirement is being added to Items 10, 14, 17, 18, and 23 of adopted Form ATS–N. In the Proposal, the Commission required a description of any differences between subscribers and persons in Part IV, Items 1(b), 1(e), 2(b), 3(b)– (d), 4, 5(a), 5(b), 6(a), 7, 8, 10(b), 12(b), and 13 of proposed Form ATS–N. See Proposal, supra note 2, at 81146–81152. 835 See, e.g., SIFMA Letter at 5–6 (stating whether all subscribers have access to the same suite of products and services is particularly appropriate and useful); Fidelity Letter at 5 (calling for disclosure when subscribers are not treated the same way); UBS Letter at 7 (suggesting the Commission request should highlight differences in subscriber access that may impact other users of the ATS). See also Consumer Federation of America Letter at 9–10 (discussing how to address potential advantages of the broker-dealer operator and its affiliates). E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations will help market participants discern any benefit or disadvantage they may receive in comparison to other market participants or the broker-dealer operator. daltland on DSKBBV9HB2PROD with RULES2 1. Types of ATS Subscribers Part IV, Item 1(c) of proposed Form ATS–N would have required disclosures about types of subscribers to the NMS Stock ATS. We are adopting Part IV, Item 1(c) of proposed Form ATS–N with modifications as Part III Item 1 (‘‘Types of Subscribers’’) of adopted Form ATS–N.836 Part III, Item 1 of adopted Form ATS–N is designed to provide market participants with information about the type of order flow in the NMS Stock ATS. NMS Stock ATSs may design their system for trading by retail, institutional, or any other type of market participant. One commenter recommends that the Commission consider eliminating or consolidating this request because it is redundant to the request in Part IV, Item 5 of proposed Form ATS–N regarding segmentation.837 In response to this comment, we are removing the requirement from Part IV, Item 1(c) of proposed Form ATS–N to ‘‘describe any criteria for distinguishing among types of subscribers, classes of subscriber, or other persons.’’ To the extent that an NMS Stock ATS distinguishes among ATS subscribers, the ATS will be required to discuss such information in Part III, Item 13 of adopted Form ATS– N, which relates to segmentation. Another commenter believes that the phrase ‘‘types of subscribers’’ should be specifically defined.838 In response to this comment, we are providing a list of market participants in Part III, Item 1 of adopted Form ATS–N that, in the Commission’s experience, are commonly used. The revised list includes: Retail investors, issuers, asset managers, brokers, dealers, NMS Stock ATSs, investment companies, hedge funds, market makers, principal trading firms, and banks. The list is nonexhaustive and an NMS Stock ATS is required to list any type of subscriber that can use the NMS Stock ATS services. Also, in response to this comment, we are revising Part IV, Item 1(c) of proposed Form ATS–N, by removing the request to describe the 836 As also discussed under Section V.D.2., commenters state with regard to the entirety of Part IV, Item 1 of proposed Form ATS–N that the Commission should adopt a ‘‘yes’’ or ‘‘no’’ format for the item instead of requests for descriptions. See SIFMA Letter at 19; KCG Letter at 11. 837 See SIFMA Letter at 20. 838 See KCG Letter at 12. The proposed Item required the NMS Stock ATS to describe the types of subscribers and other persons that use the services of the NMS Stock ATS. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 type of subscribers and other persons and instead, are only requesting that the NMS Stock ATS select the checkbox for the types of subscribers that can use the NMS Stock ATS services (and identify any other types of subscribers not listed in a checkbox). We are also revising the Item to require the selection of the types of subscribers that ‘‘can’’ use the NMS Stock ATS services, rather than solely those types of subscribers that in fact use the NMS Stock ATS as was proposed. Furthermore, in response to general comments that the Form ATS–N should be formatted to facilitate comparisons across NMS Stock ATSs,839 we are relocating Part IV, Item 1(c) of proposed Form ATS–N into a separate Item in Part III, Item 1 of adopted Form ATS–N and naming it ‘‘Types of ATS Subscribers.’’ 840 2. Eligibility for ATS Services Part IV, Item 1(a) of proposed Form ATS–N would have required disclosures about eligibility requirements of the NMS Stock ATS.841 We are adopting Part IV, Item 1(a) of proposed Form ATS–N with certain modifications described below, naming the Item ‘‘Eligibility for ATS Services,’’ and relocating the request as Part III, Item 2 of adopted Form ATS–N.842 We also received comment seeking modifications to the proposed Item. One commenter suggests that the term ‘‘eligibility requirements’’ under Part IV, Item 1(a) of proposed Form ATS–N is unclear and suggests using eligibility ‘‘standards’’ as a more accurate way to capture the various subscriber criteria an ATS might evaluate.843 In response 839 See e.g., SSGA Letter at 2; SIFMA Letter at 9; STANY Letter at 5; LeveL ATS Letter at 6–7; KCG Letter at 10. 840 See Section V.D.2 for a discussion of changes to the requirement under Part IV, Item 1(c) of proposed Form ATS–N that NMS Stock ATSs state whether they accept non-broker-dealers as subscribers to the NMS Stock ATS. 841 As discussed in the Proposal, the eligibility process and requirements to access an NMS Stock ATS may vary, and the requirements may differ depending on whether a potential subscriber is a customer of the broker-dealer operator of the ATS. For instance, some ATSs may require that a potential subscriber be a broker-dealer to submit orders in the ATS, while other ATSs may 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. See Proposal, supra note 2, at 81060. 842 One commenter supports the proposed disclosures stating that funds and other market participants would find this information valuable because it would facilitate the efficient comparison of eligibility processes and requirements across all NMS Stock ATSs and describe the types of participants that may dominate order flow on a particular NMS Stock ATS. See ICI Letter at 8. 843 See SIFMA Letter at 19. PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 38839 to this comment, we are replacing the reference to ‘‘eligibility requirements’’ in Part IV, Item 1(a) of proposed Form ATS–N with a reference to ‘‘conditions’’ the NMS Stock ATS requires a person to satisfy before accessing the ATS services. We believe that the term ‘‘conditions’’ provides the NMS Stock ATS with more flexibility to describe the relevant criteria. Also, commenters express confusion over the difference between Part IV, Item 1(a) and 1(e) (adopted as Part III, Items 2 and 3, respectively) of proposed Form ATS–N and whether they overlapped.844 In response to these commenters, we are clarifying the request by adding the phrase ‘‘before accessing the ATS services’’ in Part III, Item 2(b) of adopted Form ATS–N. On the other hand, Part III, Item 3 of adopted Form ATS–N, as discussed infra, requires disclosures about any conditions that would exclude a subscriber, in whole or in part, from using the services of the NMS Stock ATS after the person, as a subscriber, is permitted to use or submit orders to the NMS Stock ATS, such as for certain subscriber behavior while actively participating in the ATS.845 We are not imposing new requirements for NMS Stock ATSs to have certain eligibility requirements, either by implicating the fair access rule under Rule 301(b)(5) (as suggested by a commenter), or otherwise.846 The ‘‘yes’’ or ‘‘no’’ questions of Part III, Item 2(b) of adopted Form ATS–N ask whether there are any conditions that the NMS Stock ATS requires a person to satisfy before accessing the ATS services. If an NMS Stock ATS marks ‘‘yes,’’ the ATS is indicating that it has such conditions and must list and provide a summary of the conditions. We believe that these revisions make clear that we are not requiring any eligibility requirements. In Part III, Item 2(a) of adopted Form ATS–N, we are requiring the NMS Stock ATS to state whether it requires subscribers to be registered brokerdealers. This request is similar to the 844 Id. at 20 (stating it cannot distinguish between the requested information in proposed Items 1(a) and 1(e)); KCG Letter at 11–12 (noting an apparent overlap between the information requested under proposed Item 1(a) and proposed Item 1(e) and recommending that the Commission revisit and clarify the request). 845 For example, if an NMS Stock ATS has a practice of excluding subscribers that do meet certain percentage thresholds for submitting firmup orders in response to receiving a conditional order sent to them by the NMS Stock ATS, then this practice would be subject to disclosure under Part III, Item 3 of adopted Form ATS–N (‘‘Exclusion from Services’’) and not Part III, Item 2 (‘‘Eligibility Requirements’’). 846 See infra notes 855–857 and accompanying text. E:\FR\FM\07AUR2.SGM 07AUR2 38840 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 proposed request in Part IV, Item 1(c) of proposed Form ATS–N but asked in a ‘‘yes’’ or ‘‘no’’ format. Part III, Items 2(c) and 2(d) of adopted Form ATS–N are requirements proposed in Part IV, Item 1(a) 847 and 1(b), respectively, of proposed Form ATS–N, that the Commission is formatting as ‘‘yes’’ or ‘‘no’’ questions. If the NMS Stock ATS indicates that it does have conditions that a person must satisfy before accessing the ATS services, the request, as modified, requires an NMS Stock ATS to list and provide a ‘‘summary’’ of those conditions. We believe a summary of those conditions would provide sufficient disclosure (in conjunction with Part III, Item 1 of adopted Form ATS–N) for market participants to discern the type of order flow that they are likely to interact with on the NMS Stock ATS, while at the same time, not impairing the ATS’s ability to reasonably control the activities and quality of flow on its platform.848 One commenter acknowledges that it already discloses the general requirements for becoming a user of its ATS,849 which is analogous to the summary of conditions we are adopting in this Item. Moreover, we believe that requiring additional disclosures about differences in treatment among persons is important to market participants.850 We also received comment unfavorable to Part IV, Item 1(b) of proposed Form ATS–N.851 The proposed Item would have required 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 and if the terms and conditions of any contractual agreements were not the same for all 847 We are removing the reference to ‘subscriber’ from the Item, as proposed, because Part III, Item 2 of adopted Form ATS–N relates to eligibility requirements of persons before they become subscribers. 848 See UBS Letter at 7. See infra note 853 and accompanying text. 849 See id. 850 See, e.g., SIFMA Letter at 5–6 (stating whether all subscribers have access to the same suite of products and services is particularly appropriate and useful); Fidelity Letter at 5 (stating it should be disclosed when subscribers are not treated the same way); UBS Letter at 7 (suggesting the Commission request should highlight differences in subscriber access that may impact other users of the ATS). See also Consumer Federation of America Letter at 9– 10 (discussing how to address potential advantages of the broker-dealer operator and its affiliates). 851 See Liquidnet Letter at 12; UBS Letter at 7; SIFMA Letter at 19. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 subscribers and persons, the NMS Stock ATS would be required to describe any differences. We are not adopting the provision requiring the disclosure of the terms and conditions of any contractual agreements in Part IV, Item 1(b) of proposed Form ATS–N.852 We believe that the Form ATS–N, as adopted, requires comprehensive disclosure on the principal aspects of the operations of NMS Stock ATSs and any differences in the treatment of subscribers and the broker-dealer operator. We believe that a description of the terms of any contractual agreements is unlikely to provide much, if any, further information about the ATS’s operations that is not already required to be disclosed in the other items of Form ATS–N and would likely impose a significant burden. 3. Exclusion From ATS Services Part IV, Item 1(e) of proposed Form ATS–N would have required disclosures about limitation and denial of ATS services. We are adopting Part IV, Item 1(e) of proposed Form ATS–N, with certain modifications discussed below, including adopting a ‘‘yes’’ or ‘‘no’’ format to questions, as Item 3 of adopted Form ATS–N, and naming the request ‘‘Exclusion from ATS Services.’’ One commenter states that requiring an NMS Stock ATS to disclose additional details about why the ATS would limit or deny ATS services could affect the ATS’s ability to reasonably control the activities and quality of flow on its platform; the commenter suggests, therefore, that such disclosure remain confidential with the Commission.853 In response to this comment, we are adopting Part III, Item 3(a) of adopted Form ATS–N, as modified, to require the NMS Stock ATS to provide a list and ‘‘summary’’ of the conditions for excluding (or limiting) a participant from using the ATS, and are removing the requirement to describe the procedures or standards of the NMS Stock ATS that are used to determine whether to exclude a subscriber. We believe that these changes would protect sensitive information and prevent participants from using the disclosures to potentially misuse or game its system while ensuring that participants have 852 We are moving the provision in Part IV, Item 1(b) of proposed Form ATS–N, which would have required that the NMS Stock ATS state whether the contractual agreements for granting access to the NMS Stock ATS were written, to Part III, Item 2(d) of adopted Form ATS–N. Part III, Item 2(d) asks a ‘‘yes’’ or ‘‘no’’ question on whether subscribers are required to enter a written agreement to use the services of the NMS Stock ATS. 853 See UBS Letter at 7. PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 the information necessary to understand when they may be excluded. Another commenter suggests that it is unclear whether Part IV, Item 1(e) of proposed Form ATS–N requests disclosure of instances where a subscriber requests not to interact with certain counterparties.854 We are not requiring in Part III, Item 3 of adopted Form ATS–N that the NMS Stock ATS disclose instances where a subscriber requests not to interact with certain counterparties. Information regarding counter-party selection procedures on the NMS Stock ATS, including where a subscriber requests not to interact with certain counterparties, is required to be disclosed, as applicable, in Part III, Item 14 of adopted Form ATS–N. This commenter also expresses concern about the implications for fair access raised by Part IV, Item 1(e) of proposed Form ATS–N.855 The commenter assumes that the Commission intends that Part IV, Item 1(e) should apply only to entities subject to the fair access threshold, and believes that entities not subject to the fair access rule can deny access for any reason. The commenter further believes that it is important to note that unless an ATS exceeds the fair access threshold, the ATS should be able to deny access for any reason (e.g., credit risk). This commenter requests clarification from the Commission if this interpretation is wrong to avoid later misunderstanding or interpretive conflicts. The commenter also suggests that Part IV, Item 1(e) of proposed Form ATS–N goes beyond the fair access requirements (to keep records of all grants, denials, and limitations of access, and to report that information), and states that if the Commission intends to replace the fair access rule with a different regulatory and disclosure regime, the Commission should address this issue directly. We are not implicating or changing Rule 301(b)(5) of Regulation ATS, the so-called fair access rule, by requiring NMS Stock ATSs to disclose information about when the ATS can exclude, in whole or in part, a subscriber from the services of the ATSs. Pursuant to Rule 300(a)(2) of Regulation ATS, an ATS cannot set rules governing the conduct of subscribers other than the conduct of subscribers’ trading on the system and cannot discipline subscribers other than by exclusion from trading.856 NMS Stock ATSs are not required to establish rules for excluding subscribers from 854 See SIFMA Letter at 20. at 19–20. 856 See 17 CFR 242.300(a)(2). 855 Id. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 using the ATS. Nevertheless, based on the Commission’s experience, ATSs that trade NMS stocks often have rules governing subscribers’ participation on the ATS, and if a subscriber fails to comply with these rules, the ATS may limit or deny access to the ATS.857 Part III, Item 3 of adopted Form ATS–N is designed to provide subscribers with information about when the NMS Stock ATS can exclude, in whole or in part, a subscriber from the services of the ATSs and help them reasonably expect the types of activities that may cause them to be excluded (or limited) from using the services of the NMS Stock ATS. One commenter requests guidance about the ability of an ATS to deny access pursuant to Rule 301(b)(5) of Regulation ATS when such ATS has not exceeded the fair access threshold requirements under Rule 301(b)(5)(i).858 This commenter expresses concern that Part IV, Item 1(a) (‘‘Eligibility’’) and Item 1(e) (‘‘Limitations and Denial of Services’’) of proposed Form ATS–N raises the specter of fair access and that if the Commission is seeking to change regulatory expectations relating to fair access, the Commission should do so in a straight forward manner and not by way of requiring disclosures around ‘‘eligibility requirements.’’ We did not propose and are not adopting any change to the fair access rule under Rule 301(b)(5) of Regulation ATS. The commenter appears to misconstrue the requirements and application of the fair access rule in the context of the proposed disclosure requirements of Part IV, Item 1 of proposed Form ATS– N, and we believe it is important, in response to the commenter’s request for clarification if its interpretation is wrong, to further explain the operation of the fair access rule ‘‘to avoid later misunderstanding or interpretive conflicts. ’’859 In the Proposal, we discussed 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.860 Section 6(b)(2) of the Exchange Act generally requires national securities exchanges to allow any qualified and registered broker-dealer to become a member of 857 See Proposal, supra note 2, at 81063. These limitations can result in some subscribers having different levels of functionality or more favorable terms of access than others. For example, in the Commission’s experience, some ATSs exclude subscribers that have a high percentage of not responding with firm-up orders after receiving an IOI or conditional order. 858 See SIFMA Letter at 19–20. 859 Id. 860 See Proposal, supra note 2, at 81057. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 the national securities exchange—a key element in assuring fair access to national securities exchange services.861 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 Section 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.862 As a result, 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. Furthermore, 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.863 861 15 U.S.C. 78f(b)(2). 17 CFR 242.301(b)(5). See also supra notes 72–75 and accompanying text (discussing the fair access requirements of Regulation ATS). 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, which, among other things, require an ATS to establish written standards for granting access to trading on its system and not unreasonably prohibit or limit 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 adopted written standards and applied them in a fair and non-discriminatory manner. 863 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); In the Matter of UBS Securities LLC, Securities Exchange Act Release No. 74060 (Jan. 15, 2015), https://www.sec.gov/litigation/admin/2015/339697.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 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); 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; 48718 (Oct. 30, 2003), https://www.sec.gov/litigation/admin/34862 See PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 38841 In this rulemaking, we are requiring NMS Stock ATSs to identify and explain on Form ATS–N any instances where the ATS differs in how it treats subscribers and the broker-dealer operator so market participants can have additional information to consider when evaluating an ATS. More favorable service or pricing for certain ATS subscribers necessarily implies less favorable service or pricing for others.864 We believe that it is consistent with the goals of operational transparency for subscribers that receive less favorable service or pricing than other subscribers to know that fact. These subscribers will thus have better information to assess whether they should continue to trade on the ATS despite their different treatment or, if they do continue to trade on the ATS, whether they should alter their behavior in any way to better protect their interests. Part III, Items 2 and 3 of adopted Form ATS–N do not limit an NMS Stock ATS’s ability to discriminate among different subscribers. To the extent that an NMS Stock ATS is subject to the fair access rule under Rule 301(b)(5) and treats subscribers differently, the NMS Stock ATS must comply with the requirements of Rule 301(b)(5) with respect to its treatment of subscribers. If an NMS Stock ATS elects to treat subscribers differently by creating types or levels of eligibility and exclusion requirements, Part III, Items 2 and 3 of adopted Form ATS–N require an NMS Stock ATS to ‘‘identify and explain any differences,’’ which is similar to the vast majority of items on Form ATS–N. We are adopting Part III, Item 3 of Form ATS–N with certain language to reduce potential confusion with the application of Rule 301(b)(5) of Regulation ATS. As indicated above, to meet the definition of an ATS, a system 48718.htm (all settling 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). 864 See, e.g., UBS Settlement, supra note 864 (noting that UBS did not disclose the existence of a sub-penny order type to all ATS subscribers and that ‘‘nearly all of the subscribers’’ who received notice of the order type ‘‘were market makers and/ or HFT firms’’) and at 10 (noting that certain orders—those entered on behalf of UBS clients that paid to use UBS-developed order-routing algorithms—had the ability to avoid executing in the ATS against orders entered by subscribers that UBS had deemed ‘‘non-natural’’ and no other subscribers had the ability to use this natural-only crossing restriction) and Crossfinder Settlement supra note 96 (noting the ATS did not permit all subscribers to receive IOIs from the IOI server). E:\FR\FM\07AUR2.SGM 07AUR2 38842 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations must not discipline subscribers other than by exclusion from trading. 865 The language in Part III, Item 3 of adopted Form ATS–N now uses ‘‘exclude, in whole or in part,’’ which is similar to language used in the definition of ATS in Rule 300(a)(2), rather than using the term ‘‘limitations and denials of services,’’ as used in Part IV, Item 1(e) of proposed Form ATS–N. We recognize that exclusions from services, in whole or in part, are functionally equivalent to limitations and denials of services; however, we believe that the elimination of these terms from Part III, Item 3 of adopted Form ATS–N should mitigate any potential confusion that we are implicating Rule 301(b)(5) in the request.866 4. Hours of Operations Part IV, Item 2 of proposed Form ATS–N would have required disclosures about the hours of operations. We did not receive comment on Part IV, Item 2 of proposed Form ATS–N. We are adopting the Item with modifications as Part III, Item 4 (‘‘Hours of Operations’’) of adopted Form ATS–N, as discussed below. We continue to believe that it is important for market participants and the Commission to understand when an NMS Stock ATS operates and when orders can be entered, including when an NMS Stock ATS will accept orders outside of regular trading hours. Making such information publicly available would enable market participants to more easily compare when trading interest can be entered on NMS stock trading centers. We are modifying the example provided in this Item by replacing references in the Proposal to hours when ‘‘pre-opening or after-hours trading occurs’’ (emphasis added) with ‘‘hours of operation outside of regular trading hours.’’ Our intent is to provide market participants with information about when the NMS Stock ATS is operating, whether trading or performing another function, such as accepting orders, and not simply when trading is occurring.867 865 See 17 CFR 242.300(a). supra note 855 and accompanying text. Part III, Item 25 of adopted Form ATS–N (‘‘Fair Access’’) is specifically designed to require an NMS Stock ATS, as applicable, to provide information in connection with Rule 301(b)(5) of Regulation ATS. See also Section V.D.25. 867 We are also modifying this request to require the times when trading interest can be entered on the ATS, as opposed to identifying the times trading interest is entered, so as to more precisely indicate when the ATS is available for the entry of trading interest. We are replacing references to pre-opening and after-hours with the more general reference to hours of operation ‘‘outside of regular trading hours.’’ daltland on DSKBBV9HB2PROD with RULES2 866 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 5. Means of Entry In Part III, Item 6 of proposed Form ATS–N we proposed a similar request to Part IV, Item 4(a) of proposed Form ATS–N that focused on the activities of the broker-dealer operator and its affiliates. Part III, Item 6 of proposed Form ATS–N would have required disclosures about the broker-dealer operator’s, or any of its affiliates’, use of a SOR(s) (or similar functionality) or an algorithm. Part IV, Item 4(a) of proposed Form ATS–N would have required disclosures about connectivity and order entry to the NMS Stock ATS. We are adopting both requests with modifications and combining them into Part III, Item 5 (‘‘Means of Entry’’) of adopted Form ATS–N. One commenter asserts that the information sought in Part III, Item 6 of proposed Form ATS–N is generally duplicative of the requests in Part III, Item 3 (‘‘Products or Services Offered to Subscribers’’) and Part III, Item 5 (‘‘Trading Activities on the NMS Stock ATS’’) of proposed Form ATS–N and that the requests in Part III, Item 6 of proposed Form ATS–N (‘‘Smart Order Router (‘SOR’) (or Similar Functionality of Algorithm)’’) should be either consolidated into those requests or eliminated altogether.868 To reduce redundancy, we are combining the proposed requests for information as explained above. With regard to Part IV, Item 4(a) of proposed Form ATS–N, one commenter states that the requirement to ‘‘describe’’ the means of connectivity by ‘‘other persons’’ is potentially overbroad— particularly for ATSs with affiliated broker-dealers or other business units that may connect directly or indirectly to the ATS.869 This commenter suggests that Part IV, Item 4(a) conflates the identities of market participants (subscribers and other persons) with the means of connectivity. The commenter submits that end users would be better served by a table identifying the various means of connectivity without respect to the identities of who connects and in which fashion. In response to this comment, Part III, Item 5 of adopted Form ATS–N first requires an NMS Stock ATS to identify and explain the protocol that can be used to directly enter orders and trading interest into the ATS. In a separate subpart to Part III, Item 5 of adopted Form ATS–N, the NMS Stock ATS must identify and explain any other means for entering orders and trading interest into the NMS Stock ATS (e.g., smart 868 See 869 See PO 00000 SIFMA Letter at 15. id. at 22. Frm 00076 Fmt 4701 Sfmt 4700 order router, algorithm, order management system, sales desk) and indicate whether these means are provided by the broker-dealer operator, either by itself or through a third-party contracting with the broker-dealer operator, or any affiliate of the brokerdealer operator. Both of these subparts are followed, respectively, by a request to identify and explain any differences in the terms and conditions for these means of entry among subscribers and the broker-dealer operator. We believe that these changes will better distinguish subject matter regarding means of entry from subject matter regarding the identity of any party offering access to such means of entry. We note that subscribers may submit orders or trading interest to the NMS Stock ATS both directly and indirectly.870 A direct method of sending orders or 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 trading interest into the ATS without an intermediary. An example of an indirect method of submitting orders or trading interest to an NMS Stock ATS would include the use of the broker-dealer operator’s SOR (or similar functionality) or algorithm. SORs (or similar functionalities) and algorithms are discussed further below. The means of order entry into an ATS (e.g., direct or indirect) could impact the speed in which a subscriber’s order is handled and potentially executed and potentially increases the risk of information leakage.871 We believe that the disclosures regarding the direct or indirect means of order entry would inform subscribers and market participants about the functionalities that its orders and trading interest pass through on their way to the ATS and help them assess any potential advantages that orders sent through the broker-dealer operator may have with respect to other subscribers on the NMS Stock ATS. We also received several other comments on the request for information in Part III, Item 6 of proposed Form ATS–N, which as 870 See Proposal, supra note 2, at 81068. 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 ATS, the ATS must identify the application or functionality and provide a description of its purpose. In this example, given that the intermediate application or functionality has access to a subscriber’s order information, the NMS Stock ATS must take appropriate measures to protect the confidentiality of such information pursuant to Rule 301(b)(10) of Regulation ATS. 871 To E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations explained above, have been incorporated into Part III, Item 5 of adopted Form ATS–N. Many commenters express general support for public disclosures about an NMS Stock ATS’s use of the broker-dealer operator’s or its affiliates’ SORs or algorithms.872 Some commenters, however, express concern that Part III, Item 6 of proposed Form ATS–N would require the NMS Stock ATS to publicly disclose proprietary information about its SOR and/or algorithms.873 Two commenters believe that disclosing the information required under proposed Part III, Item 6 would harm broker-dealers that operate an NMS Stock ATS to the benefit of broker-dealers that do not, who would not be required to disclose what the commenter considers to be proprietary information.874 Similarly, another commenter believes that it is not necessary to require disclosure of how the SOR or algorithm interacts with any ATS operated by third-party operators; the commenter states that requiring that type of disclosure would impose a disclosure obligation on ATS operators that is not imposed on competing broker-dealers that do not operate an ATS.875 We did not intend for the proposed requests regarding SORs (or other functionalities) and algorithms used by the broker-dealer operator or its affiliates to enter orders or trading interest into an NMS Stock ATS to mandate the public disclosure of information that could place the brokerdealer operator or its affiliates at a competitive disadvantage with other broker-dealers. To clarify the scope of the adopted disclosure requirements, Part III, Item 5(c) of adopted Form ATS–N no longer contains the proposed language ‘‘[d]escribe the interaction and coordination.’’ Rather, Part III, Item 5(c) only requires the NMS Stock ATS to ‘‘list and explain’’ sources of order flow other than those used for direct entry into the ATS, which could include SORs or algorithms offered by the broker-dealer operator. Furthermore, the adopted disclosure requirements only require the NMS Stock ATS to ‘‘list and provide a summary description of the terms and conditions for entering orders or trading interest into the ATS’’ through these sources. This revised language is intended to clarify that the NMS Stock ATS need not provide a 872 See Schneiderman Letter at 1; HMA Letter at 17; STA Letter at 5; Liquidnet Letter at 9; KCG Letter at 10. 873 See STA Letter at 5; Liquidnet Letter at 9; STANY Letter at 4; SIFMA Letter at 15. 874 See STA Letter at 5; STANY Letter at 4. 875 See Liquidnet Letter at 9. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 detailed description of the programming for its SOR (or other similar functionality), algorithms, or other nondirect means for entering order and trading interests that could put the ATS at a competitive disadvantage with competitors. For example, NMS Stock ATSs need not disclose their SORs’ routing tables or other information about how the SOR may route orders.876 Another commenter states that there are numerous questions in the proposed Form ATS–N that would require ATS operators ‘‘to act as de facto agents of the SEC’’ by asking the ATS operators to seek information relating to the operations of certain trading algorithms or SORs that the ATS operators have nothing to do with and may be blocked via firm information barriers from knowing anything about.877 This commenter opines that ATS operators should properly be asked about how their ATSs work, and that information should be made available to all market participants, but if the Commission wants ATS operators to disclose whether they give preferential treatment to orders from affiliates at the expense of other ATS customers, or if they give preferential treatment to anyone else that isn’t an affiliate over other ATS customers, then the Commission should pose that specific question and require a specific answer.878 This commenter continues to state that anything beyond that which is of regulatory interest to the Commission with respect to how trading algorithms or smart order routers interact with ATSs generally or with other market centers should be asked of the firms that own or operate those algorithms or smart order routers. We agree that it is outside of the scope of this rulemaking for us to require NMS Stock ATSs to obtain detailed information about how the SORs and algorithms of third parties operate when such information does not pertain to the operation of the ATS. However, if an affiliate of the broker-dealer operator provides a means of entry into the ATS for its customers or its principal orders, we believe that market participants 876 For example, a broker-dealer operator that uses its SOR to both enter customer orders into its ATS and send customer orders to external trading venues would not be required to disclose how its SOR is programmed to decide how to route those orders. The NMS Stock ATS would be required to disclose whether the broker-dealer operator’s SOR is a means for entering client orders and, if so, indicate whether these means are provided by the broker-dealer operator, either by itself or through a third-party contracting with the broker-dealer operator, or through an affiliate of the broker-dealer operator, and list and provide a summary of the terms and conditions for entering orders or trading interest into the ATS through these means. 877 See Luminex Letter at 3. 878 See id. at 4. PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 38843 should understand certain details about the interaction between that affiliate and the ATS, which are solicited in Part III, Item 6, to properly evaluate potential conflicts of interest and information leakage on the ATS. For example, among the advantages and disadvantages that market participants should be able to discern from the disclosure of Part III, Item 5(b) is any differences in the latency of the alternative means for entering orders and trading interest into the NMS Stock ATS. We understand that alternative means of entering orders and trading interest may have different latencies associated with each alternative. For instance, in some cases, a direct connection to the NMS Stock ATS may have reduced latencies as compared to indirect means where orders and trading interest pass through an intermediate functionality. Alternatively, a brokerdealer operator could, for example, configure the NMS Stock ATS to provide reduced latencies for certain means of order entry used by itself or its affiliates, such as through a SOR or algorithm.879 We also believe that it is important for subscribers and market participants to understand a means of entry provided by an affiliate, such as the use of an affiliate’s SOR, even if it does not provide an advantage to a particular entity. Specifically, we continue to believe that disclosures about a brokerdealer operator’s use of its or an affiliate’s SOR (or similar functionality) or algorithms to enter orders into the NMS Stock ATS are important to market participants when evaluating NMS Stock ATSs.880 Today, most brokerdealers that operate an NMS Stock ATS use some form of SOR (or similar functionality) in connection with the NMS Stock ATS.881 A SOR (or similar functionality) can generally be understood as an automated system used to route orders or trading interest among trading centers, including trading centers other than the NMS Stock ATS operated by the broker-dealer operator, to carry out certain trading instructions or strategies of a brokerdealer.882 SORs (or similar 879 The Commission is not requiring a reporting regime with precise latencies calculated for each means of entry. But see Healthy Markets Letter at 19–20 (requesting that the Commission adopt annual reporting requirements regarding the latency of certain data on ATSs). Rather, the response to Item 5(b) would provide market participants with an appreciation of relative differences in the speed of order entry through the alternative means offered. 880 See Proposal, supra note 2 at 81052. 881 See id. 882 See id. E:\FR\FM\07AUR2.SGM 07AUR2 38844 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations functionalities) have become an integral part of the business of many multiservice 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 883 In addition to the SOR (or similar functionality), orders or 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.884 As discussed in the Proposal, we believe that market participants 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.885 As also discussed in the Proposal, broker-dealer operators of NMS Stock ATSs or their affiliates may use SORs (or similar functionality) or algorithms in a variety of ways.886 For example, the broker-dealer operator may use the SOR (or similar functionality) to route their agency and principal orders to different trading venues, or the broker-dealer operator may use the SOR as the primary means of routing subscriber orders or trading interest to or from the NMS Stock ATS. We understand 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 trading interest entered on, or removed from, the ATS, 883 See id. id. See also 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. 885 See Proposal, supra note 1, at 81052. 886 See id. Broker-dealer operators are likely to vary in their organizational structures. Accordingly, Part III, Item 5 of adopted Form ATS–N will include third parties that contract with the broker-dealer operator and affiliates of the broker-dealer operator that may operate a SOR(s) (or similar functionality) or algorithm to help ensure that SORs (or similar functionalities) or algorithms used with the NMS Stock ATSs are disclosed regardless of whether the SOR(s) (or similar functionality) or algorithm(s) is operated by a third-party contracting with the broker-dealer operator or an affiliate of the brokerdealer operator. daltland on DSKBBV9HB2PROD with RULES2 884 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 must pass through the SOR (or similar functionality) or algorithm). A brokerdealer 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 principal 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 ATS or a 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 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 brokerdealer 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. We continue to believe 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. A system may consist of various functionalities, mechanisms, or protocols that operate collectively to bring together the orders for securities of multiple buyers and sellers using nondiscretionary methods under the criteria of Rule 3b–16(a). In some circumstances, the various functionalities, mechanisms, or protocols may be offered or performed by another business unit of the brokerdealer operator or by a separate PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 entity.887 As discussed in the Proposal, broker-dealer operators that use a SOR (or similar functionality) or algorithm may operate the SOR (or similar functionality) or algorithm separate and apart from their ATS.888 However, to the extent that a SOR (or similar functionality) or algorithm 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.889 We believe that information provided on Form ATS–N about the use of a SOR (or similar functionality) or algorithm in Part III, Item 5 of adopted Form ATS–N will allow the Commission to better understand the operations and scope of the NMS Stock ATS. That is, the disclosures would assist the Commission in determining if a SOR (or similar functionality) or algorithm is performing a function of the NMS Stock ATS to bring together the 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. Finally, some commenters suggest reducing the level of detail solicited in the proposed disclosures about the use of SORs (or other functionalities) or algorithms. One commenter suggests reframing the proposed requests regarding the use of SORs (or other functionality) or algorithms to ‘‘yes’’ or ‘‘no’’ questions or attestations of ‘‘no advantage,’’ and in situations where the broker-dealer operators or its affiliates does have an advantage, the NMS Stock ATS should disclose that advantage publicly and in similar detail to what was proposed in Part III, Item 6.890 Another commenter states that if the Commission does not eliminate or consolidate Part III, Item 6 of proposed Form ATS–N, the commenter 887 We stated in adopting Regulation ATS that we ‘‘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 3, at 70852. 888 See Proposal, supra note 2, at 81053. 889 In this example, 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. 890 See STA Letter at 5. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 recommends focusing the requests on the controls within the ATS (as opposed to the attributes of the algorithm or SOR) and asking whether the algorithm or SOR possesses information about the ATS by virtue of its affiliation with the ATS that other algorithms or SORs do not possess.891 Likewise, a commenter states that a more granular requirement than progressive ‘‘yes’’ or ‘‘no’’ answers for Part III, Item 6 of proposed Form ATS would pose challenges to maintain up-to-date disclosures.892 This commenter recommends that Form ATS–N disclosures about potential trading activity on the ATS should be formatted as progressive ‘‘yes’’ or ‘‘no’’ questions and that certain Form ATS–N disclosures may be subject to immediate change without notice.893 We do not believe that the requests about the means for entering orders and trading interests on the NMS Stock ATS will be overly burdensome to keep upto-date on Form ATS–N because the requests do not require a level of detail that would mandate an amendment for every programming change to these services, such as an update to the routing table. Furthermore, to the extent that an NMS Stock ATS is unable to use a means for entering order and trading interests due to unexpected circumstances, such as a power failure or act of nature, the NMS Stock ATS could state in its Form ATS–N information about the alternative procedures that the ATS would use for the entry of orders and trading interests into the NMS Stock ATS under such exigent circumstances; this would obviate the need for an amendment when such alternative procedures are used. Finally, as explained in detail above, we believe that the information solicited in adopted Form ATS–N about the use of SORs (or similar functionalities) or algorithms by the ATS is very important for market participants when evaluating potential conflicts of interest on the ATS, so we do not think it would be helpful to reduce the level of detail required by the adopted form as suggested by these commenters. 6. Connectivity and Co-Location Part IV, Item 4(b) of proposed Form ATS–N would have required disclosures about co-location. We are adopting Part IV, Item 4(b) of proposed Form ATS–N, with modifications, and renumbering 891 See SIFMA Letter at 15. The commenter also states that it would like the Commission to define ‘‘Person’’ as used in proposed Part III, Item 6(b). See id. The term ‘‘Person’’ is defined in Form ATS–N. See supra Section V.A.2. 892 See KCG Letter at 10. 893 See id. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 the request as Part III, Item 6 (‘‘Connectivity and Co-location’’) of adopted Form ATS–N. A commenter recommends that the Part IV, Item 4(b) co-location request could be reworded as two ‘‘yes’’ or ‘‘no’’ questions, provides recommended questions, and states that any further information requested should be as simple and direct as possible without requiring detailed, idiosyncratic information in the form.894 In response to this comment, we have circumscribed the description of terms and conditions of co-location services and are requiring ‘‘a summary’’ of the terms and conditions for co-location and related services, including the speed and connection (e.g., fiber, copper) options offered. We believe a summary would provide market participants with the necessary information to consider and evaluate the co-location and related services the NMS Stock ATS is offering without requiring overly burdensome disclosure. We do not believe that solely asking ‘‘yes’’ or ‘‘no’’ questions (with no obligation to provide additional detail) would provide market participants with sufficient information to evaluate the co-location services the NMS Stock ATS is offering. For example, a pricesensitive market participant may not want to participate on an ATS that offers co-located subscribers certain, more expensive, high-speed connectivity options that the market participant may perceive as providing an advantage to other subscribers that are willing to pay for the service. Such information would not be disclosed by ‘‘yes’’ or ‘‘no’’ questions. We are reformatting the question regarding connectivity and co-location in Part III, Item 6 of adopted Form ATS– N to provide two sub-items that relate to speed of communication with the ATS, which were requested in Part IV, Item 4(b) of proposed Form ATS–N. As adopted, Part III, Item 6(c) of Form ATS–N requires an NMS Stock ATS to indicate whether it provides any other means besides co-location and related services described in the Item to increase the speed of communication with the ATS, and if so, to explain the means and offer a summary of the terms and conditions for its use.895 We 894 The commenter suggests the following two questions in place of proposed Item 4(b): (i) Do you offer co-location to the ATS matching engine, and (ii) do all clients have the same access to colocation services? See SIFMA Letter at 22. 895 Question 347 of the Proposal asks if Part IV, Item 4(b) of Form ATS–N captures the information that is most relevant to understanding the operations of the NMS Stock ATS related to colocation 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, PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 38845 separated the proposed request for information related to means to increase the speed of communication with the ATS into its own separate sub-item (i.e., Part III, Item 6(c)) to improve readability, make the information easier to locate, and facilitate comparisons across NMS Stock ATSs.896 We believe the request is necessary to account for advances in technology. We also are adopting a request in Part III, Item 6(e) for the NMS Stock ATS to indicate whether it offers any means to reduce the speed of communication with the ATS and provide a summary of the terms and conditions for its use. As indicated by commenters,897 latency is an important feature of equity market trading, and market participants are interested in understanding the functionalities employed by NMS Stock ATSs to influence it. There have been recent developments in equity market structure for trading centers to employ mechanisms to increase the latency or the length of time for orders, trading interest, or other information to travel from a user to the system.898 Part IV, Item 7(a) of proposed Form ATS–N required an NMS Stock ATS to disclose information about the means or facilities used by the ATS to bring together the orders of multiple buyers and sellers, as well as the established, nondiscretionary methods that dictate the terms of trading on the ATS. To the extent that an NMS Stock ATS applied a functionality or means for the ATS or a subscriber to decrease speed of communications with the NMS Stock ATS, the ATS would have been required to disclose that functionality in response to Part IV, Item 7(a) of proposed Form ATS–N. In adopted or messages to or from the NMS Stock ATS. See Proposal, supra note 2, at 81069. 896 See supra note 839. Part IV, Item 4(b) of proposed Form ATS–N would have required an NMS Stock ATS to describe ‘‘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.’’ Part III, 6(c) of adopted Form ATS–N would require similar information as Part IV, Item 4(b) of proposed Form ATS–N. The language revisions are intended to simplify and improve readability of the request. 897 See infra note 1037 and accompanying text. 898 See In the Matter of the Application of Investors’ Exchange, LLC for Registration as a National Securities Exchange, 81 FR 41142, 41154 (June 23, 2016) (explaining the use of the IEX coil and an additional distance to the IEX trading system that results in an equivalent 350 microseconds of latency) (‘‘IEX Exchange Registration’’); Securities Exchange Act Release No. Release No. 80700 (May 16, 2017), 82 FR 23381 (May 22, 2017) (Order Approving Proposed Rule Change Amending Rules 7.29E and 1.1E to Provide for a Delay Mechanism) (approving rule change on NYSE MKT LLC to provide for an intentional delay of 350 microseconds of latency to inbound and outbound order messages). E:\FR\FM\07AUR2.SGM 07AUR2 38846 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Form ATS–N, because of commenters’ concerns regarding communication latencies with NMS Stock ATSs and the impact they may have on how the subscriber’s orders and trading interest are executed on the NMS Stock ATS, we are making this request a separate subpart for market participants to more readily find information related to how a subscriber communicates with the NMS Stock ATS. For Part III, Items 6(c) and 6(e), the Item requires a summary of the terms and conditions of the services offered if applicable. We believe a summary would provide subscribers and market participants with relevant information about the NMS Stock ATS to consider and evaluate its services without requiring overly burdensome disclosure. We are also providing examples in Part III, Item 6 of adopted Form ATS– N to clarify the types of services and connection options related to colocation that an NMS Stock ATS may offer. We believe that providing these examples will help NMS Stock ATSs better understand the type of information that would be responsive to the Form ATS–N requests. We are providing further guidance as to what is required of NMS Stock ATSs when disclosing any differences in the terms and conditions among subscribers and the broker-dealer operator related to co-location and related services. Subscribers of co-location services can experience faster or slower connection speeds to an NMS Stock ATS depending on factors such as the distance of the customer servers from the matching engine, or the use or non-use of ‘‘coiling’’ to its matching engine to equal connection speeds among subscribers, among others. Such differences in connection speed or latency would be required to be disclosed under Part III, Item 6(a). daltland on DSKBBV9HB2PROD with RULES2 7. Order Types and Attributes Part IV, Item 3(a) of proposed Form ATS–N would have required disclosures about order types and modifiers.899 We received comments on Part IV, Item 3 of proposed Form ATS–N expressing general support for the Commission’s aim to provide disclosure for order 899 Part IV, Item 3(c) of proposed Form ATS–N would have required 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 have been required to describe any differences if the requirements and handling procedures for minimum order sizes, odd-lot orders, or mixed-lot orders were not the same for all subscribers and persons. As discussed further below, minimum order sizes, odd-lot orders, and mixed-lot orders are addressed in Part III, Item 8 of adopted Form ATS– N. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 types that could benefit market participants’ understanding how their orders may be handled by the NMS Stock ATS and that could help optimize order routing practices by market participants.900 We continue to believe that all market participants should have full information about the operations of order types available on an NMS Stock ATS for market participants to comprehensively understand how their orders and trading interest will be handled and executed on the ATS. Accordingly, we are adopting Part IV, Item 3(a) of proposed Form ATS–N with certain modifications described below, naming the Item ‘‘Order Types and Attributes,’’ and relocating the request as Part III, Item 7 of adopted Form ATS– N. Order types are a primary means by which users of an NMS Stock ATS communicate their instructions for handling their trading interest to the NMS Stock ATS. Moreover, order types can be complex and operate in various ways. Given the importance of order types and their complex nature, we are requiring NMS Stock ATSs to disclose the information called for by Part III, Item 7 on adopted Form ATS–N. One commenter suggests that Part IV, Item 3 of proposed Form ATS–N would require excessive information that would be unnecessarily burdensome and duplicative, and offers several suggestions on how to streamline the Item, including defining a set of order type terminology for completing the form, allowing a table template for responses, and suggested ‘‘yes’’ or ‘‘no’’ questions.901 We do not believe that it would be practical to define or standardize order types because the operation and naming of order types is not consistent across NMS Stock ATSs or trading centers, and broadly similar order types can have many permutations.902 We believe that Part III, Item 7 of adopted Form ATS– N provides NMS Stock ATSs with 900 See ICI Letter at 7 (stating that disclosure would end the practice of some ATSs of disclosing the existence of certain order types to only favored subscribers and provide long term benefits by allowing funds to optimize their order routing practices); SIFMA Letter at 6 (suggesting the proposed Item requires useful information for market participants, whose investments may be traded indirectly on ATSs via their third-party broker-dealers). See also Citadel Letter at 1; Better Markets Letter at 5; Morgan Stanley Letter at 1; Markit Letter at 4; KCG Letter at 7. 901 See SIFMA Letter at 20–21. 902 See also Consolidated Audit Trail, Final Rule, Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722, 45742 (August 1, 2012) (declining under Rule 613 to enumerate specific order types or prescribing the format or nature of how this information would be represented to allow flexibility for the future when new order types may be introduced and added). PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 necessary flexibility to describe the order types that the ATS offers subscribers while still providing the necessary information for market participants to understand how an order type will function. For similar reasons, we are declining to adopt the commenter’s suggestions that Part IV, Item 3(a)(vi) of proposed Form ATS–N could be simplified to a ‘‘yes’’ or ‘‘no’’ question asking whether each order type is available to all subscribers. This Item specifically relates to whether every order type is available across all forms of connectivity, not to all subscribers.903 A ‘‘yes’’ or ‘‘no’’ format would not allow an NMS Stock ATS to explain any differences in order types available across all forms of connectivity, if any. An NMS Stock ATS can choose a format that it finds best to provide market participants with complete and comprehensible information, such as, for instance, a table with the relevant characteristics of each order type. We have made several edits to remove duplicative requirements, improve readability and specificity, and remove unnecessary language.904 We are removing references to the ranking of order types and time in force instructions to avoid duplication. We are revising the language of the Item to require information on order types that ‘‘can be’’ entered on the NMS Stock ATS, because we intended for NMS Stock ATSs to disclose to market participants the services that the ATS offers. We are also removing superfluous language that is already captured by the instruction to ‘‘identify and explain.’’ 905 We are also removing the language from proposed Part IV, Item 3(b) requiring the NMS Stock ATS to describe any differences among subscribers in the ‘‘availability of order types’’ because the request to describe any differences in the terms and conditions of order types among subscribers and the broker-dealer operator in Part III, Item 7(b) encompasses any differences in availability. We are adding in Part III, Item 7(a)(i) of adopted Form ATS–N that the NMS Stock ATS provide not only whether an order type can receive a new time stamp, but also, when, so that market 903 See supra note 901. SIFMA Letter at 20–21. 905 Specifically, we are removing language that NMS Stock ATS describe the ‘‘characteristics, operations, and how [order types] are handled on the NMS Stock ATS.’’ As indicated in the text, we do not view this as a substantive change, and the information requested using the deleted language is captured by the instruction to identify and explain each order type. 904 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 participants can better understand how their orders or trading interest will be handled by the NMS Stock ATS. We are also removing the prompt in the proposed Item that would have required information on whether an order type can be used with any routing services offered because these services are usually provided by the broker-dealer operator. Finally, the Commission is providing further guidance with regard to the prompt in Item 7(a)(vii) that the NMS Stock ATS describe the circumstances under which orders types may be removed from the NMS Stock ATS as the information required relates to the disclosures required under Part III, Item 16 (Routing). While we are not requiring broker-dealers to disclose information about their handling of customer orders when such orders are not routed to the NMS Stock ATS, we believe that market participants should be aware of how a subscriber order or trading interest that has been received by and rests in the NMS Stock ATS can be subsequently removed from the ATS. Such circumstances may be as simple as the broker-dealer cancelling a customer order that it is handling from the ATS, or such circumstances could include the broker-dealer operator removing a thirdparty subscriber’s order at its own discretion. To the extent that this information about removal of orders overlaps with the disclosures regarding routing of orders under Part III, Item 16, the NMS Stock ATS need only provide the information in Part III, Item 7 of adopted Form ATS–N. Additionally, the Part III, Item 7 requests regarding removal of orders and trading interest from the ATS will not require the broker-dealer operator to publicly disclose its routing table or other information about where the order is sent once it is removed from the NMS Stock ATS. 8. Order Sizes Part IV, Item 3(c) of proposed Form ATS–N would have required disclosures about order size requirements and oddlot orders. We did not receive any comments directed at Part IV, Item 3(c) of proposed Form ATS–N; however, in response to commenters’ general request for the Commission to use more ‘‘yes’’ or ‘‘no’’ questions to navigate information and facilitate comparisons, we are relocating Part IV, Item 3(c) of proposed Form ATS–N to Part III, Item 8 (‘‘Order Sizes’’) of adopted Form ATS–N and adopting a ‘‘yes’’ or ‘‘no’’ format.906 In addition, we are requiring that the NMS Stock ATS identify and 906 See supra note 839. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 explain any differences in the treatment of subscribers and the broker-dealer operator, as applicable, in separate subitems 8(b), 8(d), and 8(f), respectively. In addition, we are adding to Part III, Item 8(a) of adopted Form ATS–N a request for the NMS Stock ATS to provide information about any maximum order or trading interest size requirements.907 Adding a request regarding a cap or maximum limit on an order size in the Part III, Item 8 of adopted Form ATS–N would help streamline an NMS Stock ATS’s response to Form ATS–N and help market participants understand, the size requirements for trading on the ATS. Furthermore, we are providing examples in a parenthetical indicating that ATSs state whether or not odd-lot and mix-lot orders and trading interest are treated the same as round lot orders and trading interest. Information regarding the treatment of odd-lot and mixed-lot orders and trading interest compared to round lot orders and trading interest could influence whether market participants submit odd-lot or mixed-lot orders to the NMS Stock ATS. 9. Conditional Order and Indications of Interest Part IV, Item 3(d) of proposed Form ATS–N would have required disclosures about conditional orders and indications of interest. We received one comment regarding Part IV, Item 3(d) of proposed Form ATS–N contending that providing additional disclosure regarding order types and handling (including the use of IOIs) is useful information for subscribers and the investing public, whose investments may be traded indirectly on ATS platforms via their third-party brokerdealers.908 We are adopting Part IV, Item 3(d) of proposed Form ATS–N with modification and relocating the request to Part III, Item 9 (‘‘Conditional Orders and Indications of Interest’’) of adopted Form ATS–N. Part III, Item 9 of adopted Form ATS–N is designed to provide specific information about the use of messages on the NMS Stock ATS, in particular, IOIs, actionable IOIs, 907 As proposed, Part IV, Item 3(b) requested information about minimum order size requirements. Also, Part IV, Item 7(b) of proposed Form ATS–N would have required NMS Stock ATS to disclose information about the ‘‘established, nondiscretionary methods that dictate the terms of trading . . . on the NMS Stock ATS.’’ To the extent that an NMS Stock ATS established a cap or a limit on the size of orders or trading interest that the ATS would accept from subscribers, this cap or limit would be a procedure governing the trading on the ATS and would have been responsive to proposed Form ATS–N (specifically, proposed Part IV, Item 7(b)). 908 See SIFMA Letter at 6. PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 38847 conditional orders, and similar functionalities.909 As stated in the Proposal,910 NMS Stock ATSs use IOIs 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.911 While an actionable IOI may not specify the price and/or size of the trading interest, the practical context in which it is submitted implicitly or explicitly conveys information about the symbol, 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).912 Conditional orders are also messages indicating 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.913 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).914 As discussed in the Proposal, NMS Stock ATSs may only permit conditional orders to execute against other conditional orders, but some ATSs allow conditional orders to interact with other order types.915 Understanding the manner in which NMS Stock ATSs use messages that convey trading interest, such as IOIs, actionable IOIs, conditional orders, and similar functionalities could be useful to market participants in analyzing the potential execution of a subscriber’s trading interest. In response to comment,916 we are removing the word ‘‘circumstances’’ 909 See Proposal, supra note 1, at 81067 for additional discussion of IOIs, actionable IOIs, conditional orders, and similar functionalities. 910 See Proposal, supra note 2, at 81067. 911 See id. 912 See id. 913 See id. 914 See id. 915 See id. 916 See, e.g., SIFMA Letter at 9; BIDS Letter at 4; STA Letter at 4. E:\FR\FM\07AUR2.SGM 07AUR2 38848 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations from the request and adding more detail to the request to aid NMS Stock ATSs in responding.917 The Commission is adding ‘‘price or size minimums’’ as examples of information that could be contained in the messages and ‘‘order management system, smart order router and FIX’’ to illustrate the types of mechanisms that could transmit messages, such as IOIs and conditional orders. In the Commission’s experience, the information that NMS Stock ATS include in IOIs and conditional orders can vary, including different combinations of symbol, size and/or price, and we believe that this information would be relevant to market participants when understanding what information about their orders are communicated to others and assessing potential information leakage. Second, we are adding a requirement that the NMS Stock ATS identify the type of persons that receive the message 918 (e.g., subscriber, trading center), and the possible responses to conditional orders or IOIs (e.g., submission to firm-up conditional orders). These two factors could help market participants understand when a message, such as a conditional order or IOI, would result in an execution and provide market participants important information to understand how the market participant can use the ATS, who will see its trading interest, how its trading interest will be executed, and the potential for information leakage.919 Finally, we are including ‘‘response time parameters, interaction and matching’’ as examples of topics to discuss when disclosing the conditions under which the conditional order or IOI might result in an execution in the ATS. daltland on DSKBBV9HB2PROD with RULES2 10. Opening and Reopening Part IV, Item 9(a) of proposed Form ATS–N would have required disclosures about opening and reopening processes. We received one comment on Part IV, 917 We also believe the more explicit requests address commenters’ concerns that prompts like ‘‘describe the circumstances’’ would not allow NMS Stock ATSs to know whether the disclosure ‘‘meets the Commission’s expectation until after the Form ATS–N itself or an amendment is filed.’’ See, e.g., SIFMA Letter at 19. 918 We are requiring the ‘‘type of Persons’’ that receives the message in this Item and are not requesting the names of individual recipients in the case of natural persons. 919 The information required by the prompts to disclose the type of recipient and possible responses to conditional orders or IOIs would have been required in Part III, Item 3(d) of proposed Form ATS–N in response to the request for ‘‘circumstances in which [the messages] may result in an execution on the NMS Stock ATS.’’ Because commenters requested more specificity, we are making more explicit the information required in Part III, Item 9(a) of adopted Form ATS–N. See supra note 917. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Item 9(a) of proposed Form ATS–N stating that Part IV of proposed Form ATS–N, including requests relating to the opening and reopening procedures, is essential for investors or routing brokers who are seeking to understand how the ATS works.920 We are adopting Part IV, Item 9(a) of proposed Form ATS–N with certain modifications, as described below in this section, and relocating the request as Part III, Item 10 (‘‘Opening and Reopening’’) of adopted Form ATS–N. The Commission is separating proposed Part IV, Items 9(b) (‘‘Closing Process’’) and 9(c) (‘‘AfterHours Trading’’) of proposed Form ATS–N, which were previously part of the same Item as Opening and Reopening Processes (Part IV, Item 9(a)), into separate items on the adopted Form ATS–N to facilitate locating information and making comparisons across NMS Stock ATSs.921 As stated in the Proposal,922 Part III, Item 10 of adopted Form ATS–N is designed to inform market participants about whether an NMS Stock ATS uses any special procedures to match orders at the opening, or to set a single opening or reopening price to, for example, maximize liquidity and accurately reflect market conditions at the opening or reopening of trading. The disclosures under this Item would allow for comparisons between NMS Stock ATSs and national securities exchanges, which conduct opening and closing auctions and permit members to enter orders specially designated to execute on the opening. We continue to believe that market participants would likely want to know about any special opening or reopening processes employed by an NMS Stock ATS, including if any order types participate in an NMS Stock ATS’s opening or reopening processes. Furthermore, to provide additional guidance about what needs to be included in the description of the opening and reopening process, we are adding to Part III, Item 10 of adopted Form ATS–N that the ATS describe: When and how such orders and trading interest are ‘‘priced [and] prioritized’’ and ‘‘any order types allowed’’ during the opening and reopening processes. Specifically requesting information about when orders and trading interest will be priced and prioritized during the opening or reopening of the ATS will provide market participants with the information they need to plan and execute their trading strategies during these periods. The Item would also, for example, require disclosure of any 920 See HMA Letter at 18. supra note 839. 922 See Proposal, supra note 2, at 81077. 921 See PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 procedures to match orders to set a single opening or reopening price to maximize liquidity and accurately reflect market conditions at the opening or reopening of trading.923 We believe most participants consider important the rules and procedures surrounding the pricing and priority of orders and trading interest, and the order types allowed because these rules and procedures can directly impact their execution price. In the Proposal, we would have required the information related to the pricing and priority of orders during the opening and reopening processes and any order types allowed during that time period under Part IV, Items 9(a) (‘‘Opening and Reopening Process’’), 7(b) (‘‘Order Interaction Rules’’) and Item 3 (‘‘Types of Orders’’). Part IV, Item 9(a) of proposed Form ATS–N required, in part, a description of ‘‘how orders or other trading interest are matched and executed’’ during an opening or reopening. In order to fully describe the matching and execution of orders during an opening or reopening in response to the Item, the NMS Stock ATS would necessarily have needed to disclose the pricing, priority, and order types allowed. Moreover, Part IV, Item 7(b) of proposed Form ATS requested information about the established nondiscretionary methods that dictate terms of trading among multiple buyers and sellers, which included rules and procedures for priority and pricing. In addition, Part IV, Item 3 of proposed Form ATS–N would have required disclosure of ‘‘any types of orders that are entered on the NMS Stock,’’ which would have included any order types during an opening or reopening. We are adding a specific question about the rules and procedures for the opening and reopening process in Part III, Item 10 of adopted Form ATS–N to help streamline responses to Form ATS–N requests and help market participants locate and understand information about the opening and reopening process on the ATS.924 In Part III, Item 10, we are formatting the information requested, which parallels the Item in the Proposal, into three subparts (adopted Items 10(a), 10(c) and 10(e)) and adding a ‘‘yes’’ or ‘‘no’’ question to Item 10(e). 11. Trading Services, Facilities and Rules Part IV, Item 7 of proposed Form ATS–N would have required disclosures regarding the trading services of the 923 See Proposal, supra note 2, at 81077 n. 485, 486 and accompanying text. 924 See supra note 839. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations NMS Stock ATS, including matching methodology, order interaction rules, and other trading procedures. We are adopting Part IV, Item 7, with modifications, as Part III, Item 11 of adopted Form ATS–N and renaming it ‘‘Trading Services, Facilities, and Rules.’’ Part III, Item 11 is designed to inform market participants and the Commission about the type of marketplace the NMS Stock ATS operates (e.g., crossing system, auction market, limit order matching book). In addition, Part III, Item 11 is designed to solicit disclosures about the facilities, functionalities, and mechanisms that the NMS Stock ATS uses to match the orders and trading interest of counterparties and facilitate transactions on the ATS. As discussed in the Regulation ATS Adopting Release and restated in the Proposal,925 we explained that an ATS 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.926 An ATS can bring together orders through various methods. For instance, a system brings together orders if it displays, or otherwise represents, trading interests entered on the system, such as a consolidated quote screen, to system users.927 A system 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.928 As explained above, to qualify for the Rule 3a1–1(a)(2) exemption from the statutory definition of ‘‘exchange,’’ an ATS must, among other things, bring together the orders of multiple buyers and sellers.929 As discussed in the Proposal, ATSs that trade NMS stocks may offer subscribers various types of trading mechanisms.930 For example, many 925 See Proposal, supra note 2, at 81073. Regulation ATS Adopting Release, supra note 3, at 70849. 927 See id. 928 See id. 929 See id. In the Regulation ATS Adopting Release, 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 Regulation ATS Adopting Release, supra note 3, at 70849. 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. 930 See Proposal, supra note 2, at 81073. daltland on DSKBBV9HB2PROD with RULES2 926 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 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.931 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. We continue to believe that it would be useful to market participants to be availed information about the trading facilities, functionalities, and mechanisms offered by an NMS Stock ATS to evaluate whether the operations of the NMS Stock ATS comports with their trading and investment strategies. Part III, Item 11(a) of adopted Form ATS–N is consistent with Part IV, Item 7(a) of proposed Form ATS–N; however, we are limiting the request to require NMS Stock ATSs to provide only a summary of the structure of the NMS Stock ATS marketplace.932 The summary is designed to provide market participants with a brief overview of the type of market the ATS operates, such as a limit order book, auction market, or crossing system, in a more concise manner. This Item requires more detailed responses when explaining the means and facilities for bringing together the orders of multiple buyers and sellers on the NMS Stock ATS. We also separated the requested information on whether the means and facilities are the same for all subscribers and the broker-dealer operator into subpart Part III, 11(b) and formatted the subpart 931 See Regulation ATS Adopting Release, supra note 3, at 70849 n.37. 932 In the Proposal under Part IV, Item 7(a), we proposed that the NMS Stock ATS 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.’’ PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 38849 request as a ‘‘yes’’ or ‘‘no’’ question in response to comment.933 Part III, Item 11(c) is designed to inform market participants about the rules and procedures used to determine how orders and trading interest may interact on an NMS Stock ATS upon being entered into the system.934 We 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 subscribers’ trading.935 For example, we consider 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.936 Similarly, the Commission has previously stated that rules imposing execution priorities, such as time and price priority rules, would be ‘‘established, non-discretionary methods.’’ 937 As discussed in the Proposal, NMS Stocks ATSs may employ various terms and conditions under which orders interact and match.938 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. 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 933 See supra note 839. commenter states that, when discussing electronic trading platforms for corporate bonds, ‘‘as the Commission knows, a bond trading platform that utilizes an RFQ [request for quote] trading protocol is not an ATS.’’ See MarketAxess Letter at 2. Whether a platform that trades securities is an ATS depends on whether that platform meets the definition of an ‘‘exchange’’ pursuant to the criteria of Exchange Act Rule 3b–16(a) which requires a facts and circumstances analysis. A platform that uses an RFQ protocol to trade securities would be subject to the Rule 3b–16(a) analysis, and depending on its design, activities, and rules, an RFQ platform may or may not meet the criteria of Rule 3b–16(a). 935 See Regulation ATS Adopting Release, supra note 3, at 70851–52. 936 See id. at 70851. 937 See id. at 70852. 938 See Proposal, supra note 2, at 81074. 934 One E:\FR\FM\07AUR2.SGM 07AUR2 38850 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 different priority rules for matching conditional orders than it does for matching other order types. Part III, Item 11 of adopted Form ATS–N will allow the Commission to better evaluate whether the entity that filed a proposed Form ATS–N meets the criteria of Exchange Act Rule 3b–16 and the definition of an NMS Stock ATS. In Part III, Item 11(c) of adopted Form ATS–N, we are combining the requests in Part IV, Items 7(b) (‘‘Order Interaction Rules’’) and 7(c) (‘‘Other Trading Procedures’’) of proposed Form ATS–N. Part IV, Items 7(b) and 7(c) of proposed Form ATS–N were intended to solicit information about the ATS’s established non-discretionary methods that dictate the terms of trading among the multiple buyers and sellers entering orders and trading interest. In addition to a trading facility, non-discretionary methods include rules and procedures.939 Adopted Part III, Item 11(c) combines the requests in Part IV, Items 7(b) and 7(c) of proposed Form ATS–N and is designed to communicate the rules and procedures that govern how their orders will be executed on the NMS Stock ATS. We are revising the language in adopted Item 11(c) to recognize this overlap by requiring the NMS Stock ATS to ‘‘explain the established, nondiscretionary rules and procedures of the NMS Stock ATS, including order interaction rules,’’ which requires the same information as the proposed subparts. As another component of an NMS Stock ATS’s non-discretionary methods, we are moving the trading procedures in proposed Item 7(c) into adopted Item 11(c) and including the examples of the trading procedures of an NMS Stock ATS (e.g., price protection mechanisms, shorts sales, locked-cross markets) into adopted Item 11(c) as well. A description of the ‘‘established nondiscretionary rules and procedures’’ of the NMS Stock ATS is a principal requirement of Item 11(c) and we are requiring that any differences among subscribers and the broker-dealer operator related to these methods be identified and explained. This request was moved to Part III, 11(d) and 939 The Commission recognized the intersection of ‘‘established, non-discretionary methods that dictate the terms of trading’’ and ‘‘trading procedures’’ in the Regulation ATS Adopting Release when it stated that the second essential element of what constitutes an exchange is that trading on the exchange takes place according to ‘‘established, non-discretionary rules or procedures.’’ See Regulation ATS Adopting Release, supra note 3, at 70900. The Commission is adopting this formulation in Part III, Item 11(c), which we believe encompasses the information proposed to be required in Part IV, Items 7(b) and 7(c) of proposed Form ATS–N. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 formatted as a ‘‘yes’’ or ‘‘no’’ question in response to comment.940 We seek to provide additional guidance regarding the procedures that need to be discussed in this Item.941 Specifically, in response to various initiatives (e.g., pilot programs, national market system plans, rules and regulations), NMS Stock ATSs have designed and/or modified the design of their systems and trading procedures to comply with these initiatives, including, for example, Regulation NMS,942 and more recently, the Tick Size Pilot.943 To be fully informed about the trading procedures of the NMS Stock ATS, we believe that market participants would need to understand the operations and procedures that NMS Stock ATSs adopt in response to these initiatives as the responses could affect the decision of a market participant to use the NMS Stock ATS.944 To the extent an NMS Stock 940 See supra note 839. SIFMA Letter at 24 (stating item as proposed could result in discursive disclosures of limited use to market participants). 942 For example, Rule 611 of Regulation NMS, which requires a trading center to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trade-throughs on that trading center, subject to certain exceptions. See 17 CFR 242.611. 943 See Securities Exchange Act Release No. Release No. 74892 (May 6, 2015), 80 FR 27513 (May 13, 2015) (File No. 4–657) (Order Approving the National Market System Plan to Implement a Tick Size Pilot Program [(‘‘Tick Size Pilot’’)] by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., as Modified by the Commission, For a Two-Year Period) (modifying the definition of ‘‘block-size’’ for purposes of the Tick Size Pilot to an order (1) of at least 5,000 shares or (2) with a market value of at least $100,000). 944 As discussed in the Proposal, NMS Stock ATSs apply various trading procedures to determine an execution price based on the circumstances of the match. See Proposal, supra note 2, at 81074. 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 trading procedures for executing orders that include 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’’), or short sales to be executed on its system. Thus, an NMS Stock ATS would be required to configure its system to comply with federal securities laws related to short sales, including Regulation SHO, rules and procedures governing 941 See PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 ATS has designed trading procedures to operate consistently with Commission initiatives, the NMS Stock ATS would need to disclose these procedures in response to this Item (Part III, Item 11 of adopted Form ATS–N). Furthermore, this information required on trading procedures resulting from Commission initiatives was encompassed under Part IV, Items 7(b) and 7(c) of proposed Form ATS–N, which proposed requiring comprehensive information on order interaction rules and trading procedures, including all of the established non-discretionary methods that dictate the terms of trading on the NMS Stock ATS. Another commenter suggests that disclosure of certain additional trading services should be required, specifically whether the NMS Stock ATS employs technology designed to detect and deter price manipulation and other disruptive trading practices, i.e., anti-gaming technology, and if so, to include a description of this technology in the form.945 Another commenter states that anti-gaming technology and other subscriber-related safeguards are among the core attributes of ATSs that are of particular importance to buy-side institutions.946 We, however, are not adopting a request related to antigaming technology and subscriberrelated safeguards because such descriptions made in a publicly available document could serve to undermine those safeguards by disclosing information that makes evading those safeguards easier. One commenter states that Part IV, Item 7 of proposed Form ATS–N had ‘‘the potential to become quite technical and granular’’ and thus perhaps of limited use to end-readers, and suggests the Commission consider ‘‘requesting and/or precluding the execution of orders in a locked or crossed market, or procedures governing the handling of execution errors, such as the use of an error account by the NMS Stock ATS. Other trading procedures include 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, an NMS Stock ATS may have 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 repriced orders. Trading procedures include any functionality or mechanism available on the NMS Stock ATS that allows for price improvement. 945 See ICI Letter at 9–10. See also Memorandum from the Office of Commissioner Kara Stein regarding a July 26, 2016 meeting with representatives of Morgan Stanley (including in a presentation that whether an ATS has anti-gaming controls is among the frequently asked questions by clients). 946 See State Street Letter at 2–3. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations high-level generalized descriptions or converting these prompts to a more narrow set of focused, ‘‘yes’’ or ‘‘no’’ or short-answer questions with more detail available to regulators as needed for surveillance or other purposes.’’ 947 The commenter also indicates that prompts to ‘‘describe’’ require extensive disclosures that would be difficult to maintain current. Part III of adopted Form ATS–N requests information about common operational attributes of NMS Stock ATSs, which are organized by subject matter to facilitate market participants’ understanding and evaluation of an NMS Stock ATS. The Commission recognizes that requests in Part III, Item 11 could be more expansive than other requests in Part III; however, Part III, Item 11 of adopted Form ATS–N is designed to solicit information about the unique rules and procedures that are tailored for the trading activities and interaction of orders of subscribers on the NMS Stock ATS. National securities exchanges make public similar information in their rule books, in detail, which are designed to provide their members with information about how they should expect their orders to be handled by the exchange. It would be impractical to posit ‘‘yes’’ or ‘‘no’’ to NMS Stock ATSs without allowing NMS Stock ATSs to explain how their trading mechanisms or trading procedures operate. We also believe that ‘‘yes’’ or ‘‘no’’ questions, in this case, have the potential to quickly become outdated as practices in the securities industry evolve and new developments emerge. As the industry and NMS Stock ATS operations change, NMS Stock ATS can better provide market participants with complete and comprehensive disclosures if they are able to describe how their system operates in their own words. We also are not discounting that certain items may only require a short answer depending on the complexity of the trading rules and procedures of the NMS Stock ATS. In addition, the commenter’s suggestion that more detail could be given to regulators as needed does not address the need for market participants to have full information about the ATS’s trading rules, procedures, and facilities to determine whether to route orders to the system for execution. We do not believe, as suggested by a commenter, that Part III, Item 11 of adopted Form ATS–N will require ‘‘discursive disclosures’’ 948 that would make maintaining a current Form ATS–N challenging. Although the item 947 See 948 See SIFMA Letter at 24. supra note 941 and accompanying text. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 requires substantial information depending on the complexity of the NMS Stock ATS, Rule 304(a)(2)(i)(A)– (C) of Regulation ATS provides a mechanism for an NMS Stock ATS to file amendments to Form ATS–N that allows for both material changes to the operations of an ATS and updating amendments. We believe that an NMS Stock ATS may keep current its Form ATS–N without the obligation to file continuous updates for non-material changes by filing an updating amendment under Rule 304(a)(2)(i)(B). Another commenter suggests that both Part IV, Item 7 and Item 8 (relating to suspensions of trading, system disruptions or malfunctions) of proposed Form ATS–N would be better suited as a required disclosure to subscribers that could be included in contractual agreements or systematically available to subscribers on ATS operators’ websites, rather than formally filed with the Commission.’’ 949 We, however, believe that this information could be useful to potential subscribers to evaluate an NMS Stock ATS as a potential destination for its orders. One commenter suggests that the Commission require NMS Stock ATSs to disclose precise, mathematically analyzable specifications of their algorithms to enable the Commission and financial firms to leverage formal verification techniques to automatically analyze the specifications for potential violations of regulations, and allow market participants to automatically test their connectivity and verify their routing algorithms (for best execution principles).950 We believe that requiring disclosure of mathematically analyzable specifications, which would be used to conduct compliance checks by the Commission, is outside of the scope of this rulemaking.951 While we will review Form ATS–N filings, the Commission’s review is not designed to verify the accuracy of the disclosures nor designed as an independent investigation of whether all aspects of the NMS Stock ATS operations or the ATS-related activities of the brokerdealer operator are disclosed on Form ATS–N.952 At this time, we believe that the Commission’s compliance oversight of NMS Stock ATSs would best be served through the Commission’s and 949 See SIFMA Letter at 24–25. AI Letter at 1–3. 951 We did not propose compliance checks for NMS Stock ATSs and the commenter’s recommendation is not currently required of other trading centers, such as national securities exchanges. 952 See Section IV.A.3. 950 See PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 38851 the SRO’s examination and inspection efforts.953 12. Liquidity Providers Part IV, Item 1(d) of proposed Form ATS–N would have required disclosures regarding liquidity providers to the NMS Stock ATS. The Commission is adopting Part IV, Item 1(d) of proposed Form ATS–N as Part III, Item 12 (‘‘Liquidity Providers’’) of adopted Form ATS–N with certain modifications, which are discussed below. As discussed in the Proposal,954 we believe that an NMS Stock ATS may want to ensure that there is sufficient liquidity in a particular NMS stock to incentivize market participants to send order flow in that NMS stock to the ATS. Some ATSs that trade 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.955 The obligations required of liquidity providers and the benefits that they provide vary across NMS Stock ATSs. We believe 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 liquidity providers on the NMS Stock ATS. One commenter suggests that the term ‘‘liquidity provider’’ should be specifically defined; however, the commenter did not suggest a definition.956 While we are not adopting a specific definition of liquidity provider, the Commission is providing examples of the functions a liquidity provider could perform on the NMS Stock ATS in Part III, Item 12 of adopted Form ATS–N. We believe that such arrangement could take many forms and the function of the liquidity provider on an ATS could depend on the structure and trading protocols of the ATS. Furthermore, as explained above,957 we 953 The commenter also suggests that we adopt a test that would only require NMS Stock ATSs to disclose information necessary to write an observationally-equivalent simulator of the venue. See AI Letter at 2. As we are not adopting the commenter’s suggestion to require NMS Stock ATSs to disclose operational details in a mathematicallyanalyzable format, we do not believe that such a test would be appropriate. 954 See Proposal, supra note 2, at 81062–63. 955 These liquidity providers may quote in a particular NMS stock on the 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. 956 See KCG Letter at 12. 957 See supra Sections V.C.1 and V.C.2. E:\FR\FM\07AUR2.SGM 07AUR2 38852 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations intend for this Item to cover, for example, arrangements or agreements between the broker-dealer operator and another party to trade on the NMS Stock ATS. We do not intend this to cover agreements with a subscriber that has no obligation to buy or sell NMS stocks on the system. Another commenter states that the Commission should consider eliminating or consolidating Part IV, Items 1(c) and 1(d) of proposed Form ATS–N and suggests these subparts are redundant with information about segmentation sought in Part III of proposed Form ATS–N.958 Part III, Item 12, however, requests information about subscribers or the broker-dealer operator or its affiliates that are obligated in some way to buy, sell, or both, NMS stocks on the ATS; while Part III, Item 13 pertains to disclosure about categorization of orders and trading interest submitted to the NMS Stock ATS.959 After considering whether Part IV, Item 1(d) of proposed Form ATS–N may overlap with any other items on the form, we require ATSs in Part II, Items 1(c) and 2(c) of adopted Form ATS–N to indicate whether there are any formal or informal arrangements with the brokerdealer operator and affiliate of the broker-dealer operator, respectively. As discussed above, if the answer is ‘‘yes’’ to any of these items, the NMS Stock ATS must identify the broker-dealer operator (e.g., business unit) or the affiliate in Part II, Items 1(c) and 2(c).960 In addition, the NMS Stock ATS would be required to complete Part III, Item 12 of adopted Form ATS–N regarding the arrangements with the broker-dealer operator or affiliate. daltland on DSKBBV9HB2PROD with RULES2 13. Segmentation; Notice Part IV, Items 5(a) and 5(b) of proposed Form ATS–N would have required disclosures regarding segmentation of order flow and notice of segmentation. We are adopting Part IV, Item 5 with certain modifications. We are also renumbering the request as Part III, Item 13 of adopted Form ATS–N and renaming it ‘‘Segmentation; Notice.’’ As discussed in the Proposal, some NMS Stock ATSs elect to segment order flow entered in the NMS Stock ATS according to various categories.961 An NMS Stock ATS could elect to segment trading interest by type of participant (e.g., buy-side or sell-side firms, principal trading firms, agency-only firms, firms above or below certain assets under management thresholds). In addition, buy-side or institutional subscribers might seek to trade only against other buy-side or institutional order flow, or might seek to avoid trading against principal trading firms or so-called high frequency trading firms. When segmenting order flow in the system, an NMS Stock ATS might elect to look to the underlying source of the trading interest 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. Several commenters express support for the Commission requiring information about order segmentation.962 The Commission also received comments recommending changes to aspects of Part IV, Item 5 of proposed Form ATS–N. One commenter suggests that the Item should be converted to a series of ‘‘yes’’ or ‘‘no’’ questions and that the Item overlaps with Part IV, Item 1 of proposed Form ATS–N.963 The Commission is adding a ‘‘yes’’ or ‘‘no’’ question to Part III, Item 13 of adopted Form ATS–N for ATSs to convey, and so market participants can readily understand, whether the NMS Stock ATS segments orders and trading interest and whether the ATS discloses to any Person the designated segmented category, classification, tier, or level of orders and trading interest of a subscriber or person. We believe that a response to a request that includes solely ‘‘yes’’ or ‘‘no’’ questions would not provide the necessary detail for market participants to understand and evaluate how the NMS Stock ATS segments trading interest and against whose order flow their trading interest could match. Moreover, the Commission has revised Part IV, Item 1 of proposed Form ATS–N (Part III, Item 1 of adopted Form ATS–N) to eliminate overlap.964 Several commenters express concern that Part IV, Item 5 of proposed Form ATS–N would have required the publication of precise metrics used to segment trading interest that could 958 See SIFMA Letter at 20. See supra Section V.D.1 for discussion of proposed Item 1(c) and comments thereto, and comments applicable to Part IV, Item 1 of proposed Form ATS–N as a whole. 959 See Section V.D.13 (Segmentation; Notice). 960 See supra Section V.C.1 (discussing the requirements of Part II, Items 1(c) and 2(c)). 961 See Proposal, supra note 2, at 81070. 962 See ICI Letter at 9 (stating it would inform funds of the possibility of order segmentation and allow funds to determine whether to avoid trading with certain types of market participants). See also UBS Letter at 7; Fidelity Letter at 8; SIFMA Letter at 23. 963 See SIFMA Letter at 22–23. 964 See supra Section V.D.1. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 result in the gaming of those metrics to the detriment of order flow on the ATS.965 The Commission recognizes the concerns of commenters that believe describing the precise criteria used to segment trading interest could result in potential gaming of those criteria and thus, the reduction of the effectiveness of segmentation as a control. On the other hand, we believe that market participants are interested in understanding how their orders and trading interest are categorized on the ATS and the types of market participants that would interact with those orders and trading interest. We believe that Part III, Item 13 of adopted Form ATS–N appropriately balances these competing interests by soliciting a summary of the parameters for each segmented category and length of time each segmented category is in effect.966 Requiring NMS Stock ATSs to provide a summary of these parameters on Form ATS–N, rather than a detailed analysis of those parameters and how they are calculated, is designed to avoid responses that could allow the gaming of segmentation criteria, as suggested by commenters.967 Commenters suggest that the information requested by Part IV, Item 5 of proposed Form ATS–N could be provided to the Commission confidentially,968 or the ATS be allowed to redact classification criteria that is based upon trading characteristics from Form ATS–N prior to its release.969 We believe that allowing NMS Stock ATSs to provide summary information in response to Part III, Item 13 on adopted Form ATS–N addresses the concerns 965 See UBS Letter at 7; Fidelity Letter at 8. See also SIFMA Letter at 23 (stating that disclosing proprietary or sensitive information as required by this item is not necessary or appropriate). 966 In the Commission’s experience, NMS Stock ATSs can vary the lengths of time that a segmented category is in force, such as one day, week, or monthly. The NMS Stock ATS must disclose in responding to this Item if any such time period applies to its segmentation parameters. We proposed requiring this information in Part IV, Item 5 of proposed Form ATS–N by proposing to require that the NMS Stock ATS disclose any procedures for evaluating and changing segmented categories, which may be affected by the length of time a subscriber is placed in a category. We are specifying here that the length of time that a segmented category is in force is responsive to facilitate responding to the Item. 967 We note that, as part of our review of Form ATS–N responses, we intend to monitor the level of summary information provided on the form for completeness to help ensure that such information is responsive to the form and is not designed to avoid meaningful disclosure. 968 See UBS Letter at 7 (stating that if the Commission continues to believe the information is necessary, then access should be restricted solely to the Commission); SIFMA Letter at 23. 969 See Fidelity Letter at 8. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations underlying the commenters’ suggestions. Another commenter suggests that information barriers between the ATS and other affiliates would ‘‘make it challenging or inappropriate for the ATS itself to seek some of this information.’’ 970 The ATS has no need to seek information from affiliates to respond to this Item as it relates solely to the segmentation of orders and trading interest in the NMS Stock ATS and how such orders and trading are segmented for purposes of order interaction and execution in the NMS Stock ATS.971 Another commenter recommends that an NMS Stock ATS should be required to disclose whether it identifies customer orders of broker-dealers as customer orders (which it views as a form of segmentation).972 The commenter states disclosing the origin of a particular order can contribute to information leakage and adverse selection of fund orders. We agree with the commenter’s concerns and are adding a ‘‘yes’’ or ‘‘no’’ question to solicit information regarding whether the NMS Stock ATS identifies orders or trading interest entered by a customer of a broker-dealer on the NMS Stock ATS as a customer order. We agree with the commenter that disclosing the origin of a customer order of a broker-dealer is a form of segmentation because it can facilitate users restricting their trading to only certain types of market participants, and that it can contribute to information leakage and adverse selection of fund orders.973 Another commenter states that Part IV, Item 5 of proposed Form ATS–N would be more meaningful if there was a quantitative component, such as the percentage of orders and trades per segmented class.974 We are not requiring 970 See SIFMA Letter at 23. the extent that orders or trading interest are segmented outside the NMS Stock ATS and then sent to the NMS Stock ATS for handling and execution, the functionality or entity segmenting order or trading interest could be considered part of the NMS Stock ATS, and information about its activity may be responsive to the Form ATS–N requests. See supra note 888 and accompanying text. 972 See ICI Letter at 9. 973 Part IV, Item 5(a) of proposed Form ATS–N would have required an NMS Stock ATS to describe any segmentation of orders and other trading interest on the ATS. In the Proposal, we provided ‘‘classification by type of participant’’ or ‘‘source’’ as examples of forms of segmentation. We consider identifying the orders of customers of brokerdealers (i.e., the source or type of participant) a form of segmentation and providing a separate request on the form would facilitate market participants’ understanding of the ATS’s segmentation categories. 974 See MFA/AIMA Letter at 5. The commenter states that a quantitative component would provide that NMS Stock ATSs provide quantitative information on each segmented class at this time. We believe that providing market participants with narrative disclosures about the operations of the NMS Stock ATS, which oftentimes is not publicly available, will allow market participants to understand the nature of order flow in the ATS. Nevertheless, we intend to monitor the quality of responses and information received through Form ATS–N and will continually assess in the future whether quantitative information would facilitate operational transparency for NMS Stock ATSs. We also are modifying certain components of Part IV, Item 5 proposed Form ATS–N (as adopted in Part III, Item 13). First, we are adding the terms ‘‘classifications, tiers, or levels’’ in addition to ‘‘categories’’ to describe the groupings into which an NMS Stock ATS elects to segment subscriber orders to better reflect the language used by commenters and in existing Form ATS disclosures. Second, we are providing two additional examples, order size and duration,975 of criteria whereby an NMS Stock ATS might elect to segment subscribers’ orders and trading interest. We are providing these examples to provide additional guidance on some of the types of segmentation that would be responsive to the Item and allow NMS Stock ATSs to focus their responses accordingly. Third, we are providing additional specificity around what ‘‘changing segmented categories’’ means by requiring NMS Stock ATSs to provide a discussion of procedures for overriding a determination of segmented category. Subscribers would likely want to know of any such procedures, which could affect the trading interest against which their orders trade.976 Fourth, we are requiring a description of how segmentation affects order interaction in Part III, Item 13 of adopted Form ATS– daltland on DSKBBV9HB2PROD with RULES2 971 To VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 investors with information on the extent to which a broker-dealer operator or its affiliate transacts on the NMS Stock ATS. However, Part II, Items 1, 2, and 3 of adopted Form ATS are designed to provide disclosures about the nature of trading by the broker-dealer operator and its affiliates in the ATS. 975 Duration can refer to segmenting trading interest according to how long it has rested on the book of a trading system. 976 Thus, if an NMS Stock ATS has established automated and empirical tests for segmenting subscribers into different categories—which would require the ATS to respond ‘‘yes’’ to Item III, 13(a) of adopted Form ATS–N and to explain how the segmentation procedures are applied—but allows any kind of override of those automated and empirical tests (such as an ad hoc determination by a member of the ATS’s staff), the NMS Stock ATS would have to respond ‘‘no’’ to Item III, 13(b) (‘‘Are the segmentation procedures the same for all subscribers and the broker-dealer operator?’’) and explain any differences in how its segmentation procedures are applied. PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 38853 N. We proposed that an NMS Stock ATS provide information about its order interaction rule in Part IV, Item 7 of proposed Form ATS–N, but believe that it would be more relevant and efficient to request that information here. Finally, we are requiring under Part III, Item 13(d) of adopted Form ATS–N that the NMS Stock ATS describe ‘‘whether and how [a designated segmented category] can be contested’’ (if applicable). This request is generally consistent with Part IV, Item 5 of proposed Form ATS–N which would have required information on the changing or overriding of segmented categories, as well as notice provided to subscribers of their segmented category. 14. Counter-Party Selection Part IV, Item 5(c) of proposed Form ATS–N would have required disclosures regarding order preferencing. The Commission did not receive specific comment on Part IV, Item 5(c) of proposed Form ATS–N.977 We are adopting Part IV, Item 5(c) as Part III, Item 14 (‘‘Counter-Party Selection’’) of adopted Form ATS–N and adding examples of counter-party selection in a parenthetical in the Item. Market participants have an interest in knowing whether—and how—they may designate their orders or trading interest to interact or avoid interacting with specific orders, trading interest, or persons on an NMS Stock ATS. For instance, the disclosures required under this Item would allow a market participant to know whether it could designate an order submitted to the NMS Stock ATS to interact with specific orders resting in the NMS Stock ATS. 15. Display Part IV, Item 6(a) of proposed Form ATS–N would have required disclosures about the display of order and trading interest, including recipients. We received several comments on Part IV, Item 6(a) of proposed Form ATS–N. We are adopting Part IV, Item 6(a) of proposed Form ATS–N with modifications, as discussed more fully below, and renumbering the request as Part III, Item 15 (‘‘Display’’) of adopted Form ATS–N. The display of subscriber orders and trading interest can occur in a number of ways. For instance, as 977 One commenter states that it is unclear whether Part IV, Item 1(e) of proposed Form ATS–N requests disclosure of instances where a subscriber requests not to interact with certain counterparties. See SIFMA Letter at 20. As discussed in Part III, Item 3 of adopted Form ATS–N above, any procedures related to counterparty selection would be responsive to this item (Part III, Item 14 of adopted Form ATS–N). E:\FR\FM\07AUR2.SGM 07AUR2 38854 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 discussed in the Proposal,978 when an NMS Stock ATS sends electronic messages outside of the ATS that expose the presence of orders or other trading interest on the ATS, it is displaying or making known orders or other trading interest on the NMS Stock ATS. An NMS Stock ATS also might elect to display subscriber order and trading interest through a direct data feed from the NMS Stock ATS that contains realtime information about current quotes, orders, or other trading interest in the NMS Stock ATS. Also, it would be responsive to this adopted Item for the NMS Stock ATS to disclose the circumstances under which the ATS would send these messages, the types of market participants that received them, and the information contained in the messages, including the exact content of the information, such as symbol, price, size, attribution, or any other information made known.979 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 subscribers being displayed on vendor systems, or arrangements with third parties to transmit IOIs between subscribers.980 We continue to believe that subscribers that use the services of the NMS Stock ATSs, including customers of the broker-dealer operator, have limited information about the extent to which their orders and trading interest sent to the NMS Stock ATS could be displayed outside the ATS.981 For example, subscriber orders or trading interests directed to the NMS Stock ATS could pass through the broker-dealer operator’s systems or functionality before entering the ATS. Such systems and functionalities, which could include a common gateway function, algorithm, or smart order router, could be used to support the broker-dealer operator’s other business units, including any trading centers.982 One commenter supports this item.983 Other comments raise certain concerns about Part IV, Item 6(a) of proposed Form ATS–N. One commenter states that the proposed Item would cover ‘‘order information or other trading interest’’ rather than ‘‘subscriber order 978 See Proposal, supra note 2, at 81072. id. 980 See id. 981 See id. 982 The broker-dealer operator typically controls the logic contained in these systems or functionality that determines where an order that the brokerdealer receives will be handled or sent. 983 See HMA Letter at 18. 979 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 information or other trading interest’’ and could entangle the ordinary situation where a multi-service brokerdealer that operates an ATS uses a tool to manage child orders across multiple trading venues.984 Another commenter suggests that the Commission draw a clearer distinction between the actions and operations of an ATS operator and those of affiliated broker-dealers, technical support teams, or others external to the ATS, and instead emphasize disclosures relating to the ATS operator itself.985 In response to these commenters’ suggestions, we are changing the request to ‘‘subscriber orders and trading interest.’’ We did not intend for the Proposal to, in the commenter’s words, entangle the ordinary situation where a multi-service broker-dealer uses a tool to manage child orders across multiple trading venues.986 Consistent with the discussion above regarding the definition of subscriber, a subscriber order directed to the ATS would be a subscriber order for purposes of display. For a subscriber order routed out of the NMS Stock ATS to a third-party trading venue, for example, that order in the third-party venue would not be considered a subscriber order for purposes of display.987 As explained above,988 we do not intend for Form ATS–N to require disclosures about aspects of a market participant’s commercial relationships with a brokerdealer operator that do not pertain to the NMS Stock ATS. A commenter suggests a better way of phrasing Part IV, Item 6(a) of proposed Form ATS–N would be to ask whether orders or IOIs are ever displayed in external venues, with which venues, and what information is shared.989 However, the form of this request is broader, as just discussed, and limiting the request for information to orders and trading interest displayed in external venues would not capture all of the relevant locations where subscriber orders and trading interest can be displayed. One commenter suggests that the Commission revise this Item to distinguish between orders or other trading interest displayed in external venues with real-time access to systems 984 See UBS Letter at 8. 985 See SIFMA Letter at 23. 986 See UBS Letter at 8. 987 See supra Section V.A.2.b. 988 See id. 989 See SIFMA Letter at 23. The commenter also states the need for frequent filing of amendments and the demand for specificity will diminish the readability, comparability and ultimately the usefulness of the form for subscribers and other end readers. See id. at 24. PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 designed to take advantage of this information, such as liquidity providers and SORs, and orders or other trading interest displayed in external venues without real-time access to systems designed to take advantage of this information, such as vendors (where no further information is needed or possibly not required).990 The final disclosure requirement does not draw a distinction between these orders and trading interests. Market participants can be very sensitive to precisely how and when their orders and trading interest are displayed or otherwise made known, and the Commission remains concerned that subscribers to NMS Stock ATSs might not know the full extent to which their orders and trading interest are displayed.991 While the display of orders or trading interest at venues in real time that have systems designed to take advantage of such information may raise the most acute concerns, we believe that market participants should have a full understanding about how and when an ATS displays their orders or trading interest. Differences in the latencies associated with the NMS Stock ATS displaying subscriber orders and trading interest due to a functionality of the ATS would be responsive to the request in Part III, Item 15(c).992 For example, if an NMS Stock ATS transmits and displays its proprietary data feed to certain subscribers faster than other subscribers as a result of the alternative means offered by the ATS to connect, such information would be responsive. Part IV, Item 6(b) of proposed Form ATS–N, requested the identity of any individuals in responding to whom the order and trading interest would be displayed or made known. One commenter raises confidentiality concerns with the requirement to publicly identify the position and title of the natural person to whom orders or other trading interest are displayed, because it believes that it would be relatively easy through social media to reverse engineer certain identities, and such information would require frequent updates with little market utility.993 990 See Fidelity Letter at 8. Proposal, supra note 2, at 81072. 992 See supra note 850. We proposed to require an NMS Stock ATS to disclose differences among subscribers regarding the display of orders and trading interest in Part IV, Item 6(a) of proposed Form ATS–N. 993 See Fidelity Letter at 8. See also SIFMA Letter at 23 (suggesting that identifying individuals by title or more specific identifying characteristics would present security and privacy issues, as well as client confidentiality issues). 991 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 We have revised the request so that Part III, Item 15 of adopted Form ATS–N does not require the NMS Stock ATS to identify natural persons. We understand commenters’ potential confidentiality concerns and had modified the request to make clear that the request does not seek the names of natural persons or their identity. Instead, it requires the NMS Stock ATS to only identify the recipient of displayed information, by functionality of the broker-dealer operator or the type of market participant, or both.994 For example, if orders bound for the NMS Stock ATS pass through the brokerdealer operator’s common gateway, SOR, or algorithm, the NMS Stock ATS would need to disclose these functionalities as the order was displayed to a functionality of the broker-dealer operator that would likely be outside the NMS Stock ATS. If orders resting in the NMS Stock ATS are displayed to certain subscribers or one or more of the broker-dealer operator business units, the NMS Stock ATS would need to identify these subscribers and business units of the broker-dealer operator by type of market participant (e.g., institutional investors, principal trading firms, market makers, affiliates, trading desks at the broker-dealer operator, market data vendors, clearing entities, and potential subscribers, among others). We believe this modification addresses commenters’ concerns, obviates the need for any redaction of information, and reduces the frequency of updates necessary as compared to responses identifying individual persons as proposed. We are revising Part III, Item 15 of adopted Form ATS–N to address another commenter’s concern that certain persons at the ATS in technical or quality assurance roles would need to be disclosed even though they may not be involved with trading activity.995 Part III, Item 15 now specifies that the request does not include ‘‘employees of the NMS Stock ATS who are operating the system.’’ so that employees of the NMS Stock ATS in non-trading related roles, such as technical, quality assurance, compliance or accounting roles, among others, that support the ATS’s operations would not be captured under the adopted Item.996 994 See Part III, Item 1 of adopted Form ATS–N (providing examples of types of market participants). 995 See SIFMA Letter at 23. 996 The NMS Stock ATS would still be subject to the requirements of Rule 301(b)(10) and required to establish adequate safeguards and procedures to protect subscribers’ confidential trading information, which must include: Limiting access to the confidential trading information of VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Finally, we are adding a ‘‘yes’’ or ‘‘no’’ questions in Part III, Item 15(a) that asks if the NMS Stock ATS operates as an ECN as defined in Rule 600(a)(23) of Regulation NMS. In the Proposal, the Commission noted that NMS Stock ATSs that are also ECNs may differ in how and where orders or other trading interest are displayed, and that Part IV, Item 6 of proposed Form ATS–N was designed inform market participants about how ECN display orders.997 We believe that adding this ‘‘yes’’ or ‘‘no’’ question would allow the NMS Stock ATS to identify itself to market participants as an ECN. An ATS that indicates ‘‘yes’’ to Part III, Item 15(a) would also be required to provide information in response to Part III, Item 15(b) and 15(c). 16. Routing Part IV, Item 10(a) of proposed Form ATS–N would have required disclosures about outbound routing. We are adopting Part IV, Item 10(a) of proposed Form ATS–N with modifications, renaming the request as ‘‘Routing,’’ and renumbering the request as Part III, Item 16 of adopted Form ATS–N. One commenter sought to understand whether the description of outbound routing required by the Item was limited to outbound routing performed as a functionality of the ATS itself rather than routing of client orders by the broker-dealer operator to third-party execution venues.998 The commenter believes that if this Item also applies to routing performed by the broker-dealer operator, all broker-dealers, whether or not they operate an ATS, should be required to publicly disclose routing information. Furthermore, the commenter also argues for ‘‘required disclosure of routing by a broker-dealer to any affiliate ATS’’ and of ‘‘the method by which a broker-dealer interacts with the ATSs that it operates. ’’ 999 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. See 17 CFR 242.301(b)(10). 997 See Proposal, supra note 2, at 81072. 998 See Liquidnet Letter at 12. 999 Id. We note that adopted Form ATS–N requires disclosure on both subjects. Part II, Item 1(a) of adopted Form ATS–N solicits information about the entry of orders and trading interest by the broker-dealer operator, including its business unit(s), into the NMS Stock ATS. Part II, Item 1(d) of adopted Form ATS–N solicits information about orders and trading interest in the NMS Stock ATS that can be routed to a trading center of the brokerdealer operator, which would include affiliates of the NMS Stock ATS, and if so, the NMS Stock ATS must provide information that is required in response to Part III, Item 16 of adopted Form ATS–N. PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 38855 As the commenter points out above, order handling and the routing of orders by the broker-dealer operator in its capacity as a broker-dealer may be separate from routing of orders in the ATS to other execution venues. As noted above,1000 we did not intend to require broker-dealer operators to disclose information about their handling of customer orders when such orders are not routed to or residing in the NMS Stock ATS. In response to the commenter’s concerns, the adopted Item does not request information about routing of orders and trading interest by the broker-dealer operator that are not routed to or residing in the NMS Stock ATS. We made several changes to Part IV, Item 10(a) of proposed Form ATS–N in response to comments (and adopted as Part III, Item 16). First, we are requiring an NMS Stock ATS to indicate whether orders and trading interest in the ATS can be routed to a destination outside the ATS, and if the answer to that question is ‘‘yes,’’ whether affirmative instructions from a subscriber must be obtained before their orders or trading interest is routed from the ATS. If the NMS Stock ATS indicates that ‘‘yes’’ instructions from a subscriber must first be obtained, the NMS Stock ATS will be required to describe the affirmative instruction and how the affirmative instruction is obtained. If instructions from a subscriber need not be first obtained, the NMS Stock ATS will be required to explain when orders in the NMS Stock ATS can be routed from the NMS Stock ATS (e.g., at the discretion of the broker-dealer operator).1001 In Part III, Item 16 of adopted Form ATS–N, we are removing the proposed requirement to ‘‘describe the circumstances’’ of outbound routing more broadly, and instead, are now requiring, as applicable, that the NMS Stock ATS ‘‘describe the affirmative instruction’’ of the subscriber and ‘‘explain how the affirmative instruction is obtained.’’ This change is consistent with the instruction in the Proposal to ‘‘describe the circumstances,’’ but provides more specific instruction. Moreover, if trading interest can be routed away from the NMS Stock ATS without the affirmative instruction of the subscriber, we are no longer limiting the alternative to be when it happens at the discretion of the broker-dealer, as proposed, but instead, are requiring an explanation of when orders can be routed from the NMS Stock ATS. We 1000 See supra Section V.D.15. have consolidated the discussion of how orders can be removed from the NMS Stock ATS in Part III, Item 7(a)(vii) of adopted Form ATS–N. 1001 We E:\FR\FM\07AUR2.SGM 07AUR2 38856 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations believe that phrasing the request this way reflects that trading interest can be routed from the NMS Stock ATS in different ways and better accommodates potential future developments in the industry. We believe that the information in this Item will provide a subscriber with the necessary information to authorize routing and understand how its orders in the ATS can be routed from the ATS, and help prevent the subscriber from unknowingly agreeing to the routing of their trading interest. We are not adopting in Part III, Item 16 of Form ATS–N the proposed requirements that the NMS Stock ATS explain the means by which routing is performed, or that the NMS Stock ATS explain any differences among subscribers in the means by which trading interest is routed, as this could expand the scope of Form ATS–N beyond ATS activity and into the other broker-dealer functions of the brokerdealer operator. daltland on DSKBBV9HB2PROD with RULES2 17. Closing Part IV, Item 9(b) of proposed Form ATS–N would have required disclosures about the NMS Stock ATS’s closing process. We did not receive specific comment on Part IV, Item 9(b) of proposed Form ATS–N. We are adopting Part IV, Item 9(b) with certain modifications discussed below, and renumbering the request as Part III, Item 17 (‘‘Closing’’) of adopted Form ATS–N. Part III, Item 17 is designed to inform market participants about whether an NMS Stock ATS uses any special procedures to match orders at the close of regular trading. The Item is designed to provide market participants with information about any special closing processes used by the NMS Stock ATS, particularly whether there are any order types used during the close. The vast majority of requests in Part III of adopted Form ATS–N relate to trading during regular hours. Therefore, when discussing differences between trading during the close and during regular hours, the NMS Stock ATS must discuss differences as compared to relevant information disclosed in Part III Items, including, among others, order types (Item 7), order interaction, priority, matching, and execution procedures (Item 11), segmentation (Item 13), and display (Item 15). We believe this information will be important for market participants to understand in evaluating whether participating in the closing process is VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 consistent with their trading objectives.1002 18. Trading Outside of Regular Trading Hours Part IV, Item 9(c) of proposed Form ATS–N would have required disclosures regarding after-hours trading. The Commission did not receive any comments regarding the substance of Part IV, Item 9(c) of proposed Form ATS–N. The Commission is adopting Part IV, Item 9(c) of proposed Form ATS with certain modifications, as discussed below, and relocating the request as Part III, Item 18 (‘‘Trading Outside of Regular Trading Hours’’) of adopted Form ATS–N. The Commission is merging requests from Part IV, Item 9(a), which requested information about pre-opening executions,1003 and Part IV, Item 9(c), which requested information about after-hours trading. We believe that the potential for redundant disclosures, as observed by commenters,1004 would be reduced by merging these two requests. This Item will require NMS Stock ATSs to indicate in Part III, Items 18(a) and 18(b) whether the ATS conducts trading outside regular trading hours, and indicate whether there are any differences between trading outside of regular trading hours and trading during regular hours. To the extent that there are differences, the NMS Stock ATS must describe those differences. Similar to Item 17 (requesting differences between the closing and regular trading hours), an NMS Stock ATS must discuss differences in trading outside of regular trading hours as compared to the relevant information disclosed in Part III Items, including, among others, order types (Item 7), order interaction, priority, matching, and execution procedures (Item 11), segmentation (Item 13), and display (Item 15). Many of the disclosures discussed elsewhere in Form ATS–N will relate to regular trading hours so the ATS can simply discuss any differences between trading during regular hours and trading outside regular trading hours in Part III, Item 18(b). 1002 As discussed in the Proposal, the Item would, for example, require disclosure of any procedures to match orders to set a single closing price to maximize liquidity and accurately reflect market conditions at the close of trading. See Proposal, supra note 2, at 81077 (discussing closing auctions and orders designed to execute at the close of trading). 1003 Part IV, Item 9(a) of proposed Form ATS–N requested the NMS Stock ATS 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. 1004 See, e.g., SIFMA Letter at 20. PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 19. Fees Part IV, Item 12 of proposed Form ATS–N would have required disclosures about fees. We are adopting Part IV, Item 12 of proposed Form ATS–N with modifications, which are discussed below, and renumbering the request as Part III, Item 19 (‘‘Fees’’) of adopted Form ATS–N. Some commenters suggest that the Commission exercise restraint in the area of fees given that they are the product of negotiations between sophisticated financial institutions and leave to market competition the setting of appropriate fees.1005 Another commenter suggests that NMS Stock ATSs be allowed to voluntarily report their fee structure.1006 The Commission continues to believe that disclosures regarding fees on Form ATS–N are necessary and important, and should not be voluntary for NMS Stock ATSs. Fee disclosures on Form ATS–N are designed to allow all 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 incentives or disincentives for specific market participants or trading behaviors. As NMS Stock ATSs have become a significant source of liquidity in NMS Stocks,1007 we believe that disclosures about their fees are warranted as, in the Commission’s experience, fees can be a primary factor for market participants in deciding where to route their orders and trading interest. Several commenters express support, on behalf of different types of market participants, for fee disclosures on Form ATS–N.1008 In addition, given commenters’ concerns that the use of the term ‘‘describe’’ in Form ATS–N is vague and would lead to discursive disclosures and obscure key information,1009 the 1005 See UBS Letter at 8; LeveL ATS at 6 (stating that ATS subscribers are sophisticated counterparties that have a keen sense of the market for the services provided and are not in need of the fee disclosures proposed). 1006 See STA Letter at 3–4. 1007 See supra Section II.A.1. 1008 See ICI Letter at 10; HMA Letter at 18 (suggesting that disclosure of the details regarding fees (among other topics in part III) is essential for investors or routing brokers seeking to understand how the ATS works). See also SIFMA Letter at 25 (stating that a broad description of compensation mechanisms is appropriate and a description of the mechanisms and categories of fee structure would offer an appropriate level of clarity and transparency); KCG Letter at 7 (stating the Commission should require standard documents, including pricing schedules). 1009 See supra note 941 and accompanying text. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 Commission is providing additional specificity on the Item’s requirements and more examples in the text of the Item. The Commission is adding to Part III, Item 19 requests that NMS Stock ATSs include in their descriptions: The structure of the fee, variables that impact the fee, and differentiation among types of subscribers, along with examples of responsive information included in a parenthetical in the text of each subpart.1010 The Item also would still require a range of fees as proposed. One commenter recommends that the Commission require that any description of a differential fee structure contain enough information for a market participant to understand exactly which, or which level, of fees/rebates/ charges apply to each type of subscriber or other person and the criteria that the NMS Stock ATS uses to sort subscribers into different fee categories so that market participants can assess eligibility requirements for different fee tiers.1011 The Commission recognizes that the fee structures of NMS Stock ATSs can vary and that not all NMS Stock ATSs apply set tiers or categories of fees for subscribers; 1012 however, the Commission agrees with the commenter that a market participant should have sufficient information to understand the fees for using the services of the NMS Stock ATS. Recognizing the various fees that can be charged by NMS Stock ATSs, the Commission is specifying in the fee request the types of information that an NMS Stock ATS must provide in response to the Commission’s proposed request to describe its fees (e.g., the structure of the fees, variables that impact each fee, differentiation among types of subscribers, and the range of fees). These disclosures are designed to provide market participants with more insight regarding the fees charged so that they can better understand how fees may apply to them and assess how such fees may impact their trading strategies. This approach does not require NMS Stock ATSs to provide comprehensive fee schedules but still gives subscribers meaningful information about the fees 1010 We are including examples of responsive information in parentheticals in the text of the item. For instance, for descriptions of the structure of the fee, the Commission is providing as examples a fixed fee, volume-based and transaction-based fee structures. For the description of variables that may impact the fee, the Commission is providing as examples: The types of securities traded, block orders, and the form of connectivity to the ATS. For the description of the differentiation among types of subscribers for the fee, the Commission is providing as examples of the types of subscribers: Broker-dealers, institutional investors, and retail. 1011 See ICI Letter at 10. 1012 See Liquidnet Letter at 12 (stating it has in place over 1,500 subscriber agreements). VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 the NMS Stock ATS charges.1013 Although the fees charged for NMS Stock ATS services may be individually negotiated between the broker-dealer operator and the subscriber, the disclosures about the type of fees charged by the NMS Stock ATS are designed to help market participants discern how an NMS Stock ATS’s fees are organized and compare that information across NMS Stock ATSs, which could reduce the search costs of market participants in deciding where to send their orders and trading interest. Relatedly, the Commission recognizes that a requirement to disclose the complete fee schedule for each subscriber may provide more information, but this would not be desirable or preferable given the fees for NMS Stock ATSs can be highly bespoke and specific to each subscriber.1014 One commenter suggests that a description of the mechanisms and categories of fee structures would offer an appropriate level of clarity and transparency, and that the disclosure of the existence of rebates or commission relating to volume is workable, but a high/low range of fees or more clientspecific descriptions affect registrants’ ability to negotiate custom agreements with subscribers.1015 Part III, Item 19 of adopted Form ATS–N does not require or reveal customer-specific information regarding the fees or terms and conditions of fee agreements that result in the high or low in the range of fees disclosed. Part III, Item 19 of adopted Form ATS–N requests the range of fees and does not require the NMS Stock ATS to disclose the name of the customer, or even the types of subscriber, who is the highest or lowest in the range. A commenter states that the Commission also should require an NMS Stock ATS to explain whether it discriminates among different types of subscribers in establishing fees, rebates, or other charges.1016 In Part IV, Item 12(b) of proposed Form ATS–N, we proposed that NMS Stock ATSs describe any differences if the fees, rebates, or other charges of the NMS Stock ATS were not the same ‘‘for all subscribers 1013 See SIFMA Letter at 25–26 (stating a description of the mechanisms and categories of fee structures would offer an appropriate level of clarity and transparency). 1014 One commenter notes that it agrees with the Commission on this point, and states that the concept of a fixed fee schedule would not be practical or appropriate in this context. See Liquidnet Letter at 13. 1015 See SIFMA Letter at 25–26. 1016 See ICI Letter at 10 (recommending NMS Stock ATSs explain whether they discriminate among different types of subscribers in establishing fees, rebates, or other charges). PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 38857 and persons.’’ We continue to believe that NMS Stock ATSs should be required to disclose differences in the treatment of subscribers; however, the Commission is changing Part III, Item 19 to require a description of any differentiation among ‘‘types of subscribers’’ because the Commission did not intend to require fee differences among individual subscribers. Rather, we believe that differences in fees, rebates and other charges among ‘‘types of subscribers’’ would be more informative to market participants about the fee structure of the ATS than disclosures of individual differences between subscribers, which could result from particular negotiations with individual subscribers. This information would allow subscribers to observe whether an NMS Stock ATS is offering preferential treatment among types of subscribers with regards to fees, and therefore, the information could aid them in deciding where to route their trading interest. Another commenter suggests that the Commission should require NMS Stock ATSs to provide complete information about their sources of revenue, including revenue arrangements the ATS may have with other trading centers.1017 The commenter suggests funds and other market participants would use these disclosures to evaluate the potential for information leakage attendant to routing orders to a particular NMS Stock ATS or whether these arrangements may disadvantage subscribers of the ATS, including funds. We do not believe that disclosure of all of an ATS’s sources of revenue would likely contribute more to subscribers’ understanding of conflicts of interest than the combination of the disclosures in this Item and the disclosures in Part II of adopted the Form ATS–N, which include disclosures regarding ATSrelated activities of the broker-dealer operator and its affiliates, such as Part II, Item 4.1018 Other commenters express various reasons for why they believe the Commission should not require some or all of the disclosures on fees of Part IV, Item 12 of proposed Form ATS–N. Commenters state that NMS Stock ATSs, and especially NMS Stock ATSs of multi-service broker-dealers, may establish fees based on a number of factors, including the depth and breadth of a client relationship, or the full suite of brokerage services made available to 1017 See id. supra Section V.C.4 (discussing any formal or informal arrangements between the Broker-Dealer Operator and a Trading Center to access the NMS Stock ATS services). 1018 See E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38858 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations the client.1019 The commenters believe that because fees are set taking into account these other factors, any disclosures on the range of fees on the NMS Stock ATS would be misleading.1020 As discussed in the Proposal, the types of fees charged to use an NMS Stock ATS’s services could influence whether a market participant subscribes to, or the extent to which it participates on, the NMS Stock ATS.1021 The Commission recognizes, as indicated by commenters, that fees charged for the use of the NMS Stock ATS services can be bundled with nonATS services that the broker-dealer operator offers to subscribers of the ATS. While Part IV, Item 12 of proposed Form ATS–N request did not explicitly identify bundled service fees, the proposed request did require a description of any fees, rebates, or other charges of the NMS Stock ATS. As a type of fee for use of the services of the NMS Stock ATS, bundled service fees would have been responsive to Part IV, Item 12 of proposed Form ATS–N. To avoid potential confusion about fees charged by an NMS Stock ATS, and to account for bundled service fees charged to a subscribers by multiservice broker-dealer operators of NMS Stock ATSs, the Commission is adding a separate and specific request to Part III, Item 19(b) of adopted Form ATS–N. Specifically, the Commission is requiring that the NMS Stock ATS describe any bundled fees, including a summary of the bundled services and products offered by the broker-dealer operator or its affiliates, the structure of the fee, variables that impact the fee (including, for example, whether the particular broker-dealer services selected would impact the fee), differentiation among types of subscribers, and range of fees. Part III, Item 19(b) is designed to allow market participants to better evaluate fees for bundled services that include access to the NMS Stock ATS. NMS Stock ATSs will be required to provide information, including the relevant services and products offered by the broker-dealer operator and its affiliates for each bundled fee offered, that will provide context to market participants with which to assess how fees could apply to them as subscribers. Another commenter states its understanding that the disclosures required would relate only to the fees that the ATS charges for its services, and not include brokerage services, because otherwise, it believes there would be unfair discrimination relative to broker-dealers that do not operate an ATS.1022 To the extent that a brokerdealer operator bundles its services with its NMS Stock ATS services, and the ATS services do not have an explicit fee, then the broker-dealer operator would not be required to provide a range of fees charged for the bundled services. On the other hand, if a brokerdealer operator bundles its services with its NMS Stock ATS services and charges an explicit fee for the ATS services, then the fee for the ATS services should be taken into account for determining the range of fees under this Item. Further, if a broker-dealer operator sometimes bundles its services with its NMS Stock ATS services for certain subscribers, but charges a separate fee for ATS services, it would be required to provide the information responsive to this Item, including the range, for the separate fee for ATS services. A commenter also suggests the Item be expressly limited to fees set by the ATS operator and not include fees from other affiliates or third parties (e.g., related to co-location).1023 Part III, Item 19(a) of adopted Form ATS–N covers charges to subscribers for their ‘‘use of the NMS Stock ATS services.’’ 1024 The fee information disclosed in Part III, Item 19 of adopted Form ATS–N must include fees resulting from a subscriber’s use of the NMS Stock ATS services that are charged by the brokerdealer operator, or a third party, such as a service provider to the NMS Stock ATS. The Item’s required disclosures are not limited by the entity charging the fee; rather, if the fee is for use of the NMS Stock ATS services, then the Item’s requests apply regardless of the entity charging the fee. Many brokerdealer operators today outsource some or all of the operations of the NMS Stock ATS to third parties (e.g., such as the matching engine). To the extent that subscribers are charged a fee by the third-party service provider of the NMS Stock ATS, the NMS Stock ATS would be required to disclose such fees in Part III, Item 19(a) of Form ATS–N. On the other hand, Part III, Item 19(a) of adopted Form ATS–N does not request information on fees charged for non-ATS services by a third party not in contract with the broker-dealer operator. If, for example, the NMS Stock ATS is 1022 See Liquidnet Letter at 12. SIFMA Letter at 26. 1024 The NMS Stock ATS services generally include those services used for the purpose of effecting transactions in NMS Stock, or for submitting, disseminating or displaying orders on the ATS. See 17 CFR 242.300(b). 1023 See 1019 See UBS Letter at 8; Morgan Stanley Letter at 4; STA Letter at 3–4; LeveL ATS Letter at 6. 1020 See UBS Letter at 8; STA Letter at 3–4; Morgan Stanley Letter at 4. 1021 See Proposal, supra note 2, at 81080. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 located in a facility owned by a third party, and in order to co-locate to the NMS Stock ATS a subscriber would be required to lease physical space from the third-party facility owner, a fee for the space rental would not be required to be disclosed on Form ATS–N by the NMS Stock ATS. On the other hand, if an NMS Stock ATS provides co-location services for subscribers and charges a fee to those subscribers for the colocation services, such fee would be responsive to Part III, Item 19 of Form ATS–N. In addition, to the extent that a broker-dealer operator enters into an agreement or arrangement with a third party for that third party to provide a service of the NMS Stock ATS to subscribers and charge a fee that is passed back to the broker-dealer operator in any form, the broker-dealer operator would be required to disclose that fee in response to Part III, Item 19 of Form ATS–N. In such a case, to prevent an NMS Stock ATS from circumventing disclosure otherwise responsive to Part III, Item 19(b) of adopted Form ATS–N, the pass-backed fee by the third party is a fee ‘‘for the use of NMS Stock ATS services.’’ Another commenter suggests that clients are highly interested in understanding whether an ATS offers rebates to subscribers and would support the inclusion of this question.1025 In response to the commenter, the disclosure requests under Item 19 will contain a stand-alone Item—Item 19(c)—which requests information about rebates and discounts of fees that are identified in subparts (a) and (b) of Item 19. Item 19(c) requires information about rebates and discounts that is similar to that which is required for fees (e.g., the structure of the rebate or discount, variables that impact the rebate or discount, differentiation among types of subscribers, and range of rebate or discount). 20. Suspension of Trading Part IV, Item 8 of proposed Form ATS–N would have required disclosures regarding any procedures governing trading during a suspension of trading, disruption or malfunction. The Commission is adopting Part IV, Item 8 with certain modifications, renaming it ‘‘Suspension of Trading,’’ and renumbering the request to Part III, Item 20 in adopted Form ATS–N. Part III, Item 20 is designed to, for example, inform market participants of whether, among other things, an NMS Stock ATS 1025 See UBS Letter at 8. We proposed in Part IV, Item 12(a) of proposed Form ATS–N that the NMS Stock ATS describe ‘‘any fees, rebates, or other charges’’ of the NMS Stock ATS. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations will continue to accept orders after a suspension, whether the NMS Stock ATS routes, holds, or continues to execute orders resting in the system prior to the suspension, and the type of notice provided to market participants during a suspension. Furthermore, as discussed in the Proposal,1026 one of the primary concerns of the Commission is 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. Accordingly, it is important to fully understand what, if any, trading procedures an NMS Stock ATS would follow when trading is suspended or stopped. Consistent with the Proposal, we are adding the phrase ‘‘including the suspension of trading in individual NMS stocks’’ to Item 20(a) to make clear that the procedures to suspend trading in an NMS stock by an NMS Stock ATS are required by this request.1027 We received two comments regarding Part IV, Item 8 of proposed Form ATS–N. One commenter suggests that this information would be better suited as a disclosure to subscribers rather than formally filed with the Commission and publicly disclosed.1028 We do not agree and believe that this information would allow non-subscribers to better evaluate their brokers’ order routing practices and whether the routing of their orders to an NMS Stock ATS would achieve their trading or investment strategies. Another commenter requests that the Commission consider harmonizing any definitions used in the Item with those found in Regulation SCI.1029 As discussed in the Proposal, the Commission does not intend to alter or amend the requirements of Regulation SCI with this Item, nor does it intend to require NMS Stock ATSs to adopt specific procedures during a system disruption as it did in Regulation SCI.1030 Instead, we are requiring an NMS Stock ATS to disclose what procedures, if any, it follows when 1026 See Proposal, supra note 2, at 81076. on Commission experience, an NMS Stock ATS’s procedures may include the suspension of trading in an NMS stock security to not trigger the requirements of Rule 301(b)(3) or Rule 301(b)(5) of Regulation ATS. See Proposal, supra note 2, at 81104. 1028 See SIFMA Letter at 24–25. 1029 See UBS Letter at 8. 1030 See Proposal, supra note 2, at 81076. We are removing references to ‘‘system disruptions’’ to mitigate any confusion with Regulation SCI. We believe this technical change does not change the substantive information required. daltland on DSKBBV9HB2PROD with RULES2 1027 Based VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 suspending or stopping trading so that market participants can better understand how their orders will be handled under those circumstances. 21. Trade Reporting Part IV, Item 13(a) of proposed Form ATS–N would have required disclosures regarding trade reporting. We are adopting Part IV, Item 13(a) of proposed Form ATS–N with certain modifications discussed below, and renumbering the request as Part III, Item 21 of adopted Form ATS–N. One commenter suggests that the prompt to disclose ‘‘any arrangements’’ is broad and poses challenges to keep current and recommends it would be more useful to limit the requested arrangements to those that are material to or a core feature of the operations of the ATS.1031 In response to this comment, we are revising the request to focus on ‘‘material’’ arrangements for reporting transactions on the NMS Stock ATS. We recognize that there could be arrangements relevant to trade reporting, such as the specific software used to report, that play a minor role in the ATS’s trade reporting and need not be disclosed. We believe that this change clarifies the Form ATS–N requirement and reduces potential burdens on NMS Stock ATSs while providing market participants with sufficient information to understand how their trade information will be reported. In addition, we are adding a phrase to the Item to make clear that the explanation of procedures or material arrangements required includes ‘‘where an ATS reports transactions and under what circumstances.’’ We believe this language will help NMS Stock ATSs better understand what would be responsive to Part III, Item 21 of adopted Form ATS–N and focus their responses accordingly, and is consistent with the request in Part IV, Item 13(a) of proposed Form ATS–N. For example, the NMS Stock ATS will be required to disclose the SRO to which it reports transactions, and any alternative trade reporting destinations, if applicable. Information about where an NMS Stock ATS reports transactions and under what circumstances would have been responsive to Part IV, Item 13(a) of proposed Form ATS–N, which required the NMS Stock ATS to ‘‘describe any arrangements or procedures for reporting transactions on the NMS Stock ATS.’’ The addition of the phrase to Item 21(a) clarifies those procedures that would be responsive to the request. Finally, we are revising the proposed Item to clarify that the NMS Stock ATS explain any ‘‘procedures and material arrangements’’ (emphasis added), instead of ‘‘procedures or material arrangements’’ (emphasis added). We intended that a description of both procedures and material arrangements would provide a complete and comprehensive disclosure of the most important aspects of the NMS Stock ATS’s trade reporting. 22. Clearance and Settlement Part IV, Item 13(b) of proposed Form ATS–N would have required disclosures regarding clearance and settlement. The Commission is adopting Part IV, Item 13(b) of proposed Form ATS–N with certain modifications discussed below, and renumbering it as Part III, Item 22 of adopted Form ATS–N. The integrity of the trading markets depends on the prompt and accurate clearance and settlement of securities transactions.1032 Part III, Item 22 is designed to help market participants understand the measures the NMS Stock ATS takes to facilitate clearance and settlement of transactions, including 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.1033 One commenter suggests that the prompt to disclose ‘‘any arrangements’’ is broad and poses challenges to keep current and recommends it would be more useful to limit the requested arrangements to those that are material to or a core feature of the operations of the ATS.1034 In response to this comment, and for similar reasons to those stated above for Part III, Item 21 (‘‘Trade Reporting’’), we are revising this request to focus the Item on ‘‘material’’ arrangements to facilitate the clearance and settlement of transaction on the NMS Stock ATS. For example, an arrangement under which a third party would have a role in clearance and settlement on the NMS Stock ATS may constitute a material arrangement that could trigger the disclosure requirement under Part III, Item 22. Limiting the explanation required to material arrangements will reduce the burden on 1032 See Proposal, supra note 2, at 81081. 1033 Id. 1031 See PO 00000 SIFMA Letter at 26. Frm 00093 Fmt 4701 Sfmt 4700 38859 1034 See E:\FR\FM\07AUR2.SGM SIFMA Letter at 26. 07AUR2 38860 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 NMS Stock ATSs while at the same time still allowing market participants to understand and more easily compare clearing arrangements required across NMS Stock ATSs. For similar reasons as stated above for Part III, Item 21 (‘‘Trade Reporting’’), we are revising this request to state that the NMS Stock ATS describe any ‘‘procedures and material arrangements’’ (emphasis added), instead of ‘‘procedures or material arrangements’’ (emphasis added). In addition, we are removing the phrase ‘‘undertaken by the NMS Stock ATS’’ from the proposed requirement. NMS Stock ATSs may engage a third party to facilitate the clearance and settlement of transactions on the NMS Stock ATS, and we do not intend to limit the procedures and material arrangements explained to only those specifically performed by the NMS Stock ATS. 23. Market Data Part IV, Item 11 of proposed Form ATS–N would have required disclosures regarding market data. The Commission is adopting Part IV, Item 11 of proposed Form ATS–N with certain modifications and renumbering the request as Part III, Item 23 of adopted Form ATS–N. Market data is a critical component to understanding the operations of an NMS Stock ATS. For instance, the market data received by an NMS Stock ATS might affect the price at which orders and trading interest is prioritized and executed in the ATS, including orders that are pegged to an outside reference price. The source of an NMS Stock ATS’s market data could impact the execution price received by a subscriber. Disclosures about the NMS Stock ATS’s sources of market data, and how the ATS uses such data, can help to inform market participants about how their orders would be handled and executed by the NMS Stock ATS. One commenter recommends the elimination of prompts that it suggests request proprietary, sensitive, or duplicative information. The commenter instead recommends a general, high-level description regarding the determination of NBBO and pricing.1035 As routing is a function performed by a broker-dealer and outside the ATS, the Commission is revising the request to make clear that an NMS Stock ATS would not be required to provide information about the market data that the broker-dealer operator uses to route orders and trading interest from the NMS Stock ATS to away destinations. Part III, Item 23 would require information, however, 1035 See SIFMA Letter at 25. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 about the ATS’s use of market data to determine when resting orders and trading interest will be removed from inside the NMS Stock ATS because these orders and trading interest reside inside the ATS and the data used to act on them could impact their execution. An NMS Stock ATS would also be required to provide information about how the ATS uses market data to provide the services it offers. Among other things, for example, the NMS Stock ATS would need to disclose in response to Part III, Item 23, of adopted Form ATS–N, its use of market data to display, price, prioritize, execute, and remove trading interest. As part of its explanation for how the NMS Stock ATS uses market data, the ATS would be required to specify, if applicable, when the ATS may change between its use of different sources of market data to provide its services. Given commenters’ concerns that the use of the term ‘‘describe’’ in Form ATS–N is vague and would lead to discursive disclosures and obscure key information,1036 the Commission is providing additional examples in the text of the Item to give NMS Stock ATSs more guidance on the types of information that would be responsive to the request, including how the ATS determines the NBBO and protected quotes in the Item. One commenter believes that the form should require annual disclosures of an NMS Stock ATS’s approximate latency (in microseconds) to receive market data feeds, assemble the NBBO, and deliver the updated NBBO to the matching engine.1037 As discussed elsewhere in relation to comments requesting quantitative data,1038 the Commission is not adopting ongoing reporting requirements for NMS Stock ATSs to report performance metrics of their system and therefore not requiring NMS Stock ATS to disclose this information. The information above could be important to market participants because they could be concerned, for example, about price impacts on their trading interest if the NMS Stock ATS compiles the NBBO slower than other trading venues, or that they would trade on stale prices, as well as the potential for information leakage. To address the commenter’s concern, the Commission is providing guidance to NMS Stock 1036 See supra note 941. HMA Letter at 19. 1038 See Section V.D.13 (discussing why the Commission is requiring narrative responses instead of a quantitative component, such as the percentage of orders and trades per segmented class), and V.D.26 (discussing why the Commission is requiring narrative responses instead of quantitative data from NMS Stock ATSs). 1037 See PO 00000 Frm 00094 Fmt 4701 Sfmt 4700 ATSs that, in response to Part III, Item 23, the NMS Stock ATS should explain how market data is received by the ATS, compiled, and delivered to the matching engine. For example, among other possible arrangements, the NMS Stock ATS could explain in response to the Item that market data is received by the broker-dealer operator and assembled there, and subsequently delivered to the matching engine, or that market data is sent directly to the matching engine, which normalizes the data for its use. 24. Order Display and Execution Access Part IV, Item 14 of proposed Form ATS–N would have required disclosures regarding order display and execution access pursuant to Rule 301(b)(3). The Commission is adopting Part IV, Item 14 in proposed Form ATS–N, with certain modifications, and renumbering this Item as Part III, Item 24 in adopted Form ATS–N. One commenter recommends eliminating this request altogether on the grounds that it is unclear how subscribers would benefit from the detailed information under this Item or how it would be used.1039 The Commission does not agree. As noted in the Proposal, 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 the order display requirements.1040 Thus, the commenter’s suggestion that the Item is more appropriate in the context of a Commission examination would not remedy the current lack of notice to the public once the NMS Stock ATS triggers the order display requirement. This notice would inform the Commission and the public whether an NMS Stock ATS is subject to Rule 301(b)(3). Removing Part IV, Item 14 (adopted as Part III, Item 24) would forego the benefit to market participants of knowing when an NMS Stock ATS has become a significant source of liquidity in an NMS stock and how they can access applicable quotations of that ATS. The commenter maintains, but does not describe how, the required disclosure would undermine the NMS Stock ATS’s subscriber access criteria, and we do not agree that the required disclosure would do so. We recognize that an NMS Stock ATS may not be subject to Rule 301(b)(3)(ii) of Regulation ATS even if the ATS displays subscriber orders in an NMS stock to any person (other than employees of the ATS) (Rule 301(b)(3)(i)(A)), and executes 5% or 1039 See 1040 See E:\FR\FM\07AUR2.SGM SIFMA Letter at 27. Proposal, supra note 2, at 81082. 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 more of the average daily trading volume in that NMS stock as reported by an effective transaction reporting plan during at least four of the preceding six calendar months (Rule 301(b)(3)(i)(B)).1041 If an NMS Stock ATS satisfies the Rule 301(b)(3)(i) threshold, the ATS must also meet the criteria of Rule 301(b)(3)(ii) to be subject to the requirements of Rules 301(b)(3)(ii) and (iii). As proposed, Part IV, Item 14 of Form ATS–N would have required that an NMS Stock ATS that meets the threshold requirements of Rule 301(b)(3)(i), but is not subject to Rules 301(b)(3)(ii) and (iii), to provide information about how they display and provide execution access. This was not the Commission’s intended result. Rather, the Commission intended for an NMS Stock ATS that is subject to Rule 301(b)(3)(ii) and (iii) to provide the information that the Commission proposed in Part IV, Item 14(a)–(c) of proposed Form ATS–N. Therefore, the Commission is modifying the disclosure requirement of this Item and relocating it to Part III, Item 24 of Form ATS–N. As adopted, Part III, Item 24(a) of Form ATS–N asks if the NMS Stock ATS meets the threshold requirements of Rule 301(b)(3)(i) of Regulation ATS, and, if so, whether the NMS Stock ATS is required to comply with Rule 301(b)(3)(ii) of Regulation ATS (i.e., does the ATS display to more than one person in the system). If the NMS Stock ATS is required to comply with Rule 301(b)(3)(ii), Part III, Item 24(b) requires the NMS Stock ATS to provide the information that the Commission proposed in Part IV, Item 14(a)–(c) of proposed Form ATS–N (i.e., the ticker symbol of the NMS stocks displayed, information about how the ATS displays such orders, and information about how the ATS provides access to such orders).1042 To ensure consistency with Rule 301(b)(3) of Regulation ATS, the Commission is making minor modifications to the request to better comport with requirements of Rule 301(b)(3), and in response to the commenter’s concerns regarding proposed Form ATS–N’s disclosure 1041 See Liquidnet Letter at 13–14 (stating that the ‘‘order display requirement of [Rule 301(b)(ii)] only applies where orders are ‘displayed to more than one person in the [ATS]’’ such that the disclosure obligation of proposed Part IV, Item 14 would only apply where an ATS displays orders to more than one subscriber in securities where it has exceeded the applicable 5% threshold). 1042 If the NMS Stock ATS responds ‘‘no’’ to Part III, Item 24(a) it will not be required to respond to Item 24(b), and if it responds ‘‘yes’’ to Item 24(a) but ‘‘no’’ to Item 24(b), it will not be required to provide any additional information in response to Item 24. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 requirements for NMS Stock ATSs that meet the threshold requirements of Rule 301(b)(3)(i), but may not be subject to Rules 301(b)(ii) and (iii).1043 25. Fair Access Part IV, Item 15 of proposed Form ATS–N would have required disclosures regarding the fair access requirement of Rule 301(b)(5). The Commission is adopting Part IV, Item 15 of proposed Form ATS–N, with certain modifications, and renumbering this Item as Part III, Item 25 in adopted Form ATS–N. The Commission received comment recommending the elimination of the request altogether on the grounds that it is unclear how subscribers would benefit from the detailed information under the Item or how it would be used.1044 The Commission does not agree for the same reason discussed above in connection with Part III, Item 24. As noted in the Proposal, although triggering the fair access provision requires the NMS Stock ATSs to provide certain information confidentially to the Commission under Exhibit C of Form ATS–R,1045 there is no mechanism under which an ATS must notify market participants after it has triggered the fair access threshold under the current regulatory regime for ATSs.1046 Removing Part IV, Item 15 of proposed Form ATS–N (adopted Part III, Item 25) as suggested by the commenter, would forego the benefit to market participants of knowing when an NMS Stock ATS has become a significant source of liquidity in an NMS stock and must comply with fair access requirements of Rule 301(b)(5). We believe that the information that an NMS Stock ATS will be required to disclose pursuant to Part III, Item 25 will allow market participants to assess whether fair access is in fact being granted by NMS Stock ATSs that meet the fair access threshold of Rule 301(b)(5), in part by making publicly available a description of the NMS Stock ATS’s written standards for granting access. In addition, the commenter mentions that, but does not describe how, the required disclosure would undermine the NMS Stock ATS’s subscriber access criteria. Similar to Part IV, Item 14 of proposed Form ATS–N as discussed 1043 See Liquidnet Letter at 13–14. SIFMA Letter at 27. 1045 See Proposal, supra note 2, at 81082, n.502. An ATS that meets any of the trading volume thresholds set forth in Rule 301(b)(5)(i), must comply with the requirements of Rule 301(b)(5)(ii) (including the requirement to disclose to the Commission on Form ATS–R the information required by Rule 301(b)(5)(ii)(D)), unless it meets the exception set forth in Rule 301(b)(5)(iii). 1046 See Proposal, supra note 2, at 81082. 1044 See PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 38861 above,1047 Part IV, Item 15 of proposed Form ATS–N would have applied to an NMS Stock ATS that meets the threshold requirements of Rule 301(b)(5)(i), but is not required to comply with Rule 301(b)(5)(ii). The Commission intended for an NMS Stock ATS to provide this information only if it is required to comply with Rule 301(b)(5)(ii). Therefore, the Commission is modifying the disclosure requirement of this Item and relocating it to Part III, Item 25 of adopted Form ATS–N. As adopted, Part III, Item 25(a) of Form ATS–N asks if the NMS Stock ATS meets the threshold requirements of Rule 301(b)(5)(i)(A) of Regulation ATS and if so, whether the NMS Stock ATS is required to comply with Rule 301(b)(5)(ii) of Regulation ATS (i.e., the ATS does not meet the exception set forth in Rule 301(b)(5)(iii)). If the NMS Stock ATS is required to comply with Rule 301(b)(5), Part III, Item 25(b) requires the NMS Stock ATS to provide the information that the Commission proposed in Part IV, Item 15(a) and 15(b) of proposed Form ATS–N (i.e., the ticker symbol of each NMS stock and a description of the ATS’s written standards for granting access to trading on the ATS).1048 To ensure consistency with Rule 301(b)(5) of Regulation ATS, the Commission is making minor modifications to the request to better comport with requirements of Rule 301(b)(5), and for consistency with the modifications the Commission is making to Part III, Item 24 described above. 26. Aggregate Platform-Wide Data; Trading Statistics a. Disseminated Aggregated PlatformWide Data Part IV, Item 16 of proposed Form ATS–N would have required disclosures regarding market quality statistics published or provided to subscribers. The disclosure requests in Part IV, Item 16 of proposed Form ATS–N are now contained in Part III, Item 26 of adopted Form ATS–N. We received several comments on Part IV, Item 16 of proposed Form ATS–N. Some commenters express concerns about the potential effects that the public disclosure of the information under Part IV, Item 16 would have on the flow of information to 1047 See supra Section V.D.24. the NMS Stock ATS responds ‘‘no’’ to Part III, Item 25(a), it will not be required to respond to Item 25(b), and if it responds ‘‘yes’’ to Item 25(a) but ‘‘no’’ to Item 25(b), it will not be required to provide any additional information in response to Item 25. 1048 If E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38862 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations subscribers.1049 One commenter expresses concern that the proposed requirements of Part IV, Item 16 would have made the process of providing information requested by customers more difficult, noting that it receives information requests on an ongoing basis from traders at more than 800 firms.1050 Another commenter questions the value that the snapshot disclosed under Part IV, Item 16 would have for the general public, and states that adopting Part IV, Item 16 as proposed would cause NMS Stock ATSs to stop sharing some categories of information with clients.1051 We continue to believe that it is appropriate to require an NMS Stock ATS to make public aggregate, platformwide order flow and execution statistics it already otherwise collects and publishes or provides to one or more subscribers to the NMS Stock ATS. We believe that an NMS Stock ATS may choose to create and publish or provide to one or more subscribers or persons information concerning order flow and execution quality for different reasons. Certain performance metrics and statistics may be important factors for market participants in comparing and selecting an ATS that is most appropriate for their investment objectives. We acknowledge a commenter’s point that that these disclosures might limit communication between NMS Stock ATSs and their participants to the extent that an NMS Stock ATS chooses to cease providing such statistics to subscribers due to the Form ATS–N requirements.1052 However, we believe that only a few NMS Stock ATSs would take this type of action because such ATSs would have already chosen to distribute such statistics to outside persons, thus triggering the requirements of Item 26. Furthermore, we believe that the benefits of this disclosure—requiring that all market participants have an equal opportunity to analyze aggregate platform-wide order flow and execution data that is distributed by an NMS Stock ATS— justify the potential cost of some ATSs choosing to no longer distribute such statistics to select subscribers on their platforms. Another commenter believes this request should not require the disclosure of ‘‘bespoke’’ statistics for a subscriber.1053 The commenter is 1049 See SIFMA Letter at 27; Liquidnet Letter at 15. 1050 See Liquidnet Letter at 15. SIFMA Letter at 27. 1052 See id. 1053 See MFA/AIMA Letter at 5. 1051 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 concerned that if an NMS Stock ATS has to amend its Form ATS–N each time it receives a subscriber’s request for additional information, it will not provide investors with additional information; accordingly, the commenter suggests revising Part IV, Item 16 in a way that would not discourage an NMS Stock ATS from providing additional market quality information to investors. We share the concern that if an NMS Stock ATS is compelled to amend its Form ATS–N each time it receives a request for additional information from a market participant, it will not provide investors with this information. Item 26, however, would not require an NMS Stock ATS to amend its Form ATS every time it receives a data request. As explained in the Proposal, to comply with this request, an NMS Stock ATS would only be required to file a Form ATS–N updating amendment on a quarterly basis.1054 We are not modifying the language or substantive requirements in adopted Form ATS–N. Rather, to provide greater clarity regarding when and how NMS Stock ATSs are required to respond to Item 26(a), we are adding an instruction to Form ATS–N to state that an NMS Stock ATS shall file a Form ATS–N amendment pursuant to Rule 304(a)(i)(2)(B) of Regulation ATS to provide information in response to Item 26(a). Furthermore, as explained above, the benefits of this disclosure justify the potential cost of some ATSs choosing to no longer distribute such statistics to select subscribers on their platforms. In addition, one commenter believes that broker-dealer operators and their affiliated broker-dealers should be permitted to respond to individualized questions from subscribers and to continue to provide customized reports in the course of responding to those individualized questions without attendant Form ATS–N revisions or amendment requirements.1055 This commenter states that without clarification regarding how individualized or custom reports are to 1054 See Proposal, supra note 2, at 81084. As also explained in the Proposal, if, for example, an NMS Stock ATS publishes or provides a particular statistic on a daily basis, the NMS Stock ATS would include in Exhibit 4 of adopted Form ATS–N 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). See id. at n.512. If an NMS Stock ATS publishes or provides a particular statistic weekly, the NMS Stock ATS would be required to include in Exhibit 4 of adopted Form ATS–N 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). See id. 1055 See SIFMA Letter at 27. PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 be treated, this disclosure requirement could potentially introduce misleading or skewed information into the public arena, which could undermine the transparency goals of the proposed rules.1056 Similarly, one commenter states that the Commission should clarify that Part IV, Item 16 would not apply when an NMS Stock ATS provides data to a customer relating to that customer’s specific usage of the ATS.1057 The commenter states that institutions must have access to this type of information to fulfill their best execution obligations, but making this type of information public could compromise an institution’s anonymity.1058 We note that Part III, Item 26 of adopted Form ATS–N requires only aggregate platform-wide data and, thus, would not apply when an NMS Stock ATS provides a participant with individualized or custom reports containing data relating to that participant’s specific usage of the ATS. Commenters also recommend changes and/or other clarifications to the requests under Part IV, Item 16 of proposed Form ATS–N. One of these commenters recommends that the Commission eliminate the public disclosure requirements under Item 16 and instead propose a revised report on aggregate order flow and execution that is to be filed on an annual and confidential basis with the Commission as an exhibit to Form ATS–N.1059 As noted above, we are adopting the proposed disclosure requests, as the public disclosure of the material encompassed by Part IV, Item 16 of proposed Form ATS–N will benefit market participants. Another commenter recommends revising Part IV, Item 16 of proposed Form ATS–N to only mandate the disclosure of the required market quality statistics when the NMS Stock ATS publishes or otherwise provides such statistics to a substantial portion of its subscribers (e.g., 10% or more).1060 As explained above, we believe that there is a strong policy objective behind ensuring that the information encompassed by Part III, Item 26 of adopted Form ATS–N is available to a wide array or market participants. We believe that setting a threshold for when these disclosure requirements are 1056 See id. Liquidnet Letter at 16. 1058 See id. 1059 See SIFMA Letter at 28. 1060 See MFA/AIMA Letter at 5; see also 17 CFR 242.605 (requiring market centers, which include ATSs, to make available for each calendar month an electronic report on certain categories of order execution information). 1057 See E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations triggered would not advance this policy objective because an NMS Stock ATS would be able to limit distribution of the statistics encompassed by Part II, Item 26 of adopted Form ATS–N to a select number of participants on the ATS. As an alternative to the proposed requirements for the disclosure of aggregate platform-wide statistics on Form ATS–N, a commenter recommends that the Commission designate specific execution statistics for all ATSs to provide.1061 However, if the Commission were to adopt the requests of Part IV, Item 16 as proposed, the commenter believes that the Commission should clarify that tradespecific data would not be subject to this filing requirement, including pretrade and post-trade transaction cost analyses. The commenter also requests clarification that this disclosure request only covers execution quality statistics and that other types of statistics are not included. By way of example, the commenter believes that disclosing the percentage of customers that have used a specific product or product feature would not trigger the requirements of Part III, Item 26 because that information would not be considered a market quality statistic. Finally, the commenter believes that NMS Stock ATSs should be permitted to file the relevant statistics under Part III, Item 26 without filing any associated communication to a specific customer (such as the other contents of an email containing these statistics or a questionnaire submitted by the customer), as this could compromise customer anonymity. We confirm that Part III, Item 26 of adopted Form ATS–N only requires the disclosure of order flow and execution statistics, and that trade-specific data that does not include aggregate, platform-wide information would not be covered by this request. We note, however, that whether or not a specific type of statistic should be categorized as an order and execution statistic or considered aggregate, platform-wide data will depend on the nature of the specific statistics being compiled by the NMS Stock ATS. An NMS Stock ATS should independently evaluate any statistics that it compiles and distributes to determine whether they are responsive to this disclosure request. We also agree that protecting customer anonymity should be a priority with any public disclosure under this Item, and 1061 See Liquidnet Letter at 15. We are not expanding the regulatory regime of Regulation ATS to require the public disclosure of specific, standardized statistics for ATSs. See also infra Section V.D.26.b. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 thus, an ATS would not be required to publicly file customer communications associated with the responsive statistics. While we are not changing the substance of the proposed data request being adopted in Part III, Item 26, we are making technical modifications to improve the means by which the disclosures are filed on Form ATS–N. We believe that these modifications will make it easier for market participants to review and compare the filed information. In addition to changing the proposed request into a ‘‘yes’’ or ‘‘no’’ question in adopted Form ATS–N, Part III, Item 26 requires the NMS Stock ATS to attach both the responsive statistics and its explanation of the categories or metrics of those statistics as Exhibits 4 and 5, respectively, rather than including such information as part of the form, as was proposed. We believe it will be easier for market participants to review the disclosures as stand-alone documents than it would be if they were filed and publicly posted as narratives in the form. Also, in lieu of filing Exhibits 4 and 5, the NMS Stock ATS may certify that the information requested under Exhibits 4 and 5 is available at the website provided in Part I, Item 5 of the form and is accurate as of the date of the filing. b. Other Standardized Statistical Disclosures In the Proposal, we solicited 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.1062 Several commenters believe that the Commission should add additional public statistical disclosure requirements to the ATS regulatory regime.1063 We believe that it is 1062 See Proposal, supra note 2, at 81084–85. e.g., T. Rowe Price Letter at 1 (recommending that ATSs be required to collect and disclose statistics about the percentage of volume executed in block and demi-block sizes, percentage of volume executed relative to national best bid/offer (i.e., near, far, midpoint, and intraspread), trade size and market cap distribution, and aggregate statistics regarding counterparties); Citadel Letter at 4 (advocating for the Commission to require the reporting of end-of-day trade information that the commenter believes would bring greater transparency to market participants); HMA Letter at 22 (recommending that ATSs be required to collect and disclose statistics about Order Trading and Descriptive Statistics, Subscriber Characteristics, and ATS Relationship and Trading Statistics); Anonymous at 1 (stating that the same data produced by national securities exchanges should also be provided by ATSs, including transactional short sale data); and Liquidnet Letter at 16 (recommending that ATSs be required to publicly report all individual ATS executions on an attributed basis, which could be subject to a suitable delay period, such as 30 days). 1063 See, PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 38863 appropriate to take an incremental approach to the disclosure of additional market statistics. At this time, we believe it is appropriate to only require NMS Stock ATSs to provide to all market participants—via public disclosure on Form ATS–N—aggregate, platform wide order flow and execution statistics that they already collect and distribute and that would be encompassed by adopted Item 26. Accordingly, we are not adopting rules to require NMS Stock ATSs or national securities exchanges to report quantitative data above what these trading centers are already required to report under current federal securities laws.1064 We also received comments advocating that this rulemaking include amendments to Rule 605 of Regulation NMS.1065 Other commenters recommend enhancing the disclosure requirement of Rule 606 of Regulation NMS.1066 Should we decide to take action with respect to the reporting of additional market quality data under Rule 605, we would do so in a separate rulemaking. Additionally, a separate rulemaking has been proposed to amend Rule 606 by requiring additional disclosures by broker-dealers to customers about the routing of their institutional orders.1067 We are currently considering the proposal and comments received. VI. Amendments to Rule 301(b)(10) and Rule 303(a)(1) for Written Safeguards and Written Procedures To Protect Confidential Trading Information Current Rule 301(b)(10) of Regulation ATS 1068 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.1069 Rule 301(b)(10), however, does not currently require that the safeguards and procedures 1064 See 17 CFR 242.605 and 17 CFR 242.606. 17 CFR 242.605. Rule 605 generally requires a market center that trades NMS stocks to make available to the public monthly electronic execution reports that include uniform statistical measures of execution quality. See HMA Letter at 20; Consumer Federation of America Letter at 7; Markit Letter at 5–6. 1066 17 CFR 242.606. Rule 606 of Regulation NMS requires every broker or dealer to make publicly available for each calendar quarter a report on its routing of non-directed orders in NMS securities during that quarter. See Markit Letter at 6–7; ICI Letter at 8. 1067 See Securities Exchange Act Release No. 78309 (July 13, 2016), 81 FR 49432 (July 27, 2016). 1068 See 17 CFR 242.301(b)(10). 1069 See Regulation ATS Adopting Release, supra note 3, at 70879. 1065 See E:\FR\FM\07AUR2.SGM 07AUR2 38864 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations mandated under Rule 301(b)(10) be memorialized in writing. We proposed to amend Rule 301(b)(10)(i) to require that all ATSs (including both NMS Stock ATSs and non-NMS Stock ATSs) adopt 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 Regulation ATS or any other applicable rules,1070 and implement written standards controlling employees of the ATS trading for their own accounts.1071 In addition, proposed Rule 301(b)(10)(ii) would require that the oversight procedures, which an ATS adopts and implements to ensure that the above safeguards and procedures are followed, be in writing.1072 We received five comments on the proposed amendment to Rule 301(b)(10).1073 Four commenters indicate that they support the requirement that ATSs memorialize safeguards and procedures in writing as proposed.1074 An additional commenter does not object to the Commission’s proposal to require that an ATS’s procedures to protect confidential information be memorialized in writing.1075 We are adopting the amendments to Rule 301(b)(10) as proposed. We continue to believe that safeguards and procedures to ensure the confidential 1070 See Rule 301(b)(10)(i)(A). Rule 301(b)(10)(i)(B). 1072 See Rule 301(b)(10)(ii). 1073 See ICI Letter at 10; MFA/AIMA Letter at 6; HMA Letter at 23; STANY Letter at 2; Liquidnet Letter at 17. See also Investor Advocate Letter at 2. 1074 See ICI Letter at 10; MFA/AIMA Letter at 6; HMA Letter at 23; STANY Letter at 2. 1075 See Liquidnet Letter at 17. In addition, this commenter expresses concern that the requirements of Regulation ATS relating to protection of confidential information could be interpreted in a manner that would be harmful to long-term investors by prohibiting broker-dealers that operate ATSs from providing information to customers that the customers can use to evaluate and enhance their trading performance, such reports of participants’ positive action rates and the positive action rates of the contras with which they match. See id. The commenter is concerned that if Rule 301(b)(10) is interpreted to restrict the distribution of this type of information, this would harm long-term investors. See id. Proposed and adopted amendments to Rule 301(b)(10) to require an ATS to maintain written procedures to protect confidential trading information neither (i) change the standard for what constitutes adequate safeguards and procedures to protect subscribers’ confidential trading information nor (ii) narrow or expand the scope of what is considered to be confidential trading information under that rule. In general, the determination of what constitutes subscribers’ confidential trading information is a facts and circumstances analysis, but it is also outside of the scope of this rulemaking to provide interpretive guidance about the scope of Rule 301(b)(10). daltland on DSKBBV9HB2PROD with RULES2 1071 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 treatment of ATS subscribers’ trading information are important, and that the potential for misuse of such information continues to exist. We also continue to believe 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, will strengthen the effectiveness of the ATS’s safeguards and procedures and will 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.1076 The proposed revisions would aid investors, market participants, and regulators by consolidating written safeguards and procedures into one place for easy review and evaluation.1077 Further, we agree with the comment that asserts that the process of consolidating these safeguards and procedures may facilitate ATS operators’ identification of gaps or opportunities for improvement of these measures.1078 In addition, we believe 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 brokerdealer 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 assist 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. Furthermore, we believe that the amendments we are adopting to Rule 301(b)(1) will benefit market participants because they will be able to better evaluate the implementation of such safeguards and procedures, once they are reduced to writing. We also proposed to amend the record preservation requirements of Rule 303(a)(1) to incorporate the amendments to Rule 301(b)(10).1079 We received no comments on the proposed change to Rule 303(a)(1).1080 We are adopting, as proposed, Rule 303(a)(1)(v), which requires that an ATS, for a period of not less than three years, the first two years 1076 In addition, we are requiring public disclosure related to such safeguards and procedures. See supra Section V.C.6. 1077 See HMA Letter at 23. 1078 See id. 1079 See supra Section V.C.8. 1080 See supra Section III.B.6. PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 in an easily accessible place, 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).1081 VII. EDGAR Filing Requirements; Structured Data Form ATS–N would be filed electronically in a structured format through EDGAR. By filing in EDGAR, NMS Stock ATSs will be given the option of filing using a web-fillable Form ATS–N which will render into XML in EDGAR, or to file directly in XML using the XML schema for NMS Stock ATSs as published on the Commission’s website. With both options, the Commission will receive the Form ATS–N information in XML format. For those NMS Stock ATSs that would prefer to manually key in all of their Form ATS–N responses, as had been originally proposed by us, those NMS Stock ATSs can do so using the Commission’s web-fillable Form ATS– N, which will render into XML in EDGAR. For those NMS Stock ATSs that would prefer to map the information in their existing systems so that filing of Form ATS–N can be more automated and more efficient for them, those NMS Stock ATS can file in XML using the XML schema as published on the Commission’s website. The Commission’s XML schema and the Commission’s web-fillable Form ATS–N both reflect the same set of custom XML tags and XML restrictions designed by the Commission to submit the disclosures in Form ATS–N. As we proposed, all effective Forms ATS–N and all properly filed Form ATS–N amendments will be made publicly available. Because Form ATS– N will be filed in an XML format (either using the Commission’s web-fillable form or as an XML file submitted according to the Commission’s XML schema) in EDGAR, once effective, all Forms ATS–N will be centrally located on EDGAR for the public to access in the same XML format in which the Form ATS–N was received by the Commission. The XML format is a text-searchable format that does not require the use of optical character recognition and will enhance the Commission’s and the public’s abilities to better gather, analyze, aggregate, compare, and use the Form ATS–N data. Requiring XML should result in the Form ATS–N data being provided in a consistent, structured format. XML is an open 1081 See E:\FR\FM\07AUR2.SGM proposed Rule 303(a)(1)(v). 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations standard that defines, or ‘‘tags,’’ data using standard definitions. The tags establish a consistent structure of identity and context. This consistent structure can be automatically recognized and processed by a variety of software applications such as databases, financial reporting systems, and spreadsheets, and then made immediately available to the end user to search, aggregate, compare, and analyze. In addition, XML is an open standard that is maintained by a consensus based market standards organization, rather than the Commission, and undergoes constant review. As updates to XML or industry practice develop, the Commission’s XML schema and webfillable XML architecture may also have to be updated to reflect the updates in technology. If that occurs, the supported version of the XML schema would be made available on the Commission’s website and the outdated version of the schema would be removed in order to maintain data quality and consistency with the standard, while the webfillable Form ATS–N would be updated in EDGAR to reflect the same changes in technology as the Commission’s XML schema. The Commission’s XML schema and architecture for the web-fillable Form ATS–N would also incorporate certain validations to help ensure consistent formatting and completeness among all Forms ATS–N, in other words, to help ensure data quality. Validations are restrictions placed on the formatting for each data element so that comparable data is presented comparably. However, these validations would not be designed to ensure the underlying accuracy of the data. Any Form ATS–N filed in EDGAR would have to comply with validations that are incorporated within the XML schema, otherwise the Form ATS–N will not be accepted by EDGAR. We believe that requiring Form ATS–N be provided in an XML format would provide the Commission and the public with data about NMS Stock ATSs in a format that facilitates search capabilities, and comparative analyses across NMS Stock ATSs and across filings, including more advanced text analytics for the more narrative responses of Form ATS–N. Absent this requirement, users of the Form ATS–N data that wanted to aggregate the data or search across filings or filers would need to spend additional time transferring the data into a consistent format before it could be analyzed, or incur the cost of a service provider that specializes in this data aggregation and comparison process. Further, unrestricted manual entry of data may VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 lead to errors, thereby potentially reducing data quality and usability. We understand that there are costs associated with structuring and that these costs may vary depending on the filer and the type of structuring. By offering two options for filers to submit Form ATS–N in EDGAR, filers will be able to select the method best suited to their situation. Overall, the we believe that the XML format of Form ATS–N will have enhanced benefits for the Commission’s and the public’s use of Form ATS–N while minimizing costs relative to filers having to file Form ATS–N using other structured formats.1082 Requiring the Commission’s XML schema with its incorporated validations (whether submitted as XML or in the web-fillable form) will help ensure that the data that filers submit is complete and appropriately formatted so that additional time will not have to be spent on subsequent Form ATS–N filings to correct for those errors. By comparison, the EFFS system originally proposed does not support the opensource XML format, but rather a proprietary XML implementation called XFDL. As a result, the EFFS system has fewer validation capabilities and cannot test for consistency and completeness as broadly as the XML format, and in particular, at the element level. In addition, as proposed, filers would have been required to individually upload each narrative response as a separate exhibit, whereas the XML format permits filers to provide all their narrative responses in one structured XML file, which will slightly diminish their time spent in filing in the Form ATS–N narrative information. End users will be able to download the consistently structured information directly into databases and analyze it using various software. This would enhance their ability to conduct largescale analysis and immediate crossfiling comparisons of NMS Stock ATSs, as well as comparisons across reporting periods within the same and among different NMS Stock ATSs. Moreover, as an open standard, XML is widely available to the public at no cost. By comparison, viewing information in the current EFFS system requires a license of a commercial proprietary viewer, which currently is not separately available to every member of the public without licensing. Commenters who supported the standardization of Form ATS–N information also underscored the importance of making the information 1082 See PO 00000 infra Section X.D.11. Frm 00099 Fmt 4701 Sfmt 4700 38865 comparable.1083 While the commenters did not make specific reference to the structured format, having the Form ATS–N information submitted using the Commission’s XML schema or the webfillable form will enhance the comparability of the Form ATS–N data by ensuring that the information has been submitted completely and consistently. Two commenters addressed the importance of completeness to Form ATS–N filings.1084 With the Commission’s XML schema, the restrictions incorporated into the schema (and consequently, also reflected in the web-fillable form) will help test for completeness of the data before submission and reduce filer uncertainty on the completeness and consistency of their filing. One commenter recommends that we consider ways to present information that would improve the readability and navigability of disclosure through the use of technology such as hyperlinks and/or XBRL technology.1085 The XML format is a technology format that presents the data consistently, which improves the readability and navigability of the data. In fact, XBRL is an XML-based technology, but, as discussed later, we do not think that XBRL is the appropriate format for this form.1086 While hyperlinks may be useful in some situations to crossreference information, hyperlinks do not by themselves enhance the comparability of the underlying data, but can be incorporated within the XML format, as permitted. Because Form ATS–N filings will be submitted electronically,1087 we are revising Rule 101 of Regulation S–T 1088 to add paragraph (a)(1)(xxi) to the list of mandated electronic submissions. Specifically, paragraph (a)(1)(xvii) adds to this list Form ATS–N. VIII. Effective Date and Compliance Date We did not receive any comments about the effective date for the amendments. The rules being adopted today will become effective 60 days after the date of publication in the Federal Register. With regard to the adopted amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS,1089 we 1083 See Fidelity Letter at 1; Morgan Stanley Letter at 2; SIFMA Letter at 3; UBS Letter at 2–3. 1084 See MFA/AIMA Letter at 4; SIFMA Letter at 32–33. 1085 See Fidelity Letter at 5. 1086 See infra Section X.D.11. 1087 See supra Section V.A.1. 1088 17 CFR 232.101. 1089 See supra Section VI. E:\FR\FM\07AUR2.SGM 07AUR2 38866 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 believe the 60 day effective date provides sufficient time for ATSs to memorialize in writing their safeguards and procedures to protect subscribers’ confidential trading information (to the extent that those safeguards and procedures are not currently maintained in written form). Current Rule 301(b)(10) of Regulation ATS 1090 requires every ATS to have safeguards and 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 Regulation ATS or any other applicable rules,1091 and implement standards controlling employees of the ATS trading for their own accounts.1092 We note that the adopted amendments to Rules 301(b)(10) and 303(a)(1)(v) do not modify that requirement other than to require that those safeguards and procedures be written, pursuant to Rule 301(b)(1) and preserved pursuant to Rule 303(a)(1)(v). Accordingly, we believe that the 60 days after the final rule is published in the Federal Register is reasonable for the amendments to Rules 301(b)(10) and 303(a)(1)(v) to become effective, and for ATSs to comply with those rules. We believe that the compliance dates provided in Rules 304 and 301(b)(2)(viii) provide sufficient time for NMS Stock ATSs to prepare and file Form ATS–N disclosures with the Commission. Rule 304(a)(1)(iv)(A) requires a Legacy NMS Stock ATS to file with the Commission an initial Form ATS–N, in accordance with Rule 304, no earlier than January 7, 2019, and no later than February 8, 2019.1093 Rule 301(b)(2)(viii) provides that a Legacy NMS Stock ATS that is operating pursuant to an initial operation report on Form ATS on file with the Commission as of January 7, 2019 shall be subject to the requirements of Rule 301(b)(2)(i) through (vii) until the Legacy NMS Stock ATS files an initial Form ATS–N with the Commission pursuant to Rule 304(a)(1)(iv)(A).1094 In addition, pursuant to Rule 301(b)(2)(viii), as of January 7, 2019, an entity seeking to operate as a new NMS Stock ATS shall also be subject to Rule 304 and the rules amended in relation.1095 1090 See 17 CFR 242.301(b)(10). Rule 301(b)(10)(i)(A). 1092 See Rule 301(b)(10)(i)(B). 1093 See supra Section IV.A.4.a. See also Rule 304(a)(1)(iv)(A). 1094 See supra Section III.B.4. 1095 See supra Section III.B.4; IV.A.1. See also supra note 291 and accompanying text. 1091 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 IX. Paperwork Reduction Act Certain provisions of the proposal contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).1096 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); and • Rule 304 and Form ATS–N (a new collection of information). In accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11, we submitted these requirements to the Office of Management and Budget (‘‘OMB’’) for review and approval in accordance with the PRA and its implementing regulations.1097 The title for the new collection of information in Rule 304 and Form ATS–N is ‘‘Rule 304 and Form ATS–N.’’ We have applied for a new OMB Control Number for this collection in accordance with 44 U.S.C. 3507(j) and 5 CFR 1320.13. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information requirement unless it displays a currently valid OMB control number. In the Proposal, we solicited comments on the proposed collection of information burdens and asked whether commenters agree with our estimate of the number of respondents and burdens of the Proposal. We received one comment on our estimates of the collection of information burden included in the Proposal, which is addressed below.1098 A. Summary of Collection of Information The amendments to Regulation ATS include two new categories of obligations that require a collection of information within the meaning of the PRA. The first category relates to Rule 301(b)(10) and Rule 303 of Regulation ATS 1099 and applies to all ATSs, while the second category relates to Form ATS–N and applies only to NMS Stock ATSs. 1. Requirements Relating to Rule 301(b)(10) and 303(a)(1) of Regulation ATS The amendments to Regulation ATS will require an ATS to place in writing the safeguards and procedures required by Rule 301(b)(10) to protect subscribers’ confidential trading information and oversight procedures to ensure that the safeguards and procedures are followed. In addition, we are amending Rule 303(a)(1) 1100 of Regulation ATS to require an ATS to preserve at least one copy of written safeguards and written procedures, and written oversight procedures created in the course of complying with Rule 301(b)(10) for a period of not less than three years, the first two years in an easily accessible place.1101 2. Requirements Relating to Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Form ATS–N Any ATS that meets the definition of an NMS Stock ATS is required to complete an initial Form ATS–N, file it with the Commission via EDGAR, and make public via posting on its website a direct URL hyperlink to the Commission’s website that contains the documents enumerated in Rule 304(b)(2).1102 Form ATS–N requires that the entity submitting the filing would indicate whether the NMS Stock ATS currently operates pursuant to a Form ATS, and the type of Form ATS–N filing— whether the Form ATS–N is an initial Form ATS–N, a Form ATS–N amendment (whether a material amendment, updating amendment, correcting amendment, or order display and fair access amendment), a notice of cessation, and if it is a notice of cessation, the date the NMS Stock ATS will cease to operate, or if it is a withdrawal. If the filing is a Form ATS–N amendment, the NMS Stock ATS is also required to provide a brief summary of the amendment and the EDGAR accession number for the Form ATS–N filing to be amended. If the filing is a withdrawal, the NMS Stock ATS is required to provide the EDGAR accession number for the Form ATS–N filing to be withdrawn. Part I requires information about the broker-dealer operator.1103 Part II of Form ATS–N requires an NMS Stock ATS to disclose information about the ATS-related activities of the brokerdealer operator and its affiliates.1104 Part 1100 17 1096 44 U.S.C. 3501 et seq. 1097 44 U.S.C. 3507; 5 CFR 1320.11. 1098 See infra note 1235 and accompanying text. 1099 17 CFR 242.301(b)(10); 17 CFR 242.303. PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 CFR 242.303(a)(1). 1101 Id. 1102 See generally Section IV. Section V.B.2. 1104 See Section V.C. 1103 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations III of Form ATS–N requires an NMS Stock ATS to provide certain information about the manner of operations of the NMS Stock ATS.1105 Part IV of Form ATS–N requires an NMS Stock ATS to provide contact information. In addition, Form ATS–N will require NMS Stock ATSs to file the form electronically via EDGAR with a typed signature.1106 We are also amending Rule 303(a)(2)(ii) to require that an NMS Stock ATS preserve, for the life of the enterprise and of any successor enterprise, copies of reports filed pursuant to Rule 304.1107 Furthermore, an ATS that trades both NMS stocks and non-NMS stocks will 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 will also be required to file two Forms ATS–R filings—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 daltland on DSKBBV9HB2PROD with RULES2 1. Amendments to Rule 301(b)(10) and 303(a)(1) of Regulation ATS We continue to believe that both the Commission and the SRO of which the ATS’s broker-dealer operator is a member will use the written safeguards and written procedures required by the amendments to Rule 301(b)(10) to better understand how each ATS protects subscribers’ confidential trading information from unauthorized disclosure and access. We continue to believe that the information contained in the records required to be preserved by Rule 303(a)(1)(v) will 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. We also believe that the requirement to memorialize in writing the safeguards and procedures to protect subscribers’ confidential trading information will help 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. 1105 See Section V.D. Section V.A.1. 1107 See Rule 303(a)(2)(ii). 1106 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 2. Rules 301(b)(2)(viii), 304 of Regulation ATS, Including Form ATS–N, and 301(b)(9) We believe that market participants will use the information publicly disclosed on Form ATS–N to compare and evaluate NMS Stock ATSs when making their routing decisions.1108 In addition, we believe we will use the information disclosed on Form ATS–N, Form ATS, and Form ATS–R to oversee the growth and development of NMS Stock ATSs.1109 We believe that the information contained in the records required to be preserved by the amendment to Rule 303(a)(2)(ii) will 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 amendments to Regulation ATS relating to Rule 301(b)(10) and Rule 303(a)(1)(v) would apply to all ATSs, including NMS Stock ATSs. The ‘‘collection of information’’ requirements under the amendments to Regulation ATS relating to Rule 304, Form ATS–N, and the amendments to Rule 303(a)(2)(ii) would apply only to NMS Stock ATSs, and the ‘‘collection of information’’ requirements under the amendments to Rule 301(b)(9) would apply to NMS Stock ATSs that also transact in both NMS stocks and nonNMS stocks. Currently, there are 87 ATSs that have filed Form ATS with us. Of these 87 ATSs, 41 would meet the definition of an NMS Stock ATS.1110 Accordingly, the we estimate that 87 entities would be required to comply with the amendments related to Rule 301(b)(10) of Regulation ATS and 41 entities would be required to complete Form ATS–N.1111 1108 See supra Section III.A.1.a. id. 1110 As of March 31, 2018, 41 ATS have disclosed on their Form ATS that they trade or expect to trade NMS stock. 1111 We recognize 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 January 2014 through the first half of 2017, an average of 12 Form ATS initial operation reports were filed each year with us. Similarly, some ATSs may cease operations in the normal course of business or possibly in response to the proposed amendments to Regulation ATS. From January 2014 through the March 31, 2018, an average of 9 ATSs, including those that trade NMS stocks have ceased operations. For the purposes of this paperwork burden analysis, we assume that 87 respondents would be required to comply with the proposed amendments to Rule 301(b)(10), if adopted. We are 1109 See PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 38867 In addition, there are currently 10 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.1112 Under the amendments to Regulation ATS, these 10 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, these 10 ATSs would have to amend their Forms ATS to remove information regarding operations 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.1113 With respect to Form ATS–N, we recognize there may be entities that might file a Form ATS–N to operate an NMS Stock ATS in the future. From January 2014 through March 2018, an average of 2 new ATSs per year disclose that they trade or expect to trade NMS stocks on their Form ATS initial operation reports, and would therefore fall within the definition of an NMS Stock ATS. Similarly, some ATSs that currently trade NMS stocks may choose to cease operations rather than comply with the amendments requiring them to file Form ATS–N. Other ATSs may choose to cease operations in the normal course of business. From January 2014 through March 2018, an average of 9 ATSs that trade NMS stocks have ceased operations each year.1114 We believe that most ATSs that currently trade NMS stocks would continue to operate notwithstanding the amendments to Regulation ATS. For the purposes of this analysis of the paperwork burden associated with the amendments to Regulation ATS, we assume that there will be 41 respondents. This number assumes that most ATSs that currently trade NMS 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. 1112 Data compiled from Forms ATS and ATS–R submitted to us as of March 31, 2018. These 10 ATSs are included within the 41 NMS Stock ATSs. 1113 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. An ATS that trades both NMS stocks and non-NMS stocks 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. 1114 In the Proposal, we cited the average number of new ATSs and ATSs that ceased operations from 2012 through the first half of 2015, which were 2 and 6, respectively. See Proposal, supra note 2, at 81092. E:\FR\FM\07AUR2.SGM 07AUR2 38868 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations stocks would file a Form ATS–N with the Commission. We acknowledge that some ATSs may cease operations altogether and other entities that may commence operations as an NMS Stock ATS. Based on the current number of initial operation reports and cessation of operations reports on current Form ATS for ATSs that trade NMS stocks described above, we estimate that 2 to 3 new entities will file initial Form ATS–N to become an NMS Stock ATS and 7 to 9 NMS Stock ATSs will cease operations in each of the next three years. D. Total Initial and Annual Reporting and Recordkeeping Burdens 1. Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS a. Baseline Measurements We believe 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.1115 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, we estimate that the average annual burden they voluntarily undertake to update and preserve those written safeguards and written procedures is 4 hours.1116 Because neither current Rule 301(b)(10) 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 303.1117 In accordance with the below analysis, we are 1115 See infra Section VI. 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. 1117 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’’). daltland on DSKBBV9HB2PROD with RULES2 1116 Attorney VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 modifying the current PRA burdens for Rules 301 and 303 to account for the new requirement that ATSs have and preserve in written format the safeguards and procedures to protect subscribers’ confidential trading information.1118 b. Burdens We recognize that 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, we believe that there will be no increased burden under the amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS. We believe that the current practices of those ATSs would already be in compliance with the rules and the amendments should not require these ATSs to take any 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). In the Proposal, we estimated 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 8 hours.1119 We did not receive any comment on the preliminary estimates. 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, we believe that recording these items in a written format would not impose a substantial burden on ATSs and would rely on internal staff to record the ATS’s Rule 301(b)(10) procedures in writing. Therefore, we estimate 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,1120 1118 See infra note 1125 and accompanying text. Proposal, supra note 2, at 81094. 1120 Attorney at 7 hours + Compliance Clerk at 1 hour = 8 burden hours. 1119 See PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 but we estimate that the burden could range between 5 and 10 hours.1121 We estimate that, of the 87 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.1122 Accordingly, we estimate that the aggregate initial, one-time burden on all ATSs would be 120 hours based on our highest approximation of the additional burden per ATS.1123 We estimate 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.1124 As a result, we estimate that the total aggregate, ongoing burden per year for all ATSs would be 348 hours,1125 and thus, we are modifying the current PRA burden estimates for Rules 301 and 303 to account for this increased burden on ATSs. 2. Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Form ATS–N a. Baseline Measurements Currently, Rule 301(b)(2)(i) of Regulation ATS 1126 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 1127 requires an ATS to file amendments to its current Form ATS at least 20 1121 Attorney at 4–9 hours + Compliance Clerk at 1 hour = 5–10 burden hours. 1122 It is likely that most, if not all, ATSs already 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. 1123 (Attorney at 7 hours + Compliance Clerk at 1 hour) x (15 ATSs) = 120 burden hours. 1124 See supra note 1116 and accompanying text. 1125 (Attorney at 2 hours + Compliance Clerk at 2 hours) × 87 ATSs = 348 burden hours. 1126 17 CFR 242.301(b)(2)(i). 1127 17 CFR 242.301(b)(2)(ii). E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations calendar days prior to implementing a material change to its operations. Rule 301(b)(2)(iii) of Regulation ATS 1128 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.1129 Regarding shutting down an ATS, Rule 301(b)(2)(v) of Regulation ATS 1130 requires an ATS to promptly file a cessation of operation report on current Form ATS upon ceasing operations as an ATS. Our 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.1131 With respect to Form ATS amendments, we understand, 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.1132 The frequency and scope of Form ATS amendments vary depending on whether the ATS is implementing a material change or an updating change. Some ATSs may not change how 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. Our currently approved estimated average compliance burden for each amendment to Form ATS is approximately 6 hours.1133 Accordingly, the estimated average annual ongoing burden of updating and amending Form ATS is approximately 12 hours per NMS Stock ATS.1134 With respect to ceasing operations, the currently approved average estimated compliance burden for an ATS to complete a notice of cessation is 2 hours to check the appropriate box on Form ATS and send the notice of cessation to the 1128 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). 1130 17 CFR 242.301(b)(2)(v). 1131 Attorney at 13 hours + Compliance Clerk at 7 hours = 20 burden hours. See Rule 301 PRA Update, supra note 1117, 79 FR 6237. 1132 See id. 1133 Attorney at 4.5 hours + Compliance Clerk at 1.5 hours = 6 burden hours. See id. 1134 2 Form ATS amendments filed annually × 6 burden hours per Form ATS amendment = 12 burden hours per ATS. daltland on DSKBBV9HB2PROD with RULES2 1129 In VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Commission.1135 Our currently approved estimate for the average compliance burden for each Form ATS–R filing is 4 hours.1136 b. Burdens We recognize that Rules 301(b)(2)(viii) and 304 of Regulation ATS, including Form ATS–N, would impose certain burdens on respondents.1137 Although many of the disclosures required by Form ATS–N are currently required by Form ATS, Form ATS–N requires an NMS Stock ATS to provide significantly more detail in those disclosures than currently required by Form ATS. Form ATS–N also requires additional disclosures not currently mandated by current Form ATS such as those contained in Part II of adopted Form ATS–N. Under the amendments to Regulation ATS, NMS Stock ATSs will be required to complete and file the enhanced and additional disclosures on Form ATS–N.1138 Section IX.D.2.b.i below provides the estimated burden above the current Form ATS baseline of each item of Form ATS–N. Many of the disclosure items on Form ATS–N are already required disclosures by respondents in whole or in part on current Form ATS, while other disclosure items on Form ATS–N are novel (i.e., current Form ATS does not require some form of the disclosure). Section IX.D.2.b.ii aggregates these new burdens and the additional burdens above the current Form ATS baseline that will be imposed by Form ATS–N. (i) Analysis of Estimated Additional Burden for Form ATS–N (a) Part I In the Proposal, we estimated that preparing Parts I and II for a Form ATS–N would add 0.5 hours to the current baseline for an NMS Stock ATS to prepare an initial operation report on current Form ATS.1139 Part I of adopted Form ATS–N contains substantially the same information as Parts I and II of 1135 Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 2 burden hours. See PRA Update, supra note 1117, 79 FR 6237. 1136 Attorney at 3 hours + Compliance Clerk at 1 hour = 4 burden hours. See id. 1137 In establishing the estimates below with respect to Form ATS–N, we have considered its estimate of the burden for an SRO to amend a Form 19b–4. Specifically, we 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, 60294 (October 8, 2004). 1138 These disclosures will be provided on Form ATS–N and may have to be amended periodically as provided in proposed Rule 304. 1139 See Proposal, supra note 2, at 81095. PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 38869 proposed Form ATS–N. However, adopted Form ATS–N does not include several proposed disclosure requirements and contains several new requests. Overall, we estimate that the burden for Part I of adopted Form ATS– N will be the same as that which was estimated for proposed Form ATS–N. Accordingly, we estimate that Part I of adopted Form ATS–N will add an additional 0.5 hours above the baseline of current Form ATS. (b) Part II As explained above, Part II, Items 1 and 2 contain disclosure requests about the broker-dealer operator’s and affiliates’, respectively, trading activity on the NMS Stock ATS. For Part II, Item 1(a), to the extent that the broker-dealer operator is not permitted to enter or direct orders and trading interest to the NMS Stock ATS, the NMS Stock ATS would only be required to check ‘‘no.’’ In addition, to the extent the brokerdealer operator enters or directs the entry of orders and trading interest into the NMS Stock ATS, but such orders and trading interest is treated the same as trading interest from other subscribers and persons, Part II, Item 1(b) would require that the NMS Stock ATS check ‘‘no.’’ Part II, Item 1(a) of adopted Form ATS–N incorporates aspects of several proposed disclosures that addressed the activity of the broker-dealer operator’s trading activity on the NMS Stock ATS. First, Part II, Item 1(a) of adopted Form ATS–N incorporates requirements of Part III, Items 1 and 2 of proposed Form ATS–N, which would have requested disclosures about the non-ATS trading centers and other NMS Stock ATSs operated by the broker-dealer operator and its affiliates. In the Proposal, we estimated that preparing Part III, Item 1 for proposed Form ATS–N would add 10 hours to the current baseline of Form ATS and Part III, Item 2 would add 4 hours to the current baseline of Form ATS, for a total estimated burden of 14 hours for Part III, Items 1 and 2. Adopted Part II, Item 1(a) more narrowly tailors those proposed requests by focusing on the actual trading activities of the broker-dealer operator on the NMS Stock ATS and its use of the ATS’s services. Primarily, the request under adopted Item 1(a): (i) Does not require an NMS Stock ATS to list all non-ATS trading centers and NMS Stock ATSs operated by the broker-dealer operator, regardless of whether those entities trade on the NMS Stock ATS; and (ii) replaces what some commenters perceived as potentially broad narrative requests to describe the ‘‘interaction and coordination’’ between E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38870 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations the NMS Stock ATS and those non-ATS trading centers and other NMS Stock ATSs. Instead, the NMS Stock ATS is now required to name and describe each type of business unit of the brokerdealer operator that enters or directs the entry of orders and trading interest into the NMS Stock ATS, and we have replaced the term ‘‘interaction and coordination’’ with specific, enumerated data points and narratives that the NMS Stock ATS must provide. Furthermore, the corresponding affiliate disclosures for Part III, Items 1 and 2 of proposed Form ATS–N are now encompassed by Part II, Item 2(a) of adopted Form ATS– N, so Part II, Item 1(a) of adopted Form ATS–N will not impose the entire burden that was estimated for proposed Part III, Items 1 and 2. It will impose the burden from those proposed items that would have been imposed by the disclosure requirements related to the broker-dealer operator itself, which we believe is a small fraction of the proposed estimate relevant to the requirements related to affiliates of the broker-dealer operator. Accordingly, out of the 14-hour estimate for proposed Part III, Items 1 and 2, we estimate that Part II, Item 1(a) of adopted Form ATS–N would add approximately 2.75 hours to the baseline estimate to complete an initial operation report on Form ATS. Second, the request under Part II, Items 1(a) of adopted Form ATS–N also incorporates aspects of the disclosures proposed under Part III, Item 5(a) of proposed Form ATS–N. We estimated that preparing proposed Part III, Item 5(a) would add 5 hours to the current baseline.1140 While we did not provide estimates for each individual subpart of Part III, Item 5 of proposed Form ATS– N, the aspects of Part III, Item 5 that are incorporated into Part II, Item 1(a) of adopted Form ATS–N (i.e., information about the broker-dealer operator’s trading activity on the ATS, other than the information covered by proposed Item 5(d)) accounted for approximately 1.5 hours of the 5 hour estimate. We believe that the aspects of proposed Part III, Item 5 that are incorporated into Part II, Item 1(a) of adopted Form ATS–N would still add approximately 1.5 hours to the baseline for an initial operation report on current Form ATS.1141 Adopted Form ATS–N requires the NMS Stock ATS to identify business units of the broker-dealer operator that enter or direct the entry of orders, 1140 See Proposal, supra note 2, at 81097. estimated burden hours for proposed Part III, Item 5(a) related to affiliate trading on the ATS are now allocated to Part II, Item 2(a) of adopted Form ATS–N. 1141 The VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 whereas proposed Form ATS–N would have required the NMS Stock ATS to identity all business units that may enter orders or other trading interest. However, we believe that it would impose approximately the same burden for the broker-dealer operator to compile both lists because both would involve the collection of information about internal units of the broker-dealer operator.1142 Accordingly, we estimate that the adopted requests under Part II, Item 1(a) would add a total of approximately 4.25 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 174.25 hours above the baseline for all NMS Stock ATSs to complete Part II, Items 1(a) and (b) of Form ATS–N.1143 The information sought under Part II, Item 1(b) of adopted Form ATS–N would have been requested under Part III, Item 9 of proposed Form ATS–N. We estimated that completing Part III, Item 9 of proposed Form ATS–N would add 2 hours to the current baseline of Form ATS.1144 In most cases, Part II, Item 1(b) of adopted Form ATS–N will require the NMS Stock ATS to answer ‘‘yes’’ or ‘‘no’’ and list applicable item numbers in Part III of adopted Form ATS–N. An NMS Stock ATS will need to provide a narrative under Item 1(b) only if there are differences that are not applicable to Part III. But we believe that the subject matter covered by Part III is very comprehensive, and therefore, we do not believe that an NMS Stock ATS typically will need to provide additional narratives about differences in treatment that are not otherwise covered by Part III. Accordingly, we estimate that Part II, Item 1(b) of adopted Form ATS–N would add 0.25 hours out of the proposed 2-hour estimate for Part III, Item 9 to the current baseline for an initial operation report on Form ATS because in most instances, the NMS Stock ATS will be required to check the ‘‘yes’’ or ‘‘no’’ box and provide a list of relevant requests in Part III. This would result in an aggregate initial burden of 10.25 hours above the baseline for all NMS Stock ATSs to complete Part II, Item 1(b) of Form ATS–N.1145 Similarly, Part II, Items 1(c) and 1(d) of adopted Form ATS–N include 1142 As noted below with regard to Part II, Item 2(a) of adopted Form ATS–N, however, the analogous change in scope for affiliate trading activity on the NMS Stock ATS will reduce the burden on NMS Stock ATSs relative to that which was proposed. 1143 (Attorney at 3.75 + Compliance Manager at 0.5) × 41 NMS Stock ATSs = 174.25 burden hours. 1144 See Proposal, supra note 2, at 81098. 1145 Attorney at 0.25 hours × 41 NMS Stock ATSs = 10.25 burden hours. PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 requests for information that are intended to highlight disclosures about conflicts of interests and potential information leakage in Part III, Items 12 and 16, respectively, of adopted Form ATS–N. Part IV, Item 1(d) of proposed Form ATS–N set forth the proposed disclosure requirements regarding liquidity providers on the NMS Stock ATS. This request for information is now set forth in Part III, Item 12 of adopted Form ATS–N. In Part II, Item 1(c) of adopted Form ATS–N, we have now added the additional disclosure requirements for the NMS Stock ATS to answer a ‘‘yes’’ or ‘‘no’’ question and provide a list of any internal business units that trade on the NMS Stock ATS as liquidity providers in order to highlight information about potential conflicts of interest that might be disclosed in Part III, Item 12 of adopted Form ATS–N. We therefore estimate that, on average, preparing Part II, Item 1(c) for a Form ATS–N would add 1 hour to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 41 hours above the baseline for all NMS Stock ATSs to complete Part II, Item 1(c) of Form ATS–N.1146 Part III, Items 1(b)(iii) and 2(b)(iii) of proposed Form ATS–N would have required the NMS Stock ATS to explain the circumstances under which subscriber orders or trading interest received by the NMS Stock ATS may be removed from the NMS Stock ATS and sent to non-ATS trading centers or other NMS Stock ATSs operated or controlled by the broker-dealer operator, respectively. These disclosures are now incorporated into Part III, Item 16 of adopted Form ATS–N. However, we believe that information about the routing or removal of orders from the NMS Stock ATS to a trading center operated or controlled by the brokerdealer operator may include information that market participants find necessary to evaluate potential conflicts of interest or information leakage on the NMS Stock ATS, so we have added Part II, Item 1(d) to Part II of adopted Form ATS–N. Part II, Item 1(d) of adopted Form ATS–N requires the NMS Stock ATS to answer a ‘‘yes’’ or ‘‘no’’ question. The narrative associated with this disclosure will be set forth in Part III, Item 16. We therefore estimate that, on average, preparing Part II, Item 1(d) for a Form ATS–N would add 0.5 hour to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial 1146 Compliance Manager at 1.0 hours × 41 NMS Stock ATSs = 41 burden hours. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations burden of 20.5 hours above the baseline for all NMS Stock ATSs to complete Part II, Item 1(d) of Form ATS–N.1147 The requests under Part II, Item 2 of adopted Form ATS–N mirror those of Part II, Item 2 of adopted Form ATS–N, except that the former requires disclosures about the trading activity of the broker-dealer operator and the latter require disclosures about the trading activities of affiliates.1148 As with Item 1, to the extent no affiliate of the brokerdealer operator can enter or direct the entry of orders and trading interest into the NMS Stock ATS, the NMS Stock ATS would be required to check ‘‘no’’ under Part II, Item 2(a). In addition, to the extent that there are no differences between treatment of affiliates that can enter or direct the entry of orders and trading interest into the ATS and other subscribers and persons regarding services offered and provided by the NMS Stock ATS, the NMS Stock ATS would \ be required to check ‘‘no’’ under Part II, Item 2(b). Likewise, as with Part II, Item 1(a) of adopted Form ATS–N, the disclosure requests in Part II, Item 2(a) of adopted Form ATS–N are more narrowly tailored than those which were proposed, and the disclosure requests about trading activities of the broker-dealer operator are no longer contained in the same questions as those regarding affiliate trading in adopted Form ATS–N. Most significantly, we believe that the burden for an NMS Stocks ATS to provide information about each of its brokerdealer operator’s affiliates that trades on the NMS Stock ATS will be less than it would have been to provide: (i) A comprehensive list of all non-ATS trading centers and NMS Stock ATSs operated by affiliates, as was proposed under Part III, Items 1 and 2, respectively; and (ii) a list of each affiliate that may enter orders or other trading interest on the NMS Stock ATS, as was proposed under Part III, Item 5(a). Under their current disclosure requirements pursuant to Regulation ATS, ATSs must compile a list of subscribers that were participants on the ATS for its quarterly reports on current Form ATS–R.1149 On the other hand, there is no current requirement for an ATS to maintain a list of its brokerdealer operator’s affiliates’ non-ATS trading centers or NMS Stock ATSs, as was proposed. To the extent that an NMS Stock ATS must dedicate resources to determine whether any of its affiliates direct the entry of orders or Manager at 0.5 hours × 41 NMS Stock ATSs = 20.5 burden hours. 1148 See supra Section V.C.1. 1149 See Exhibit A of Form ATS–R. 1147 Compliance VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 trading interest into the ATS through a third-party broker-dealer in order to be responsive to Part II, Item 2(a) of adopted Form ATS–N, we believe that burden will also be less than it would have been to compile—and keep up-todate—a list of all non-ATS trading centers and NMS Stock ATSs operated by its affiliates. Additionally, the burden to complete Item 2(a) will likely vary significantly among NMS Stock ATSs because the number of affiliates of each brokerdealer operator—and the number of those affiliates that trade on the NMS Stock ATS—may vary significantly among ATSs. However, even though the wording of the disclosure requests are almost identical, Part II, Item 2(a) of adopted Form ATS–N will likely impose a greater burden than that of Part II, Item 1(a) because we believe it will take an NMS Stock ATS longer to compile the necessary information about affiliated third-party entities than it will to compile that information for internal business units of the brokerdealer operator. Accordingly, we estimate that, on average, preparing adopted Part II, Item 2(a) would add approximately 6.25 hours to the current baseline for an initial operation report on current Form ATS. This will result in an aggregate initial burden of 256.25 hours above the baseline for all NMS Stock ATSs to complete Part II, Item 2(a) of Form ATS–N.1150 Like Part II, Item 1(b) of adopted Form ATS–N, the disclosure request in Part II, Item 2(b) will usually require the NMS Stock ATS to answer ‘‘yes’’ or ‘‘no’’ and list applicable item numbers in Part III of adopted Form ATS–N. An NMS Stock ATS must provide a narrative under Item 2(b) only if there are differences that are not applicable to Part III. Accordingly, we estimate that Part II, Item 2(b) of adopted Form ATS–N would add .25 hours out of the proposed 2 hours for Part III, Item 9 to the current baseline for an initial operation report on Form ATS because in most instances, the NMS Stock ATS will be required to check the ‘‘yes’’ or ‘‘no’’ box and provide a list of relevant requests in Part III. This would result in an aggregate initial burden of 10.25 hours above the baseline for all NMS Stock ATSs to complete Part II, Item 1(b) of Form ATS–N.1151 Furthermore, as is the case with Part II, Item 1 of adopted Form ATS–N, Part II, Items 2(c) and 2(d) of adopted Form 1150 (Attorney at 5.75 hours + Compliance Manager at 0.5 hours) × 41 NMS Stock ATSs = 256.25 burden hours. 1151 Attorney at 0.25 hours × 41 NMS Stock ATSs = 10.25 burden hours. PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 38871 ATS–N includes requests for information that are intended to highlight potential conflicts of interests and information leakage that will be disclosed in Part III, Items 12 and 16, respectively, of adopted Form ATS–N. Accordingly, similar to Part II, Item 1(c), we estimate that, on average, preparing Part II, Item 2(c) for a Form ATS–N would add 1 hour to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 41 hours above the baseline for all NMS Stock ATSs to complete Part II, Item 1(c) of Form ATS–N.1152 Similar to Part II, Item 1(d), we estimate that, on average, preparing Part II, Item 2(d) for a Form ATS–N would add 0.5 hour to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 20.5 hours above the baseline for all NMS Stock ATSs to complete Part II, Item 2(d) of Form ATS–N.1153 As explained above, Part II, Item 3 of adopted Form ATS–N contains disclosure requests about order interaction with the broker-dealer operator and its affiliates. To the extent that the NMS Stock ATS does not allow subscribers to opt out of interacting with the broker-dealer operator, the NMS Stock ATS must check ‘‘no’’ to Part II, Item 3(a). Similarly, to the extent that the NMS Stock ATS does not allow subscribers to opt out of interacting with the broker-dealer operator, the NMS Stock ATS must check ‘‘no’’ to Part II, Item 3(b). In addition, to the extent that the terms and conditions of the opt out processes are the same for all subscribers, the NMS Stock ATS must check ‘‘no’’ to Part II, Item 3(c). The requirements under Part II, Items 3(a) and (b) of adopted Form ATS–N are intended to cover the subject matter originally proposed under Part III, Item 5(d) of proposed Form ATS–N.1154 In the Proposal, we estimated that all of the items of Part III, Item 5 of proposed Form ATS–N would add 5 hours to the current baseline for an initial operation report on current Form ATS.1155 While we did not provide estimates for each individual subpart of Part III, Item 5 of proposed Form ATS–N, subpart (d) of Part III, Item 5 of proposed Form ATS–N accounted for approximately 1 hour of the 5 hour estimate. We believe that the requests under Part II, Items 3(a) 1152 (Compliance Manager at 1.0 hours) × 41 NMS Stock ATSs = 41 burden hours. 1153 (Compliance Manager at 0.5 hours) × 41 NMS Stock ATSs = 20.5 burden hours. 1154 Other requirements of Part III, Item 5 of proposed Form ATS–N are incorporated in adopted Part II, Item 1. 1155 See Proposal, supra note 2, at 81097. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38872 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations and (b) would still add approximately 1 hour to the baseline for an initial operation report on current Form ATS. As described in the Proposal, the broker-dealer operator should already know whether subscribers can opt out of interacting with the orders and trading interests of the broker-dealer operator and its affiliates.1156 In addition, we have incorporated the disclosure request from Part III, Item 9 regarding differentiated and preferential treatment into the disclosure request under Part II, Item 3(c) of adopted Form ATS–N. We estimate that Item 3(c) would add approximately .5 hours out of the proposed 2 hours for Part III, Item 9 to the baseline for an initial operation report on Form ATS. To the extent there are such differences, the NMS Stock ATS would be required to provide a narrative under Part II, Item 3(c) regarding services or functionalities of the NMS Stock ATS in addition to the narratives about manner of operations required under Part III. Accordingly, we estimate that, on average, preparing Part II, Item 3 for adopted Form ATS–N would add 1.5 hours to the baseline for an initial operation report on current Form ATS. This will result in an aggregate initial burden of 61.5 hours above the baseline for all NMS Stock ATSs to complete Part II, Item 3 of adopted Form ATS–N.1157 As explained above, Part II, Item 4 of adopted Form ATS–N contains disclosure requests about arrangements with other trading centers. In the Proposal, we estimated that the requirements of Part III, Item 4 of proposed Form ATS–N—which set forth the proposed requests regarding arrangements with unaffiliated trading centers—would add 4 hours to the current baseline for an initial operation report on current Form ATS.1158 We have revised the proposed disclosure to clarify the scope of requested information and to add a requirement to disclose any arrangements with affiliated trading centers.1159 As we stated in the Proposal, depending on the extent to which the broker-dealer operator or any affiliate of the brokerdealer operator has any formal or informal arrangement with a trading center to access the services of the NMS Stock, the hourly burden related to completing Part II, Item 4 would likely vary.1160 While the scope of Part III, Item 4 of proposed Form ATS–N only 1156 See id. at 81096. at 1 hours + Compliance Manager at 0.5 hours) × 41 NMS Stock ATSs = 61.5 burden hours. 1158 See Proposal, supra note 2, at 81096. 1159 See supra Section V.C.3. 1160 See Proposal, supra note 2, at 81096. encompassed arrangements with unaffiliated trading centers, Part II, Item 4 of adopted Form ATS–N encompasses arrangements with both unaffiliated and affiliated trading centers. However, we still believe that the hourly burden for the adopted disclosure request will vary depending on the extent to which a broker-dealer operator enters into arrangements with its affiliates and on the number of the broker-dealer operator’s affiliates. We therefore, estimate that, on average and consistent with the proposed disclosure requirement, preparing Part II, Item 4 for a Form ATS–N would still add approximately 4 hours, on average, to the current baseline for an initial operation report on current Form ATS. This results in an aggregate initial burden of 164 hours above the current baseline for all NMS Stock ATSs to complete Part II, Item 4 of adopted Form ATS–N.1161 As explained above, Part II, Item 5 of adopted Form ATS–N contains disclosure requests about other products or services. To the extent that that the broker-dealer operator or any of its affiliates does not offer subscribers any products or services for the purpose of effecting transactions or for submitting, disseminating, or displaying orders and trading interest in the NMS Stock ATS, the NMS Stock ATS would need to check ‘‘no’’ on Part II, Items 5(a) and 5(b) and Items 5(c) and 5(d), respectively. Part II, Item 5 of adopted Form ATS–N adopts, with modifications, the disclosure requests in Part III, Item 3 of proposed Form ATS–N, which would have required an NMS Stock ATS to disclose whether the broker-dealer operator, or any of its affiliates, offers subscribers any products or services used in connection with trading on the NMS Stock ATS (e.g., algorithmic trading products, market data feeds). In the Proposal, we estimated that it would take an average of 3 hours for an NMS Stock ATS to disclose this information.1162 As noted in the Proposal, we believe that depending on the extent to which the broker-dealer operator or any of its affiliates offers subscribers or persons any products or services for the purpose of effecting transactions or for submitting, disseminating, or displaying orders and trading interest in the NMS Stock ATS, the hourly burden related to completing Part II, Item 5 would likely vary.1163 We have modified the proposed disclosures to require a summary of the terms and conditions for use and a cross-reference to the applicable Item number(s) in Part III of adopted Form ATS–N where the use of the product or service is explained. Only if there is no applicable Item in Part III would the NMS Stock ATS be required to include a narrative of the use of the product or service with the ATS under Part II, Item 5. While we have revised the wording of the adopted disclosure request to reduce the potential of NMS Stock ATSs unnecessarily disclosing commercially sensitive information,1164 we do not believe that the estimated burden of the proposed disclosure request should change. It was not our intent to require NMS Stock ATSs to provide granular details that might constitute commercially sensitive information in response to the proposed disclosure requests. We therefore, estimate that, on average and consistent with the estimate in the Proposal, preparing Part II, Item 5 for a Form ATS–N would add 3 hour to the current baseline for an initial operation report on current Form ATS. This results in an aggregate initial burden of 123 hours above the current baseline for all NMS Stock ATSs to complete Part II, Item 5 of Form ATS– N.1165 As explained above, Part II, Item 6 of adopted Form ATS–N contains disclosure requests about the activities of service providers. Part II, Item 6(a) is similar to the request contained in Part III, Item 7 of proposed Form ATS–N, and Part II, Items 6(b) and (c) of adopted Form ATS–N are similar to the requests in Part III, Item 8 of proposed Form ATS–N. In the Proposal, we estimated that, on average, preparing Part III, Item 7 of proposed Form ATS–N would add 4 hours to the current baseline for an initial operation report on current Form ATS.1166 Part II, Item 6(a) of adopted Form ATS–N asks for information about shared employees like proposed Part III, Item 7, but does not require the NMS Stock ATS to disclose the identity and titles of such employees, as was proposed. In addition, Part II, Item 6(a) requires a summary of such information, which results in a reduced filing burden relative to that which was proposed. Part III, Item 8 of proposed Form ATS–N would have required an NMS Stock ATS to disclose information about whether any operation, service, or function of the NMS Stock ATS is 1157 (Attorney VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 1161 (Compliance Manager at 3 hours + Senior Marketing Manager at 1 hour) × 164 NMS Stock ATSs = 164 burden hours. 1162 See Proposal, supra note 2, at 81096. 1163 See id. PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 1164 See supra Section V.C.4. Manager at 2 hours + Senior Marketing Manager at 1 hour) × 41 NMS Stock ATSs = 123 burden hours. 1166 See Proposal, supra note 2, at 81097. 1165 (Compliance E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations performed by any person(s) other than the broker-dealer operator of the NMS Stock ATS. We had estimated that, on average, preparing Part III, Item 8 for proposed Form ATS–N would add 3 hours to the current baseline for an initial operation report on current Form ATS.1167 Like Part II, Item 6(a), Part II, Item 6(b) of adopted Form ATS–N only requires a summary of the role and responsibilities of service providers to the ATS. As with Part II, Item 6(a) of adopted Form ATS–N, we estimate that only requiring a summary narrative for the service provider request in adopted Form ATS–N would result in a reduced filing burden relative to that which was proposed. Additionally, Item 6(c) requires the NMS Stock ATS to identify service providers and their affiliates that use the services of the ATS and list the services used; Part III, Item 8(c) of proposed Form ATS–N would have required the NMS Stock ATS to describe the circumstances and means by which service providers enter orders or trading interest on the ATS. Due to the reduced filing burden of adopted Part II, Items 6(a)–(c) relative that which was proposed, we estimate that, on average, Part II, Items 6(a)–(c) of adopted Form ATS–N would add 4.5 hours to the current baseline for an initial operating report on Form ATS. Furthermore, as with Part II, Items 1, 2, and 3 of adopted Form ATS–N, we have incorporated aspects of Part III, Item 9 of proposed Form ATS–N regarding differentiated and preferential treatment into Part II, Item 6(d) of adopted Form ATS–N.1168 We estimate that Item 3(c) would add approximately .5 hours out of the proposed 2-hour burden estimate for Part III, Item 9 to the current baseline for an initial operation report on current Form ATS because the NMS Stock ATS would be required to provide a narrative in Item 6(d) in additional to narratives about the manner of operations under Part III of adopted Form ATS–N. Accordingly, we estimate that on average, Part II, Item 6 of adopted Form ATS–N will add approximately 5 hours to the burden for an initial operation report on current Form ATS. This results in an aggregate initial burden of 205 hours above the current baseline for all NMS Stock ATSs to complete Part II, Item 6 of Form ATS– N.1169 As explained above, Part II, Item 7 of adopted Form ATS–N contains disclosure requests about the NMS 1167 See id. requirements of Part III, Item 5 of proposed Form ATS–N are incorporated in adopted Part II, Item 1. 1169 (Attorney at 3 hours + Compliance Manager at 2 hours) × 41 NMS Stock ATSs = 205. 1168 Other VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Stock ATS’s protection of confidential subscriber trading information. Part II, Item 7 of adopted Form ATS–N is similar to Part III, Item 10 of proposed Form ATS–N, which would have required 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.1170 As previously discussed, NMS Stock ATSs will now be required to have and maintain written policies and procedures under Rule 301(b)(10) of Regulation ATS.1171 Part II, Item 7(a) of adopted Form ATS– N requires a description of these policies and procedures, and the request in Item 7(a) will contain the information requested in Part III, Items 10(c) and (d) of proposed Form ATS–N. Part II, Item 7(b)–(c) of adopted Form ATS–N requests the same information as Part III, Item 10(a) of proposed Form ATS–N. Lastly, Part II, Item 7(d) is similar to Part III, Item 10(b) of proposed Form ATS–N, but the adopted request only requires a summary of roles and responsibilities, rather than identification of the positions or titles of all persons that have access to confidential trading information and a description of the circumstances of such access as was proposed. We continue to believe 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 such, we believe that this change to proposed Part II, Item 10(b) of adopted Form ATS–N does not increase the proposed burden estimate. Rather, because the adopted request in Part II, Item 7(d) reduces the level of detail from that which was proposed and the other requests from proposed Part III, Item 10 are unchanged in adopted Form ATS–N, we estimate that the burden for Part II, Item 7 of adopted Form ATS–N 1170 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. 1171 See supra Section VI. PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 38873 is less than that which was proposed by 0.5 hours. In the Proposal, we estimated that Part III, Item 10 would add 2 hours to the baseline for an NMS Stock ATS to complete this item.1172 Accordingly, we estimate that, on average, preparing Part II, Item 7 for a Form ATS–N would add 1.5 hours above the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 61.5 hours above the current baseline for all NMS Stock ATSs to complete Item 7 of Part II of Form ATS–N.1173 (c) Part III Part III, Item 1 of adopted Form ATS–N is based on Part IV, Item 1(c) of proposed Form ATS–N, although certain information from the proposed item is not required to be disclosed in this item. Specifically, the requirement to describe any criteria for distinguishing among types of subscribers, classes of subscribers, or other persons is being removed from the item because such information is covered under Part III, Item 13 of adopted Form ATS–N on ‘‘Segmentation; Notice.’’ 1174 Moreover, the required information on whether the NMS Stock ATS accepts non-brokerdealers as subscribers to the ATS is being converted to a ‘‘yes’’ or ‘‘no’’ question and placed in Part III, Item 2 of adopted Form ATS–N. Part IV, Item 1 of proposed Form ATS–N is, in large part, already required under current Form ATS.1175 We estimated all of Part IV, Item 1 of proposed Form ATS–N, which includes subparts (a)–(e), would add 6 hours to the to the current baseline for an initial operation report on current Form ATS.1176 We now estimate that Part III, Item 1 as adopted would add 0.5 hours of burden to the current baseline. The current requirement of Exhibit A on Form ATS to describe the classes of subscribers on the ATS should oftentimes have substantial overlap with the requirement in Part III, Item 1 to select the types of subscribers from a list of checkboxes and identify any other types of subscribers. The additional 0.5 hours of burden is meant to account for identifying and listing any types of 1172 See Proposal, supra note 1 at 81098. at 1.0 hour + Compliance Manager at 0.5 hour) × 41 NMS Stock ATSs = 61.5 burden hours. 1174 See supra Section V.D.1. 1175 See Proposal, supra note 2, at 81098–81099. 1176 The requirements related to subparts (a)–(e) of Item 1 of proposed Form ATS–N have been broken out into separate questions with the exception of subpart (b) which is being eliminated. We did not provide estimates for each individual subpart of Part IV, Item 1 of proposed Form ATS–N. 1173 (Attorney E:\FR\FM\07AUR2.SGM 07AUR2 38874 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 subscribers that are not already captured by the classes of subscribers identified in Exhibit A of Form ATS. We therefore estimate that, on average, preparing Part III, Item 1 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 20.5 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 1 of adopted Form ATS–N.1177 Part III, Item 2 of adopted Form ATS–N requires similar information to that required under Part IV, Items 1(a) and 1(b) of proposed Form ATS–N.1178 In the Proposal, we estimated all of Part IV, Item 1 of proposed Form ATS–N, which includes subparts (a)–(e), would add 6 hours to the to the current baseline for an initial operation report on current Form ATS.1179 However, a number of provisions of Part IV, Item 1 of proposed Form ATS–N either have been eliminated or moved to other Items in the adopted Form. Depending on the complexity of the NMS Stock ATS, the disclosure burden related to Part III, Item 2 of Form ATS–N would likely vary. For example, an NMS Stock ATS with two sets of conditions for different persons to satisfy before accessing the ATS services would likely have less of a burden than an NMS Stock ATS with five groups of persons that have to satisfy varying conditions. Accordingly, we estimate that, on average, preparing Part III, Item 2 for a Form ATS–N would add 1.0 hour to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 41 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 2 of adopted Form ATS–N.1180 Part III, Item 3 of adopted Form ATS–N requires similar information to that required under Part IV, Item 1(e) of proposed Form ATS–N, with certain clarifications to reduce potential confusion with the application of Rule 301(b)(5) of Regulation ATS. First, Item 3(a) as adopted asks for a summary description of the conditions for excluding, in whole or in part, a subscriber from the ATS’s services rather than the more detailed proposed requirement that the NMS Stock ATS describe the circumstances by which 1177 Attorney at 0.5 hours × 41 NMS Stock ATSs = 20.5 burden hours. 1178 Adopted Part III, Item 2 removed some of the provisions in Part IV, Items 1(a) and 1(b) of proposed Form ATS–N and formatted the item to ’’yes’’ or ‘‘no’’ questions. 1179 See Proposal, supra note 2, at 81098–81099. 1180 (Attorney at 0.7 hours + Compliance Manager at 0.3 hours) × 41 NMS Stock ATSs = 41 burden hours. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 access for a subscriber or other person may be limited or denied. Second, we are no longer requiring that the NMS Stock ATS describe its procedures or standards to determine whether to exclude. Third, we are changing the language in the request to correspond closely with the definition of ATS in Regulation ATS.1181 In the Proposal, we estimated all of Part IV, Item 1 of proposed Form ATS–N, which includes subparts (a)–(e), would add 6 hours to the current baseline for an initial operation report on current Form ATS.1182 Although ATSs are not required to establish conditions for excluding subscribers from using the ATS, as stated in the Proposal,1183 in our experience, ATSs often have rules governing subscribers’ participation on the ATS, and if a subscriber fails to comply with these rules, the ATS may limit or deny access to the NMS Stock ATS. The burden associated with the request would likely vary depending on the complexity of the ATS, whether it has conditions for excluding subscribers, and whether those conditions differ among subscribers. For some NMS Stock ATSs, the information required by Part III, Item 3 would require gathering information on its practices for excluding subscribers that previously may have been ad hoc decisions in order to prove the summary of conditions for excluding subscribers required by the Item. Accordingly, we estimate that, on average, preparing Part III, Item 3 for a Form ATS–N would add 1 hour to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 41 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 3 of adopted Form ATS–N.1184 Part III, Item 4 of adopted Form ATS–N is substantially similar to Part IV, Item 2 of proposed Form ATS–N, except that we are modifying the example provided in this item by replacing references in the Proposal to hours when ‘‘pre-opening or after-hours trading occurs’’ (emphasis added) with ‘‘hours of operation outside of regular trading hours’’ and the format of the item is being changed to a ‘‘yes’’ or ‘‘no’’ question. In the Proposal, we estimated 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 1181 See 17 CFR 242.300(a). Proposal, supra note 2, at 81098–81099. 1183 See Proposal, supra note 2, at 81063. 1184 (Attorney at 0.7 hours + Compliance Manager at 0.3 hours) × 41 NMS Stock ATSs = 41 burden hours. ATS, and we believe this estimate is still accurate for the adopted Item.1185 The NMS Stock ATS is aware of the hours during which it operates, including any hours of operation outside of regular trading hours. Based on the experience of the Commission and its staff reviewing Form ATS and ATS–R filings, we believe that most ATSs that currently trade NMS stocks do not provide for after-hours or preopening trading of NMS stock. For NMS Stock ATSs for which the times when orders or trading interest may be sent to the NMS Stock ATS are not the same for all subscribers and the broker-dealer operator, the disclosure burden related to Part IV, Item 2 would likely be greater. Considering the foregoing, we continue to believe that, on average, preparing Part III, Item 4 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 20.5 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 4 of adopted Form ATS–N.1186 Part III, Item 5 of adopted Form ATS–N is based on Part IV, Item 4(a) of proposed Form ATS–N, although we have made modifications to the proposed item, and also are incorporating Part III, Item 6 proposed Form ATS–N. First, we are separating the requests regarding direct and indirect means of entry for orders and trading interest into the NMS Stock ATS so that information regarding direct means of entry will be disclosed in Part III, Item 5(a) of adopted Form ATS–N and information about other means of entry for orders and trading interest will be disclosed in adopted Part III, Item 5(c) of adopted Form ATS–N. Also, the information required by Part III, Item 5(a) on the direct means of order entry is being revised from the Proposal to be in a ‘‘yes’’ or ‘‘no’’ format. We are also moving and revising Part III, Item 6 of proposed Form ATS–N to adopted Part III, Item 5(c) regarding the means available for entering orders other than entering orders directly.1187 Part III, Item 5(c) of adopted Form ATS–N would not require a broker-dealer operator to disclose its SOR’s routing table or other information about how the SOR may route orders. Part III, Item 5(b) of adopted Form ATS–N no longer contains the proposed language ‘‘[d]escribe the interaction and coordination,’’ which was contained in 1182 See PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 1185 See Proposal, supra note 2, at 81099. Manager at 0.5 hours × 41 NMS Stock ATSs = 20.5 burden hours. 1187 See supra Section V.D.5. 1186 Compliance E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Part III, Item 6(b) of proposed Form ATS–N. Rather, Part III, Item 5(b) requires the NMS Stock ATS to ‘‘identify and explain’’ sources of order flow other than those used for direct entry into the ATS. Furthermore, the adopted disclosure requirements of Part III, Item 5(c) require the NMS Stock ATS to ‘‘list and provide a summary description of the terms and conditions for entering orders or trading interest into the ATS’’ through these sources. In the Proposal, we estimated that, on average, preparing Part IV, Item 4, which includes both subparts (a) (related to order entry) and (b) (related to co-location) would add 5 hours to the current baseline for an initial operation report on current Form ATS.1188 While we did not provide estimates for each individual subpart, each subpart of Part IV, Item 4 of proposed Form ATS–N accounted for half of the 5 hour estimate (i.e., 2.5 hours each for subparts (a) and (b)). Furthermore, we estimated that, on average, preparing Part III, Item 6 of proposed Form ATS–N would add 10 hours to the current baseline for an initial operation report on current Form ATS. We estimate that the burden hours for adopted Part III, Item 5 that correspond to the information required in Part IV, Item 4(a) of proposed Form ATS–N would be substantially similar (i.e., 2.5 hours). Therefore, we estimate Part III, Item 4 would add 2.5 hours to the current baseline for an initial operation report on current Form ATS.1189 The disclosure requirements that were proposed in Part III, Item 6 of proposed Form ATS–N have been revised and moved to this Item 5(c) as adopted. We expect that the associated burden would be reduced as we are allowing the NMS Stock ATS to ‘‘list and provide a summary description of the terms and conditions for entering orders or trading interest into the ATS,’’ as opposed to the ‘‘interaction and coordination’’ language used in the Proposal. Therefore, we estimate this requirement would add 8.0 hours to the current baseline for an initial operation report on current Form ATS 1190 Thus, in total, we estimate that, on average, preparing Part III, Item 5 for a Form ATS–N would add 10.5 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 430.5 hours above the current baseline for all NMS Stock ATSs to 1188 See Proposal, supra note 2, at 81101–02. at 0.5 hours + Compliance Manager at 1 hours + Senior Systems Analyst at 1 hours) × 41 NMS Stock ATSs = 102.5 burden hours. 1190 (Attorney at 3 hours + Compliance Manager at 2 hours + Senior Systems Analyst at 3 hours) × 41 NMS Stock ATSs = 328 burden hours. 1189 (Attorney VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 complete Part III, Item 5 of adopted Form ATS–N.1191 We have made various revisions to the proposed item in adopted Part III, Item 6 of adopted Form ATS–N. Part III, Item 6(a) is limiting the proposed request by allowing for a ‘‘summary’’ of the terms and conditions for co-location and related services. We are also converting the information required by Part IV, Item 4(b) of proposed Form ATS–N into a series of ‘‘yes’’ or ‘‘no’’ questions, with accompanying explanations as applicable, in Part III, Item 6 of adopted Form ATS–N. 1192 We are also separating the requests for disclosure into separate sub-parts. In the Proposal, the we estimated that, on average, preparing Part IV, Item 4 of proposed Form ATS–N, which included subparts (a) (connectivity and order entry) and (b) (co-location), would add 5 hours to the current baseline for an initial operation report on current Form ATS.1193 We intended that each subpart of Part IV, Item 4 accounted for half of the 5 hour estimate (i.e., 2.5 hours each for subparts (a) and (b)). We have reduced the burden compared to the proposed item by allowing for a summary of the terms and conditions related to co-location and related services in Part III, Item 6(a). On the other hand, the information required in Part III, Item 6(e) of Form ATS–N was previously proposed under a different item (Part IV, Item 7 of proposed Form ATS–N), and therefore, the burden related to responding to this item is now being added to Item 6(e) as adopted. Therefore, as we have revised Part III, Item 6 to both reduce the associated burden (by allowing for a summary) and increase the associated burden (by moving information required in proposed Part IV, Item 7 of proposed Form ATS–N), we believe that the burden hours for Part III, Item 6 will remain the same as the proposed estimate for Part IV, Item 4(b), 2.5 hours above the current baseline for an initial operation report. This would result in the aggregate initial burden of 95 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 6 of adopted Form ATS–N.1194 1191 (Attorney at 3.5 hours + Compliance Manager at 3 hours + Senior Systems Analyst at 4 hours) × 41 NMS Stock ATSs = 430.5 burden hours. 1192 See supra note 839. 1193 See Proposal, supra note 2, at 81101–02. The requirements related to subparts (a) and (b) of Item 4 of proposed Form ATS–N have been broken out into separate items in the adopted form. Item 4(a) is being adopted as Part III, Item 5, as modified. See supra notes 1188- 1191 and accompanying text. 1194 (Attorney at 1 hour + Compliance Manager at 1 hour + Senior Systems Analyst at .5) × 41 NMS Stock ATSs = 102.5 burden hours. PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 38875 The disclosure requirements in Part III, Item 7 of adopted Form ATS–N are substantially the same as those set forth in Part IV, Item 3(a) and(b) of proposed Form ATS–N. ATSs that currently trade NMS stocks vary in the depth of their disclosures related to order types. We estimated in the Proposal that, on average, preparing Part IV, Item 3 of proposed Form ATS–N, which also included Items 3(c) and 3(d) that have been moved to other items in the adopted form,1195 would add 6 hours to the current baseline for an initial operation report on current Form ATS.1196 Because the requirements in Part III, Item 7 of adopted Form ATS–N are substantially the same as the corresponding requirements set forth in subparts (a) and (b) of Part IV, Item 3 of proposed Form ATS–N, we estimate that the burden hours will also be substantially similar. While we did not provide estimates for each individual subpart of Part IV, Item 3 of proposed Form ATS–N, subparts (a) and (b) of Part IV, Item 3 of proposed Form ATS–N, accounted for 4 hours (of the 6 burden hours estimated for Part IV, Item 3). Consequently, we estimate that adopted Part III, Item 7 will also add 4 hours above the current baseline for an initial operation report on current Form ATS, resulting in the aggregate initial burden of 164 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 7 of adopted Form ATS–N.1197 Part III, Item 8 of adopted Form ATS–N is based on Part IV, Item 3(c) of proposed Form ATS–N. In adopted Form ATS–N, Part III, Item 8, we separated the requests proposed under Item 3(c) into six sub-parts. However, the requirements have not changed significantly.1198 Additionally, we are adding to Part III, Item 8(a) of adopted Form ATS–N a request for the NMS Stock ATS to provide information about any maximum order or trading interest size requirements. Because the requirements in Part III, Item 8 of adopted Form ATS–N are substantially the same as the corresponding 1195 Item 3(c) of proposed Form ATS–N is being adopted with modifications as Item 8 of adopted Form ATS–N. Item 3(d) is being adopted with modifications as Item 9 of adopted Form ATS–N. 1196 See Proposal, supra note 2, at 81099. 1197 (Attorney at 1.0 hours + Compliance Manager at 2 hours + Senior Systems Analyst at 1) × 41 NMS Stock ATSs = 164 burden hours. 1198 We are relocating Part IV, Item 3(c) of proposed Form ATS–N to Part III, Item 8 of adopted Form ATS–N and adopting a ‘‘yes’’ or ‘‘no’’ format. We are requiring that the NMS Stock ATS identify and explain any differences in the treatment of subscribers and the broker-dealer operator, as applicable, in separate sub-items 8(b), 8(d), and 8(f), respectively, which is the same as required in Part IV, Item 3(c) of the Proposal. E:\FR\FM\07AUR2.SGM 07AUR2 38876 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 requirements set forth in Part IV, Item 3 of proposed Form ATS–N, we estimate that the burden hours in adopted Part III, Item 8 that correspond to the information required in proposed Part IV, Item 3 would be substantially similar. While we did not provide estimates for each individual subpart of Part IV, Item 3 of proposed Form ATS–N, subpart (c) of Part IV, Item 3 of proposed Form ATS–N, would have accounted for 1 hour (of the 6 burden hours estimated for Part IV, Item 3). Consequently, we estimate that the burden hours in adopted Part III, Item 8 would add 1 hour to the current baseline for an initial operation report on current Form ATS, resulting in the aggregate initial burden of 41 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 8 of adopted Form ATS–N.1199 Part III, Item 9 of adopted Form ATS–N is based on Part IV, Item 3(d) of proposed Form ATS–N. We separated Part IV, Item 3(d) of proposed Form ATS–N into two sub-parts in adopted Part III, Item 9. However, the requirements have not changed substantially. We are adding ‘‘price or size minimums’’ as examples of information that could be contained in the messages and ‘‘order management system, smart order router and FIX’’ to illustrate the types of mechanisms that could transmit messages, such as IOIs and conditional orders. Because the requirements in Part III, Item 9 of adopted Form ATS–N are substantially the same as the corresponding requirements set forth in Part IV, Item 3(d) of proposed Form ATS–N, we estimate that the burden hours in adopted Part III, Item 9 that correspond to the information required in Part IV, Item 3(d) of proposed Form ATS–N are substantially similar. While we did not provide estimates for each individual subpart of Part IV, Item 3 of proposed Form ATS–N, subpart (d) would have accounted for 1 hour (of the 6 burden hours estimated for Part IV, Item 3). Accordingly, we estimate that the burden hours in adopted Part III, Item 9 would add 1 hour to the current baseline for an initial operation report on current Form ATS, resulting in the aggregate initial burden of 41 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 9 of adopted Form ATS–N.1200 1199 (Attorney at .25 hours + Compliance Manager at .25 hours + Senior Systems Analyst at .5) × 41 NMS Stock ATSs = 41burden hours. 1200 (Attorney at .25 hours + Compliance Manager at 0.25 hours + Senior Systems Analyst at 0.5) × 41 NMS Stock ATSs = 41 burden hours. As noted above, we estimate the burden for Part III, Item 7 of adopted Form ATS–N to be 4 hours above the VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Part III, Item 10 of adopted Form ATS–N corresponds with Part IV, Item 9(a) of proposed Form ATS–N. We separated what was proposed in Part IV, Item 9(a) into five sub-parts in adopted Part III, Item 10. We are adding to Part III, Item 10(a) of adopted Form ATS–N requirements regarding ‘‘when’’ and how such orders and trading interest are ‘‘priced [and] prioritized’’ and ‘‘any order types allowed’’ during the opening and reopening processes.1201 Additionally, we are formatting the requests that parallel the information requested in the Proposal into three subparts (adopted Items 10(a), 10(c) and 10(e)) and adding a ‘‘yes’’ or ‘‘no’’ question to Item 10(e) to improve readability and facilitate comparisons of the information for market participants. Also, we are adding a new requirement to identify and explain any differences in the treatment of subscribers and the broker-dealer operator in the opening and reopening processes, if applicable, in the form of ‘‘yes’’ or ‘‘no’’ questions in adopted Part III, Items 10(b) and 10(d). We estimate that the overall burden hours for adopted Part III, Item 10 will be slightly more than Part IV, Item 9(a) because while the adopted subparts that parallel the information requested in the proposed item (adopted Items 10(a), 10(c) and 10(e)) result in a similar burden, we expect that the new subparts (adopted Items 10(b) and 10(d)) will impose an additional burden on some NMS Stock ATSs that treat subscribers and the broker-dealer operator differently. While we did not provide an estimate for each individual subpart of Part IV, Item 9 of proposed Form ATS–N, subpart (a) would have accounted for 1 hour (of the 3 burden hours estimated for Part IV, Item 9).1202 Consequently, we estimate that the burden hours in adopted Part III, Item 10 would add 1.25 hours to the current baseline and the burden for Part III, Item 8 to be 1 hour above the baseline. Accordingly, we estimate that the total burden hours above the baseline for Part III, Items 7, 8, and 9 of adopted Form ATS–N is 6 hours, which is the same as that which was proposed for Part IV, Item 3. 1201 The words in quotes in this sentence represent new text from that proposed in Item 9(a), adopted as Item 10(a). The requirement to explain when orders and trading interest are priced, prioritized, matched and executed when the NMS Stock ATS opens or re-opens for trading is not expected to change significantly the burden on the ATS given that Form ATS–N requires disclosure of the hours of operations under Part III, Item 4 of adopted Form ATS–N. 1202 Part IV, Item 9(b) of proposed Form ATS–N is being adopted with modifications as Item 17 of adopted Form ATS–N. Part IV, Item 9(c) of proposed Form ATS–N is being adopted with modifications as Item 18 of adopted Form ATS–N. We are estimating 1.25 burden hours for Item 17 and 1.25 burden hours for Item 18 of adopted Form ATS–N. PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 baseline for an initial operation report on current Form ATS, resulting in the aggregate initial burden of 51.25 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 9 of adopted Form ATS–N.1203 Part III, Item 11 of adopted Form ATS–N is substantively similar to Part IV, Item 7 of proposed Form ATS–N, but we are making various revisions to the Item. We are limiting the request to require NMS Stock ATSs to provide a summary of the structure of the NMS Stock ATS marketplace instead of describing the means or facilities used by the NMS Stock ATS to bring together the orders of multiple buyers and sellers. In Part III, Item 11(c) of adopted Form ATS–N, we are combining the requests in the Proposal in Part IV, Items 7(b) (‘‘Order Interaction Rules’’) and 7(c) (‘‘Other Trading Procedures’’). Part IV, Items 7(b) and 7(c) of proposed Form ATS–N were intended to solicit information about the ATS’s established non-discretionary methods that dictate the terms of trading among the multiple buyers and sellers entering orders and trading interest. In addition to a trading facility, non-discretionary methods include rules and procedures. We are revising the language in adopted Item 11(c) to recognize this overlap by requiring the NMS Stock ATS to ‘‘explain the established, nondiscretionary rules and procedures of the NMS Stock ATS, including order interaction rules,’’ which requires the same information as the proposed subparts. As another component of an NMS Stock ATS’s non-discretionary methods, we are moving the trading procedures description required in proposed Item 7(c) into adopted Item 11(c) and including the examples of the trading procedures of an NMS Stock ATS (e.g., price protection mechanisms, shorts sales, locked-cross markets) in adopted Item 11(c) as well. Finally, we are converting the prompts in Part IV, Item 7(a), 7(b) and 7(c) of proposed Form ATS–N to identify and explain any differences among subscribers and persons into ‘‘yes’’ or ‘‘no’’ questions in Items 11(b) and 11(d) of adopted Form ATS–N. Consistent with the estimate in the Proposal, we estimate that, on average, preparing Part III, Item 11 for a Form ATS–N will 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 will result in an aggregate initial burden of 246 hours 1203 (Attorney at .5 hours + Senior Systems Analyst at .75) × 41 NMS Stock ATSs = 51.25 burden hours. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 above the current baseline for all NMS Stock ATSs to complete Part III, Item 11 of adopted Form ATS–N.1204 The requirements of Part III, Item 12 were proposed as Part IV, Item 1(d) of proposed Form ATS–N. In the Proposal, we estimated that the entire Part IV, Item 1 (which also would have addressed eligibility, terms and conditions of use, types of subscribers, and liquidity providers) 1205 would add 6 hours to the current baseline for an initial operation report on current Form ATS. The requirements related to eligibility, terms and conditions of use, types of subscribers, and liquidity providers have been broken out into separate questions, and Part III, Item 12 of adopted Form ATS–N solely relates to formal and informal arrangements with subscribers or the broker-dealer operator to provide orders or trading interest to the NMS Stock ATS. We believe that Part III, Item 12 of adopted Form ATS–N will add 1 hour to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 41 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 12 of adopted Form ATS–N.1206 Part III, Item 13 of adopted Form ATS–N corresponds with Part IV, Item 5(a) and (b) of proposed Form ATS–N. The requirements of Part III, Item 13 of adopted Form ATS–N cover the requirements proposed under Part IV, Items 5(a) and 5(b), although we have modified the proposed requirements.1207 We are adding ‘‘yes’’ or ‘‘no’’ questions to Part III, Item 13(a), 13(b), 13(d) and 13(e) of adopted Form ATS–N to facilitate responses to the items and to facilitate market participants finding the information. We are also modifying certain components of Part IV, Item 5 of proposed Form ATS–N. First, we are adding the terms ‘‘classifications, tiers, 1204 Attorney at 1.0 + Compliance Manager at 2.0 + Senior Systems Analyst at 3.0) × 41 NMS Stock ATSs = 246 burden hours. 1205 Proposed Part IV, Item 1(a) (‘‘eligibility’’) is being adopted with modifications as Part III, Item 2 of adopted Form ATS–N. Proposed Part IV, Item 1(b) (‘‘terms and conditions’’) is not being adopted, except for the request to state whether contractual agreements are written, which is being adopted with modifications as Part III, Item 2(d) of adopted Form ATS–N. Proposed Part IV, Item 1(c) (‘‘Types of Subscribers’’) is being adopted with modifications as Part III, Item 1 and Item 2(a) of adopted Form ATS–N. Proposed Part IV, Item 1(e) (‘‘Limitation and Denial of Services’’) is being adopted with modifications as Part III, Item 3 of adopted Form ATS–N. 1206 (Attorney at 0.7 hours + Compliance Manager at 0.3 hours) × 41 NMS Stock ATSs = 41 burden hours. 1207 See supra Section V.D.13. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 or levels’’ to adopted Part III, Item 13(a) through (e) in addition to ‘‘categories’’ to describe the groupings that an NMS Stock ATS may segment subscriber orders. Second, we are providing two additional examples, order size and duration, of criteria for segmentation of subscribers’ orders and trading interest. Third, we are providing additional specificity around what ‘‘changing segmented categories’’ means by requiring NMS Stock ATSs to provide a discussion around overriding a determination of segmented category. Fourth, we are requiring a description of how segmentation affects order interaction on Part III, Item 13 of adopted Form ATS–N. Finally, we are requiring under Part III, Item 13(d) of adopted Form ATS–N that the NMS Stock ATS describe ‘‘whether and how such designation can be contested.’’ In the Proposal, we estimated 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. The proposed requirement regarding order preferencing is broken out into a separate item, Part III, Item 14 of adopted Form ATS–N, which is described below. We also are adding a ‘‘yes’’ or ‘‘no’’ question in adopted Part III, Item 13(b) regarding identifying orders by a customer of a broker-dealer as a customer order. We believe the aforementioned minor modifications to the proposed question will slightly increase the burden for the adopted item. Therefore, we believe that Part III, Item 13 of adopted Form ATS–N will add 6 hours to the current baseline for an initial operation report on current Form ATS. This would result in an aggregate initial burden of 205 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 13 of adopted Form ATS–N.1208 Part III, Item 14(a) is substantially similar to Part IV, Item 5(c) of proposed Form ATS–N. However, we have added a requirement in Item 14(b), that if counter-party selection functionality is not the same for all subscribers and the broker-dealer operator, that the NMS Stock ATS identify and explain any differences. The burden associated with this change is likely to vary among NMS Stock ATS depending on their 1208 (Attorney at 2.0 hours + Compliance Manager at 2.25 hours + Senior Systems Analyst at 1.75 hours) × 41 NMS Stock ATSs = 205 burden hours. PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 38877 complexity and the extent to which they treat all subscribers and the brokerdealer operator the same or differently. We estimated that, on average, preparing all of Part IV, Item 5 (including subparts (a), (b), and (c)) 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 counter-party selection.1209 We understand that most, but not all, ATSs that currently trade NMS stocks allow subscribers to enter some type of counter-party selection criteria. These ATSs vary in the depth of their description as to how they allow counter-party selection. We believe that Part III, Item 14 of adopted Form ATS–N, which solely relates to counterparty selection, will add 2 hours to the current baseline for an initial Form ATS. This will result in an aggregate initial burden of 82 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 14 of adopted Form ATS–N.1210 Part III, Item 15 is modified from a similar requirement of Part IV, Item 6 of proposed Form ATS–N, which asked about order display and the subscribers and persons to which orders and trading interest are displayed or otherwise made known. We are changing the language in this item from ‘‘order information or other trading interest’’ to ‘‘subscriber orders and trading interest.’’ We are also revising the proposed requests to make clear that it only applies to the display of the NMS Stock ATS’s subscriber orders and trading interest as opposed to non-ATS orders and trading interest handled or otherwise displayed to the broker-dealer operator. Accordingly, the disclosure of non-ATS orders by affiliates of the NMS Stock ATS and others external to the ATS of non-ATS orders would not have to be disclosed. However, if for example, an affiliate of the NMS Stock ATS is displaying an order that is simultaneously bound for or resting in the NMS Stock ATS, then Item 15 would apply. In addition, we have revised the request so that Part III, Item 15(b) of adopted Form ATS–N makes clear that the request does not 1209 See Proposal, supra note 2, at 81100. Proposed Part IV, Items 5(a) and 5(b) are being adopted with modifications as Part III, Item 13 of adopted Form ATS–N. We are estimating 5 burden hours for Part III, Item 13 of adopted Form ATS–N. 1210 (Attorney at 0.5 hours + Compliance Manager at 0.75 hours + Senior Systems Analyst at 0.75 hours) × 41 NMS Stock ATSs = 82 burden hours. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38878 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations require the NMS Stock ATS to identify employees of the ATS who are operating the system. Finally, we are adding a ‘‘yes’’ or ‘‘no’’ questions in Part III, Item 15(a) that asks if the NMS Stock ATS is an ECN as defined in Rule 600(a)(23) of Regulation NMS. 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 III, Item 15 would likely vary among NMS Stock ATSs. In the Proposal, we estimated that, on average, preparing Part IV, Item 6 of proposed 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. Although we are revising the item text to provide more specificity so NMS Stock ATSs better understand the requirements and scope of the request and provide sufficient information to market participants in Part III, Item 15 of adopted Form ATS– N, we are also simplifying responses to the item by no longer requiring NMS Stock ATSs to identify the subscriber or person to whom order and trading interest is displayed and instead requiring disclosure of the types of market participants that receive the information. Thus, we believe these changes would, in total, provide no additional burden from proposed Form ATS–N. We therefore believe that preparing Part III, Item 15 of adopted Form ATS–N will add 5 hours to the current baseline for an initial Form ATS. This will result in an aggregate initial burden of 205 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 15 of adopted Form ATS–N.1211 Part III, Item 16(a) relates to disclosures surrounding orders and trading interest in the NMS Stock ATS being routed to a destination outside the ATS. We understand, based on disclosures in Form ATS submissions, that some ATSs that currently trade NMS stocks do not route orders out of the ATS. Consequently, the disclosure burden related to Part III, Item 16 of adopted Form ATS–N will likely vary among NMS Stock ATSs depending on whether they route orders at all. In the Proposal, we estimated that, on average, preparing Part IV, Item 10 for proposed 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. We, 1211 (Attorney at 1 hour + Compliance Manager at 2 hours + Senior Systems Analyst at 2 hours) × 41 NMS Stock ATSs = 205 burden hours. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 however, are substantially simplifying the item as adopted by converting subpart (a) into a ‘‘yes’’ or ‘‘no’’ question that no longer requires a description of the circumstances under which orders are routed, and also removes the requirement to describe the means by which routing is performed and the requirement to describe any differences among subscribers and persons. We therefore estimate that Part III, Item 16 of adopted Form ATS–N will add 2 hours to the current baseline for an initial operation report, depending on the extent to which the ATS routes orders and trading interest. This will result in an aggregate initial burden of 82 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 16 of adopted Form ATS–N.1212 The requirements of Part III, Item 17(a) are similar to those proposed in Part IV, Item 9(b) of the proposed Form ATS–N.1213 We estimated that, on average, preparing all of Part IV, Item 9, including subparts (a)–(c), for proposed Form ATS–N would have added 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.1214 While we did not provide an estimate for each individual subpart of Part IV, Item 9 of proposed Form ATS–N, subpart (b) would have accounted for 1 hour (of the 3 burden hours estimated for Part IV, Item 9). As we stated in the Proposal, current Form ATS, Exhibit F requires an ATS to describe its closing processes. Therefore, we continue to believe that Part III, Item 17 of adopted Form ATS– N will not impose a significant additional requirement. We are newly requiring, as Part III, Item 17(b) of adopted Form ATS–N, that if the treatment of orders and trading interest during the close is not the same for all subscribers and the broker-dealer operator, the NMS Stock ATS identify and explain such differences. The burden associated with this change is likely to vary among NMS Stock ATS depending on their complexity and the extent to which they treat all subscribers 1212 (Attorney at 0.5 hours + Compliance Manager at 0.5 hours + Senior Systems Analyst at 1 hours) × 41 NMS Stock ATSs = 82 burden hours. 1213 Although we are revising the item text to provide more specificity so NMS Stock ATSs better understand the requirements and scope of the request and provide sufficient information to market participants, we believe these revisions should not change the burden of the required disclosure. 1214 Part IV, Items 9(a) and 9(c) of proposed Form ATS–N are being adopted with modifications as Part III, Items 10 and 18 of adopted Form ATS–N, respectively. We are estimating 1.25 burden hours for Item 10 and 1.25 burden hours for Item 18 of adopted Form ATS–N. PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 and the broker-dealer operator the same or differently. Therefore, we believe that it would add 1.25 hours to the current baseline for an initial operation report on Form ATS–N. This would result in an aggregate initial burden of 51.25 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 17 of adopted Form ATS–N.1215 Subparts (a) and (b) of Part III, Item 18 of adopted Form ATS–N are substantially similar to Part IV, Item 9(c) of proposed Form ATS–N. We estimated that, on average, preparing all of Part IV, Item 9 for a proposed 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.1216 While we did not provide an estimate for each individual subpart of Part IV, Item 9 of proposed Form ATS–N, subpart (c) would have accounted for 1 hour (of the 3 burden hours estimated for Part IV, Item 9). In the Proposal, we stated that Exhibit F of current Form ATS requires an ATS to describe after-hours trading procedures. These procedures may vary widely across different ATSs. Therefore, we continue to estimate that the additional requirements will not impose a significant additional burden above the current baseline for an initial operation report on current Form ATS. Unlike Part IV, Item 9(c) of proposed Form ATS–N, an ATS that has trading outside of regular hours that follows the same procedures as trading within regular trading hours would need to check the boxes to indicate it conducts trading outside of its regular trading hours and to indicate that its trading procedures do not differ between regular and outside of regular trading hours; it would not need to describe any afterhours trading procedures. We, however, also added the requirement that the NMS Stock ATS describe, as applicable, the treatment of orders and trading interest outside of regular trading hours if it is not the same for all subscribers and broker-dealer operator as Item 18(c) of adopted Form ATS–N. In light of these changes, we believe that Part III, Item 18 of adopted Form ATS–N would add 1.25 hours to the current baseline for an initial operation report on Form ATS–N. This would result in an 1215 (Compliance Manager at .75 hours + Senior Systems Analyst at 0.50 hour) × 41 NMS Stock ATSs = 51.25 burden hours. 1216 Part IV, Items 9(a) and 9(b) of proposed Form ATS–N are being adopted with modifications as Part III, Items 10 and 17 of adopted Form ATS–N, respectively. We are estimating 1.25 burden hours for Item 10 and 1.25 burden hours for Item 17 of adopted Form ATS–N. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations aggregate initial burden of 51.25 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 18 of adopted Form ATS–N.1217 Part III, Item 19 of adopted Form ATS–N is similar to Part IV, Item 12 of proposed Form ATS–N. In the Proposal, we estimated 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 relating to fees, rebates, or other charges. As discussed in the Proposal,1218 current Form ATS does not require an ATS to disclose and explain its fee structure, and few, if any, do so in their current Form ATS filings. We recognize 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, the disclosure burden related to Part III, Item 19 of adopted Form ATS–N will likely vary. However, we are requiring additional specificity related to the description of fees of the NMS Stock ATS that are based on or bundled with the use of non-ATS services or products offered by the broker-dealer operator or its affiliates. These were not previously explicitly specified by Part IV, Item 12 of proposed Form ATS–N, and the adopted item will likely require additional burden hours for NMS Stock ATSs that are operated by multi-service broker-dealers that bundle their ATS fees with other non-ATS services or products. In contrast, we are narrowing the request for NMS Stock ATSs to describe any differences in fees or rebates charged to different ‘‘subscribers,’’ and instead asking for NMS Stock ATSs to disclose any differentiation between fees and/or rebates charged among ‘‘types’’ of subscribers, which should reduce the burden of responding as differences among individual subscribers need not be explained. Accordingly, we estimate that, on average, preparing Part III, Item 19 of Form ATS–N would add 6 hours to the current baseline for an initial 1217 (Compliance Manager at .75 hours + Senior Systems Analyst at 0.50 hour) × 41 NMS Stock ATSs = 51.25 burden hours. 1218 See id. at 81103. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 operation report on current Form ATS. This will result in an aggregate initial burden of 246 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 19 of Form ATS– N.1219 Part III, Item 20 of adopted Form ATS–N is substantially similar to Part IV, Item 8 of proposed Form ATS–N with certain modifications. We are renaming the item ‘‘Suspension of Trading,’’ converting the prompt in Part IV, Item 8(a) of proposed Form ATS–N to identify and explain any differences among subscribers and persons into a ‘‘yes’’ or ‘‘no’’ question in Part III, Item 20(b) of adopted Form ATS–N, revising the language to refer to procedures for stopping trading, and clarifying that suspensions of trading in an NMS stock are responsive. In the Proposal, we estimated 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. We believe that NMS Stock ATSs should be able to provide the disclosures in Part III, Item 20 of adopted Form ATS–N as they should already be aware of how the ATS operates, handles system disruptions, malfunctions or other suspensions based on the information required in Exhibits G and F of current Form ATS. We recognize, however, that Part III, Item 20 is significantly more specific and detailed in its disclosure requirements than current Form ATS. Accordingly, we estimate that respondents would incur an additional burden above the current baseline when preparing the disclosures required under Part III, Item 20 of Form ATS–N, consistent with the estimated burden for proposed Item IV, Part 8. We estimate that, on average, preparing Part III, Item 20 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 suspending or stopping trading on the NMS Stock ATS. This would result in an aggregate initial burden of 102.5 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 20 of proposed Form ATS–N.1220 Part III, Item 21 is substantially the same as Part IV, Item 13(a) of proposed 1219 (Attorney at 2 hour + Compliance Manager at 3 hours + Senior Systems Analyst at 1 hour) × 41 NMS Stock ATSs = 246 burden hours. 1220 (Attorney at 1 hour + Compliance Manager at .5 hours + Senior Systems Analyst at 1 hour) × 41 NMS Stock ATSs = 102.5 burden hours. PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 38879 Form ATS–N with certain modifications. We are limiting the description of any arrangements for reporting transactions on the NMS Stock ATS to only ‘‘material arrangements’’ in the adopted item, and converting the prompt in the proposed Part IV, Item 13(a) to describe any differences among subscribers and persons into a ‘‘yes’’ or ‘‘no’’ question in Part III, Item 21(b) of adopted Form ATS–N. Part III, Item 22 is substantially the same as Part IV, Item 13(b) of proposed Form ATS–N with certain modifications. We are limiting the description of any arrangements to facilitate the clearance and settlement of transactions on the NMS Stock ATS to only ‘‘material arrangements’’ in the adopted item, and converting the prompt in Part IV, Item 13(b) of proposed Form ATS–N to describe any differences among subscribers and persons into a ‘‘yes’’ or ‘‘no’’ question in Part III, Item 22(b) of adopted Form ATS–N. In addition, we are removing the phrase ‘‘undertaken by the NMS Stock ATS’’ from the proposed requirement to describe any procedures or arrangements by the NMS Stock ATS to facilitate clearance and settlement on the ATS. In the Proposal, we estimated 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.1221 We believe that preparing Part III, Items 21 and 22 for a Form ATS–N will impose a lesser burden as compared to the proposed items because the adopted items only require that ‘‘material’’ arrangements related to reporting and clearance and settlement of transactions be disclosed (as opposed to ‘‘any arrangements’’ in the Proposal). Therefore, we estimate that, on average, preparing Part III, Item 21 and 22 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 will result in an aggregate initial burden of 20.5 hours above the current baseline for all NMS Stock ATSs to complete Part III, Items 21 and 22 of adopted Form ATS–N.1222 Part III, Item 23 of adopted Form ATS–N is substantially the same as Part IV, Item 11 of proposed Form ATS–N with certain modifications. We are revising the request to make clear that an NMS Stock ATS would not be 1221 See Proposal, supra note 2, at 81103. Manager at 0.50 hours × 41 NMS Stock ATSs = 20.5 burden hours. 1222 Compliance E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38880 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations expected to provide information about the market data that the broker-dealer operator uses to route orders and trading interest from the NMS Stock ATS to away destinations by removing from the item the prompt to describe how the ATS uses market data to determine routing destinations. As discussed above in Section V.D.23, we believe, however, that it would be responsive to Part III, Item 23 for the NMS Stock ATS to provide information about the ATS’s use of market data to determine when resting orders and trading interest will be removed from inside the NMS Stock ATS as such orders and trading interest reside inside the ATS. Accordingly, the NMS Stock ATS should disclose, in response to this request, the market data that is used to remove resting orders and trading from the NMS Stock ATS. Because the adopted Item is removing the requirement from the proposed Item for information related to using market data to determine routing destinations, and the adopted Item is adding a requirement to explain how market data is used to determine when resting orders will be removed from the NMS Stock ATS, we believe that the resulting overall burden for the adopted Item will remain the same. In addition, we are adding a requirement that if the use of market data is not the same for all subscribers and the broker-dealer operator, that the NMS Stock ATS must identify and explain any differences. We believe that the disclosures under Part III, Item 23 will 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. The information requested in Part III, Item 23 of adopted Form ATS–N is similar to that required by Part IV, Item 11 of proposed Form ATS–N. In the Proposal, we estimated 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.1223 However, unlike Part IV, Item 11 of proposed Form ATS– N, Part III, Item 23 also requests information regarding differences in treatment between subscribers and the broker-dealer operator. We believe that this requirement would add to the total additional burden; however, we believe that such information should be readily available to the NMS Stock ATS. Therefore, we believe that preparing Part IV, Item 11 for a Form ATS–N will add 5 hours to the current baseline for 1223 See Proposal, supra note 2, at 81103. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 an initial operation report on current Form ATS. This would result in an aggregate initial burden of 205 hours above the current baseline for all NMS Stock ATSs to complete Part IV, Item 11 of adopted Form ATS–N.1224 Part III, Items 24 and 25 of adopted Form ATS–N correspond with of Part IV, Item 14 and 15 of proposed Form ATS–N. Current Form ATS does not require an ATS to disclose the information that would be required under Part III, Items 24 and 25 of Form ATS–N. However, based on the experience of the Commission and its staff, we continue to believe 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 we believe 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 III, Items 24 and 25 of Form ATS–N may result. Because Items 24 and 25 of Part III are tied to existing obligations that arise pursuant to Rule 301(b)(3) and Rule 301(b)(5) of Regulation ATS, respectively, we believe that NMS Stock ATSs should already be generally aware of the procedures they would follow pursuant to those rules, which should reduce the burden associated with the disclosures that would be required under Items 24 and 25. An NMS Stock ATS would only have to respond to Part III, Items 24 or 25 of a Form ATS–N if the NMS Stock ATS previously operated as an ATS, triggered the applicable 5% thresholds, and was subject to Rules 301(b)(3) and 301(b)(5). Further, NMS Stock ATSs would be less likely to have to complete Item 24 as compared to Item 25 because Item 24 requires as an additional precondition that the NMS Stock ATS displays orders in an NMS stock to more than one person in the system (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, 1224 (Compliance Manager at 2.5 hours + Senior Systems Analyst at 2.5 hours) × 41 NMS Stock ATSs = 205 burden hours. PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 meaning that such NMS Stock ATSs would only be required to complete Item 24 or 25 (or both) in a Form ATS– N Amendment. In the Proposal, we estimated 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. We believe that the requirements in Part III, Items 24 and 25 remain substantially unchanged, and that the burden should remain the same. Therefore, we continue to believe that completion of Part III, Item 24 or 25 would be 5 hours per item. Triggering the 5% threshold, a precondition necessary to require completion of Part III, Items 24 and 25 of Form ATS–N, currently occurs, and we estimate would continue to occur, very infrequently. Based on the review of Form ATS and Form ATS–R disclosures by the Commission and its staff, we estimate that 1 NMS Stock ATS would have to complete Item 24, and 2 NMS Stock ATSs would have to complete Item 25 in any given year. Accordingly, we estimate that the disclosures that would be required under Part III, Items 24 and 25 of adopted Form ATS–N would result in an aggregate initial burden of 15 hours above the current baseline.1225 Part III, Item 26 of adopted Form ATS–N corresponds with of Part IV, Item 16 of proposed Form ATS–N. An NMS Stock ATS will not be required to develop or publish any new statistics for purposes of making the required disclosures under Item 26. It is only be required to make the disclosures for statistics it already otherwise publishes or provides in the course of its operations. Thus, NMS Stock ATSs that do not publish or otherwise provide aggregate platform-wide market quality statistics, other than those currently required under Rule 605 of Regulation NMS, would not incur any additional burden due to the adopted disclosure request under Item 26. For NMS Stock ATSs that do publish or provide such statistics, Item 26 imposes an additional burden above the baseline because current Form ATS does not require the disclosure of market quality statistics. In the Proposal, we estimated that preparing Part IV, Item 16 of proposed Form ATS–N would add 7 hours to the current baseline for an initial operation report on current Form ATS.1226 Part III, Item 26 of adopted Form ATS–N is substantially the same as Part IV, Item 1225 (Attorney at 2 hours + Compliance Manager at 1 hour + Senior Systems Analyst at 2 hours) × 3 NMS Stock ATSs = 15 burden hours. 1226 See Proposal, supra note 2, at 81104. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 16 of proposed Form ATS–N. Therefore, as adopted, we still estimate that preparing Part III, Item 26 will add 7 hours to the current baseline for an initial operation report on current Form ATS. This will result in an aggregate initial burden of 287 hours above the current baseline for all NMS Stock ATSs to complete Part III, Item 26 of adopted Form ATS–N.1227 (ii) Estimated Burden Above the Current Baseline for an Initial Form ATS–N, Form ATS–N Amendment, and Notice of Cessation on Form ATS–N (a) Initial Form ATS–N Based on the above analysis, we estimate that an initial Form ATS–N will, on average, require approximately 107.4 burden hours above the baseline for an initial operation report on current Form ATS. This results in an estimated 127.4 hours in total, including the current baseline.1228 ATSs that trade NMS stocks vary in terms of their structure, the manner in which they operate, and the depth and extent of their disclosures on Form ATS. Consequently, we believe that the estimated hour burden regarding Form ATS–N will likely vary among NMS Stock ATSs, depending on such 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 or affiliate activities. daltland on DSKBBV9HB2PROD with RULES2 (b) Form ATS–N Amendments As previously noted, we estimate that ATSs that trade NMS stocks submit 2 amendments on Form ATS, on average, each year.1229 In the Proposal we 1227 (Attorney at 1 hour + Compliance Manager at 1 hour + Senior Systems Analyst at 5 hours) × 41 NMS Stock ATSs = 287 burden hours. Unlike the proposed requirement under Part IV, Item 16, the adopted requirement will allow the NMS Stock ATS to make certifications in lieu of filing Exhibits 4 and 5, which we believe will significantly reduce the burden imposed by this request for information. 1228 (Current Baseline at 20 hours) + (Part I at 0.5 hour) + (Part II at an average of 29 hours) + (Part III at an average of 77.5 hours) + (Access to EDGAR at 0.15 hours, see infra Section IX.D.2.b.iv) = 127.4 burden hours. The aggregate totals by professional, including the baseline, are estimated to be approximately 54.1 hours for an Attorney, .5 hours for a Chief Compliance Manager, 33.9 hours for a Compliance Manager, 30.25 hours for a Senior Systems Analyst, 1 hour for a Senior Marketing Manager, and 7.65 hours for a Compliance Clerk. This estimated burden for a Form ATS–N includes the hour burden associated with completing Part III, Items 24 and 25 of proposed Form ATS–N. We believe that the majority of NMS Stock ATSs would not be required to complete those items of the proposed form. 1229 See supra note 1132 and accompanying text. During the fiscal year of 2017, we received 85 amendments from ATSs that trade NMS stocks, of which there were approximately 38 at any given time during 2017. Some ATSs that trade NMS VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 estimated that the 46 respondents would file 3 Form ATS–N amendments each year, for an estimated total of 138 Form ATS–N amendments.1230 We currently estimate that the hourly burden related to an amendment to Form ATS is 6 hours.1231 In the Proposal, we estimated that the average hourly burden above this current baseline of 6 hours for each Form ATS– N amendment would be 3 hours—for a total of 9 hours—to accommodate the more voluminous and detailed disclosures required by Form ATS–N as compared to Form ATS.1232 Rule 304(a)(2) of Regulation ATS will contain the same three general categories of required amendments for Form ATS–N as Rule 301(b)(2) of Regulation ATS currently requires for current Form ATS; 1233 in addition, Form ATS–N requires two additional types of amendments—order display and fair access amendments. However, due to the greater detail and number of disclosures required by Form ATS–N, we believe that respondents will likely file more amendments to Form ATS–N than NMS Stock ATSs currently do for Form ATS. For example, adopted Form ATS–N requests information about the ATS-related activities of the brokerdealer operator and its affiliates in Part III of Form ATS–N, and these requests are not contained in current Form ATS. To the extent information provided in response to these requests changes, an NMS Stock ATS must file a Form ATS– N amendment. We are mitigating some of the additional burden by requiring that NMS Stock ATSs file correcting amendments only to correct ‘‘material’’ information that was inaccurate or incomplete when filed.1234 Current Form ATS requires ATSs to promptly file amendments upon discovery that any information was inaccurate when filed. As adopted, filers instead would correct any immaterial information when they file updating amendments, which could potentially reduce the frequency with which NMS Stock ATSs would need to file amendments. With respect to Form ATS–N amendments, one commenter expresses concern that due to the breadth of Form ATS–N disclosures, the estimated amount of time and resources required to keep Form ATS–N ‘‘evergreen’’ is ‘‘daunting,’’ and asserts that the stocks filed as many as 7 amendments while others did not file any amendments in 2017. 1230 See Proposal, supra note 2, at 81105. 1231 See supra note 1133 and accompanying text. 1232 Attorney at 1 hour + Compliance Manager at 2 hours = 3 burden hours above the baseline. 1233 See 17 CFR 242.301(b)(2). See also supra Section IV.B.1. 1234 See supra note 498 and accompanying text. PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 38881 Commission did not fully consider in the Proposal the amount of time and resources that would be required to keep Form ATS–N current.1235 We fully considered the burden for each question on the Form ATS–N by indicating the estimated burden hour for each item. After consideration of comments, we made changes to adopted Form ATS–N, which we believe will alleviate some of the potential burdens of Form ATS–N, including, among other things, requiring correcting amendments only for ‘‘material’’ information,1236 narrowing the scope of the required disclosures related to affiliates that can enter or direct the entry of orders and trading interest into the ATS,1237 and eliminating the proposed requirement to attach 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.1238 However, as with amendments to Form ATS, the burden on NMS Stock ATSs associated with updating Form ATS–N to reflect current ATS functionality will vary depending on the frequency and scope of changes made by the NMS Stock ATSs. Making complete and comprehensible disclosures of material changes to the NMS Stock ATS’s operations, such as the introduction of a new order type and its attributes or changes to segmentation procedures and parameters, would likely require more time and resources from an NMS Stock ATS than providing complete and comprehensible disclosures of a simple change to the NMS Stock ATS’s physical or website address. We believe that the frequency with which an NMS Stock ATS files Form ATS–N amendments in a given year may vary greatly, as some NMS Stock ATSs may make infrequent changes to their operations and functionality, but other NMS Stock ATSs, such as those that publish or otherwise provide to one or more subscribers or person aggregate platform-wide market quality statistics, may file several Form ATS–N amendments annually. Therefore, we continue to believe that the requirements for Form ATS–N amendments will add 3 hours above the current baseline of 6 hours for amendments to Form ATS, as set forth in the Proposal. We estimate that the 41 respondents will file 3 Form ATS–N amendments each year, for a total of 123 1235 See Fidelity Letter at 10. supra note 498 and accompanying text. 1237 See supra Section V.C. 1238 See supra Section V.B.2. 1236 See E:\FR\FM\07AUR2.SGM 07AUR2 38882 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 Form ATS–N amendments.1239 In addition, an NMS Stock ATS must provide a brief summary of the amendment at the top of Form ATS– N.1240 As proposed, an NMS Stock ATS would have been required to submit two redlines—Exhibit 3A to show changes to Part III of proposed Form ATS–N and Exhibit 4A to show changes to Part IV of proposed Form ATS–N. We estimated that the requirement would create an additional burden of 0.5 hours to draft the summary and create the redline(s).1241 Adopted Form ATS–N requires NMS Stock ATSs to submit as Exhibit 3 one marked document that indicates changes to ‘‘yes’’ or ‘‘no’’ answers or additions to or deletions to both Part I, Parts II, and III. We believe that requiring a single marked document rather than two separate documents will reduce the filing burden on ATSs, and that requiring a marked document for changes to Part I would impose minimal burden, and therefore we estimate that this requirement would add an additional burden of 0.4 hours to draft the summary and prepare the marked documents showing the amendments the NMS Stock ATS is making.1242 This would result in a total estimated hourly burden, including the baseline, of 9.4 hours for a Form ATS–N amendment,1243 and an aggregate annual burden on all NMS Stock ATSs of 1,156.2 hours.1244 Under the Proposal, a Legacy NMS Stock ATS would have continued to operate pursuant to its existing Form ATS initial operation report pending our review of the Legacy NMS Stock ATS’s filed Form ATS–N and would have been required to continue filing amendments on Form ATS to provide notice of changes to the operations of its system.1245 Adopted Rule 304(a)(1)(iv)(C) requires a Legacy NMS Stock ATS to amend its Form ATS–N to notify the Commission of operational changes during the review period.1246 We believe that if a Legacy NMS Stock ATS had been required to file amendments to Form ATS during the Commission review period, the Legacy 1239 41 respondents × 3 Form ATS–N amendments per year = 123 Form ATS–N amendments per year. 1240 See Exhibit 3 to Form ATS–N. 1241 See Proposal, supra note 2, at 81105. 1242 Compliance Clerk at 0.4 hours. Most word processing software provides for this functionality. 1243 Attorney at 5.5 hours + Compliance Manager at 2 hours + Compliance Clerk at 1.9 hours = 9.4 burden hours. 1244 123 amendments per year × 9.4 hours = 1,156.2 aggregate burden hours. Therefore, the aggregate burden hours equals 1,156.2 hours. 1245 See Proposal, supra note 2, at 81023; see also proposed Rule 304(a)(1)(i). 1246 See 17 CFR 242.304(a)(1)(iv)(C). VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 NMS Stock ATS would have also complied with the requirements of Rule 304 by amending its Form ATS–N to reflect such changes disclosed in such Form ATS amendments. During the Commission review period, the Legacy NMS Stock ATS would have, therefore, submitted amendments to both Form ATS and Form ATS–N. Although we are now requiring that a Legacy NMS Stock ATS amend its Form ATS–N during the review period rather than its Form ATS, this requirement does not change our estimates of the aggregate burden hours for filing amendments. Although a Legacy NMS Stock ATS will be required to amend Form ATS–N, which requires greater detail and a larger number of disclosures than Form ATS, the Legacy NMS Stock ATS will no longer need to file a Form ATS amendment during the review period and a Form ATS–N amendment to reflect changes disclosed in such Form ATS–N amendments. (c) Notice of Cessation on Form ATS–N From January 2014 through March 2018, an average of 9 ATSs that trade NMS stocks ceased operations each year.1247 Although it is unclear how many NMS Stock ATSs might cease operations each year going forward, for purposes of providing a PRA burden estimate, we are estimating that this average would generally remain the same for NMS Stock ATSs using Form ATS–N because economic conditions, business reasons, and other factors may cause some NMS Stock ATSs to cease operations. Accordingly, we estimate that 9 respondents may file a cessation of operation report on Form ATS–N each year. In the Proposal, we estimated that the average compliance burden for each cessation of operations filing would be 2 hours.1248 We received no comments on this estimate, and continue to believe that the burden for filing a notice of cessation on Form ATS–N will not be significantly greater than that for filing a cessation of operations report on current Form ATS. Both Form ATS and Form ATS–N require the ATS to check the appropriate box indicating that the ATS is ceasing operations; however, Form ATS–N also requires that the NMS Stock ATS provide the date that the NMS Stock ATS expects to cease operating. Accordingly, we estimate that the average compliance burden for each respondent will be 2 hours.1249 This will result in an aggregate annual 1247 See supra note 1114. Proposal, supra note 2, at 81105. 1249 Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 2 burden hours. See supra note 1135, and accompanying text. 1248 See PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 burden of 18 hours for all NMS Stock ATSs that choose to cease operations and submit a cessation of operation report on Form ATS–N.1250 (iii) ATSs That Trade Both NMS and Non-NMS Stocks ATSs that trade both NMS stocks and non-NMS stocks would incur: (1) The above baseline burdens related to filing a Form ATS–N and Form ATS–N amendments; 1251 (2) the additional burden of filing a new Form ATS to only disclose information related to non-NMS stock trading activity on the ATS; 1252 and (3) the burden of completing and filing two Forms ATS– R. We received no comment on the estimated burden set forth in the Proposal for ATSs to separately file a Form ATS for its non-NMS stock trading activity and Form ATS–N for its NMS stock trading activity.1253 We continue to believe that the average estimated burden set forth in the Proposal is a reasonable estimate of the additional burden. Accordingly, we estimate that the total hourly burden for an ATS to separately file a Form ATS for its nonNMS stock trading activity and Form ATS–N for its NMS stock trading activity will be 20 burden hours to amend its initial operation report on Form ATS for its non-NMS stock trading activity and 127.4 burden hours to file its initial Form ATS–N. The estimated hour burden related to the initial operation report submission on Form ATS for non-NMS stock trading activity may 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.1254 As previously noted, there are currently 10 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, we estimate that the aggregate initial burden on ATSs to file these separate forms would be 1,774 hours, and the aggregate annual 1250 2 burden hours × 9 NMS Stock ATSs = 18 aggregate annual burden hours. 1251 See supra Sections IX.D.2.b.ii.A and B. 1252 See supra Section IX.D.2.a and accompanying text for the baseline estimates for submitting an IOR for Form ATS and amendments to Form ATS. 1253 See supra note 1136 and accompanying text for the baseline estimate for submitting a Form ATS–R. 1254 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 9.4 estimated burden hours for Form ATS–N amendments. See supra notes 1231–1232, 1240–1243 and accompanying text. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations burden for filing amendments to both forms would be 402 hours.1255 We estimate that the total burden for completing and filing two Forms ATS– R would be 4.5 hours, which is 0.5 hours 1256 above the current baseline burden of 4 hours for filing a Form ATS–R.1257 We believe that ATSs required to file two Forms ATS–R will 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. We do not believe that those ATSs will 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 10 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, we estimate 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 180 hours.1258 daltland on DSKBBV9HB2PROD with RULES2 (iv) Access to EDGAR The Proposal contemplated the use of an online filing system, the EFFS, but the adopted amendments to Regulation ATS will require NMS Stock ATSs to submit certain Form ATS–N filings through the Commission’s EDGAR system. Based on the widespread use and availability of the internet, we believe that filing Form ATS–N in an electronic format will be a less burdensome and 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.1259 1255 (Form ATS initial operation report at 20 hours + Form ATS–N at 127.4 hours) × 10 respondents = 1,774 aggregate burden hours. Using the estimates of 2 amendments each year to Form ATS, see supra Section IX.D.2.a, and 3 amendments each year to Form ATS–N, see supra Section IX.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 × 9.4 hours)) × 10 respondents = 402 aggregate ongoing burden hours per year relating to amendments. 1256 Attorney at 0.5 hours = 0.5 burden hours. 1257 See supra note 1136 and accompanying text for the baseline estimate for submitting a Form ATS–R. 1258 ((Attorney at 3.5 hours + Compliance Clerk at 1 hour) × (4 filings annually)) × 10 ATSs = 180 aggregate burden hours. 1259 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 requirement VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 For a Form ATS–N filer to gain access to make filings on the EDGAR system, the filer must submit a Form ID as required by Regulation S–T Rule 11 (B) and submit the Form ID following the processes detailed in Volume I of the EDGAR Filer Manual. Once a Form ID has been successfully completed and processed, EDGAR will establish a Central Index Key (‘‘CIK’’) number which enables each authorized user to create EDGAR access codes, which will enable the NMS Stock ATS to use EDGAR. We estimate that the burden associated with receiving access to EDGAR by submitting a Form ID is 0.15 burden hours per response. All registered broker-dealers have been assigned a CIK number and do not need to submit a Form ID to access EDGAR.1260 Because all ATSs, regardless of whether they trade NMS stocks, are operated by registered broker-dealers, we estimate that there will be no burden associated with gaining access to EDGAR for Legacy NMS Stock ATSs or non-NMS Stock ATSs that later decide to trade NMS stocks. Based on the number of initial filings and cessation of operations reports on current Form ATS for ATSs that trade NMS stocks, we estimate that, 2 to 3 new entities will file Form ATS– N to become an NMS Stock ATS in each of the next three years. We estimate that among these new entities, 1 new entity per year will be operated by an entity that has not previously registered as a broker-dealer or that does not otherwise already have access to EDGAR. The total estimated hourly burden and aggregate initial burden for gaining access to EDGAR is therefore 0.15 hours.1261 v. Public Posting on NMS Stock ATS’s Website Rule 304(b)(3) will require each NMS Stock ATS to make public via posting on the NMS Stock ATS’s website, a direct URL hyperlink to the Commission’s website that contains the documents enumerated in Rule 304(b)(2). We estimate that each NMS Stock ATS will incur an initial, onetime burden to program and configure its website to post the required direct URL hyperlink pursuant to Rule 304(b)(3). We estimate that this initial, that NMS Stock ATSs file Form ATS–N in a structured XML format on EDGAR, including narrative responses that are block-text tagged, or use the web-fillable form. 1260 A broker-dealer that has never used EDGAR to make electronic submissions may use its assigned CIK number to receive access codes that will allow the broker-dealer operator to submit Form ATS–N filings on EDGAR without needing to apply for a Form ID. 1261 Compliance Manager at 0.15 hours × 41 NMS Stock ATSs = 6.15 burden hours. PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 38883 one-time burden would be approximately 2 hours, in part because many broker-dealer operators currently maintain a website for their NMS Stock ATSs.1262 This is unchanged from the estimate set forth in the Proposal.1263 We estimate that the aggregate initial, one-time burden will be approximately 82 hours.1264 (v) Recordkeeping Requirements Because NMS Stock ATSs that solely trade NMS stocks will file Form ATS– N in lieu of Form ATS, we believe that the amendment to Rule 303(a)(2)(ii) will not result in any burden for those ATSs that are not already accounted for under the current baseline burden estimate for Rule 303.1265 The estimated burden under amended Rule 303(a)(2)(ii) for each ATS is the same as in the Proposal.1266 For the 10 ATSs that transact in, or have indicated in Exhibit B to their Forms ATS that they expect to trade both NMS stock and non-NMS stock on their respective ATSs, we estimate that the burden above the current baseline estimate for preserving records relating to compliance with the amendment to Rule 303(a)(ii) will be, consistent with the estimate in the proposing release, approximately 3 hours annually per ATS for a total annual burden above the current baseline burden estimate of 30 hours for all respondents.1267 Accordingly, we are modifying the PRA burden estimate for Rule 303 to account for the increased burden on ATSs that trade both NMS stock and non-NMS stock. E. Collection of Information Is Mandatory All collections of information pursuant to the amended rules and Form ATS–N are mandatory for entities that meet the definition of NMS Stock ATS. 1262 Senior Systems Analyst at 2 burden hours. Proposal, supra note 2, at 81106–07. 1264 Senior Systems Analyst at 2 hours × 41 NMS Stock ATSs = 82 burden hours. 1265 To comply with all of the record preservation requirements of Rule 303, we currently estimate that ATSs spend approximately 1,305 hours per year (87 respondents at 15 burden hours per respondent). See Rule 303 PRA Update, supra note 1613, 78 FR 43943. At an average cost per burden hour of $111.32, the resultant total related cost of compliance is $145,272.60 per year (1,305 burden hours × $111.32/hour). See id. The cost per burden hour is adjusted for an inflation rate of 6.8% based on the Bureau of Labor Statistics data on CPI–U between July 2013 and March 2018. 1266 See Proposal, supra note 2, at 81107. 1267 3 additional burden hours × 10 ATSs = 30 aggregate burden hours. 1263 See E:\FR\FM\07AUR2.SGM 07AUR2 38884 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations F. Confidentiality of Responses to Collection of Information X. Economic Analysis With respect to the amendments to Rules 301(b)(2)(viii) and 304 of Regulation ATS, including Form ATS– N, the Commission will make publicly available on its website all effective Forms ATS–N, all properly filed Form ATS–N amendments to effective Forms ATS–N, and notices of cessation on Form ATS–N. The Commission will not make publicly available on its website initial Forms ATS–N that the Commission has declared ineffective, but these forms will be available for examination and inspection by the Commission and its staff, state securities authorities, and self-regulatory organizations. Form ATS–N amendments also require each NMS Stock ATS that has a website to post on the NMS Stock ATS’s website a direct URL hyperlink to the Commission’s website that contains the documents enumerated in Rule 304(b)(2). The collection of information required by the amendments to Rules 301(b)(10), 303(a)(1)(v), 301(b)(9), and 303(a)(2)(ii) will 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 II, Item 7 of Form ATS– N, however, NMS Stock ATSs must describe the written safeguards and written procedures to ensure confidential treatment of trading information that will be required under Rule 301(b)(10) as amended. To the extent that the Commission receives confidential information pursuant to this collection of information, such information will be kept confidential, subject to the provisions of applicable law. We are 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.1268 We are concerned that the limited and differential level of operational transparency around NMS Stock ATSs impedes market participants’ ability to adequately discern how their orders interact, match, and execute on NMS Stock ATSs, which impedes their ability to evaluate whether submitting order flow to a particular NMS Stock ATS aligns with their business interests and would help them achieve their investing or trading objectives. In addition, we are concerned that the current lack of transparency around the potential conflicts of interest that arise from the ATS-related activities of the brokerdealer operator and its affiliates hinders market participants’ abilities to protect their interests when doing business on NMS Stock ATSs. We are adopting amendments to Regulation ATS to require NMS Stock ATSs to publicly file Form ATS–N, which would require NMS Stock ATSs to provide detailed disclosures about their trading operations and the ATSrelated activities of their broker-dealer operators and their affiliates. In addition, we are adopting new Rule 304 as part of Regulation ATS, which provides a process for the Commission to review Form ATS–N filings and declare an NMS Stock ATS’s initial Form ATS–N, after notice and opportunity for hearing, ineffective.1269 Finally, we are adopting amendments to Rule 301(b)(10) of Regulation ATS to require that all ATSs memorialize in writing their procedures and safeguards to protect subscribers’ confidential trading information.1270 The adopted amendments and Form ATS–N seek to make information regarding the operations of NMS Stock ATSs available to market participants, which will increase the operational transparency for NMS Stock ATSs, bringing it more in line with the operational transparency for national securities exchanges. The amendments A. Background daltland on DSKBBV9HB2PROD with RULES2 G. Retention Period for Recordkeeping Requirements All reports required to be made under Rules 301(b)(2)(viii), 301(b)(9), and 304 of Regulation ATS, including Form ATS–N, will be required to be preserved during the life of the enterprise and any successor enterprise, pursuant to the amendment to Rule 303(a)(2) of Regulation ATS. In addition, ATSs will be required to preserve a copy of their written safeguards and written procedures to protect subscribers’ confidential trading information under Rule 301(b)(10) of Regulation ATS for not less than 3 years, the first 2 years in an easily accessible place, pursuant to Rule 303(a)(1)(v) of Regulation ATS. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 1268 See supra Section I. See also supra Sections II.A and D. 1269 Rule 304 also provides a process for the Commission to declare amendments to Form ATS– N ineffective. 1270 Current Rule 301(b)(10) requires all ATSs establish procedures and safeguards to protect subscribers’ confidential trading information, but it does not expressly require that such procedures and safeguards must be maintained in writing. PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 also seek to improve the quality of information regarding different NMS Stock ATSs’ operations and the ATSrelated activities of their broker-dealer operators and their affiliates. As discussed in more detail below, we believe that this would help market participants make better-informed decisions about where to route their orders in order to achieve their trading or investment objectives, thereby improving the efficiency of capital allocation and enhancing execution quality. Additionally, we believe that requiring NMS Stock ATSs to memorialize their safeguards and written procedures in writing will improve Commission oversight by helping it better understand, monitor, and evaluate how each ATS protects subscribers’ confidential trading information from unauthorized disclosure and access, which in turn could increase investor protection. On the other hand, creation of responses to aid disclosure of Form ATS–N and the possibility that we may declare the Form ATS–N ineffective would entail costs to NMS Stock ATSs, which could result in some of them ceasing to operate as ATSs. If some NMS Stock ATSs cease operating as ATSs, it could impact the competitive dynamics between NMS Stock ATSs and national securities exchanges, as well as the competitive dynamics among NMS Stock ATSs and between NMS Stock ATSs and broker-dealers who trade NMS stocks but do not operate an ATS. We are sensitive to the economic consequences and effects, including the costs and benefits, of our rules. The following economic analysis identifies and considers the costs and benefits— including the effects on efficiency, competition, and capital formation— that would result from new Rule 304, Form ATS–N and the amendments to Rule 3a1–1(a) and Regulation ATS. These costs and benefits are discussed below and have informed the policy choices described throughout this release.1271 1271 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\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 B. Baseline The numerous parties that would be affected by new Rule 304, Form ATS– N, and the 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 transact in NMS stocks on ATSs; and national securities exchanges that compete for order flow with NMS Stock ATSs and other OTC trading systems. We recognize that the economic effects of Rule 304, Form ATS–N, and the amendments, including costs and benefits and effects on efficiency, competition and capital formation, should be compared to a baseline that accounts for the current market and regulatory framework for trading NMS stocks. The baseline 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 ATS-related activities of their broker-dealer operators and their affiliates; and the competitive environment between 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 As of March 31, 2018 there are 41 ATSs that have noticed on their Form ATS that they expect to trade NMS stocks.1272 During the first quarter in 2018, 33 ATSs, all of which operated as dark pools, traded NMS stocks and accounted for approximately 57 billion shares traded in NMS stocks (approximately $2.9 trillion in dollar volume), representing approximately 11.4% of total share trading volume (11.5% of total dollar trading volume) on all registered national securities exchanges, ATSs, and non-ATS OTC trading venues in the first quarter of 2018.1273 Based on their market share, 1272 See supra note 9 and accompanying text. infra Table 1, ‘‘NMS Stock ATSs Ranked by Dollar Trading Volume (January 1, 2018–March 30, 2018)’’ Total dollar trading volume on all exchanges and off-exchange trading in the first 1273 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 NMS Stock ATSs represent a significant source of liquidity in NMS stocks. 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.1274 A system that meets the criteria of Rule 3b–16(a) may operate as an ATS on the condition that the ATS complies with Regulation ATS, which requires, among other things, that the ATS make filings with the Commission on Form ATS and Form ATS–R,1275 which are ‘‘deemed confidential when filed,’’ as well as adhere to other reporting requirements under Regulation ATS.1276 Furthermore, ATSs must register as broker-dealers and become members of an SRO. Accordingly, the ATS must comply with rules applicable to a broker-dealer and the SRO’s rules applicable to brokerdealers. In addition, FINRA Rules 6160 and 6170 require each NMS Stock ATS to use a single, unique MPID for trade reporting purposes.1277 FINRA uses the trade data reported by ATSs to publish aggregated weekly trading volume and trade count information on its website for each ATS on a security-by-security basis.1278 3. Lack of Standardized Public Disclosure As described in detail in the Proposal,1279 the level of information about the operations of NMS Stock ATSs and the ATS-related activities of quarter of 2018 was approximately $25.4 trillion and approximately 503 billion shares. 1274 See supra Section II.B (discussing the conditions to the exemption from the definition of ‘‘exchange’’ for an ATS). 1275 See supra Section II.C (discussing the Form ATS filing requirements). See also supra note 65 and accompanying text (discussing the Form ATS– R filing requirements). 1276 See supra Section II.C (discussing the requirements of Regulation ATS); see also 17 CFR 242.301(b). 1277 See FINRA Rules 6160 and 6170. See also supra note 15. 1278 FINRA computes the aggregated statistics from trade data reported by ATSs to the FINRA equity trade reporting facilities (i.e., the Alternative Display Facility, the Trade Reporting Facilities, and the OTC Reporting Facility). For trade data prior to February 1, 2016, FINRA publishes aggregated trade data reported by ATSs pursuant to former FINRA Rule 4552. 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. See FINRA OTC Transparency Data at https:// otctransparency.finra.org/. See also supra note 15. 1279 See Proposal, supra note 2, at 81110–11. PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 38885 the NMS Stock ATSs’ broker-dealer operators and their affiliates vary across NMS Stock ATSs and across subscribers. Although Regulation ATS states that information on Form ATS is ‘‘deemed confidential when filed,’’ 1280 some NMS Stock ATSs voluntarily make their filings publicly available.1281 NMS Stock ATSs that either voluntarily make their Form ATS publicly available, or publish summary information of their operations, provide market participants more information about their operations than do NMS Stock ATSs that do not make their Forms ATS or information about their operations publicly available.1282 However, market participants cannot always use these voluntary disclosures to systematically compare NMS Stock ATSs, because the disclosures are not standardized.1283 Additionally, subscribers might have access to more information about the NMS Stock ATSs to which they subscribe than they might about others, and also might have more information about their NMS Stock ATSs than might non-subscribers. For example, subscribers might have access to the NMS Stock ATS’s subscriber manual, other subscriber quotes, and, potentially, certain market quality statistics an NMS Stock ATS may publish or otherwise disclose to subscribers in addition to what is currently publicly disclosed under Exchange Act Rule 605.1284 Subscribers to an NMS Stock ATS might have varying access to the different services of the NMS Stock 1280 See 17 CFR 242.301(b)(2)(vii). supra note 56. 1282 On the other hand, some ATSs not only provide current Form ATS on their public websites, they also provide more information regarding their ATS operations. For instance, one commenter asks all their subscribers to consent to having their names publicly disclosed on their website so that all their subscribers know the universe of entities that they could be executing against. See Luminex Letter at 1. 1283 The level of detail and the format in which information is presented on Form ATS varies among the NMS Stock ATSs. Several commenters agree with us that either there is a lack of disclosure about the operations of NMS Stock ATSs or that there is a need to standardize disclosures made by NMS Stock ATSs. See Fidelity Letter at 1; ICI Letter at 1; SIFMA Letter at 3. One commenter specifically states that opacity of venue matching logic ‘‘increases costs for brokers connecting to venues, and they in turn pass these costs to clients.’’ See AI Letter at 2. 1284 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. 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. See Rule 605(a)(8) for the definition of a covered order. 1281 See E:\FR\FM\07AUR2.SGM 07AUR2 38886 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations ATS.1285 Those subscribers with greater access might obtain more knowledge and information about the operations of NMS Stock ATSs than the subscribers with less access. With this additional information, subscribers with greater access can make more nuanced decisions about which trading venue suits their trading purposes, and thus possess an informational advantage over other subscribers. 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, subscribers that do not have full access to services of the NMS Stock ATS, and the resulting additional information, might still want to trade on NMS Stock ATSs in spite of their relative informational disadvantage. Had these subscribers possessed more detailed information about the operations of the NMS Stock ATS, they might have been able to make more informed—and therefore potentially different—decisions about where to route their orders for execution. daltland on DSKBBV9HB2PROD with RULES2 4. NMS Stock ATS Treatment of Subscriber Confidential Trading Information Under current Rule 301(b)(10) of Regulation ATS,1286 all ATSs must establish adequate safeguards and procedures to protect subscribers’ confidential trading information, and, to ensure that those safeguards and procedures are followed, must also establish adequate oversight procedures.1287 Furthermore, all ATSs are required to preserve certain records pursuant to Rule 303(a)(1).1288 However, neither Rule 301(b)(10) nor Rule 303(a)(1) of Regulation ATS currently requires that an ATS maintain and preserve their safeguards and procedures to protect subscribers’ confidential trading information, or their related oversight procedures in writing. As discussed in the Proposal,1289 we believe 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 1285 See Proposal, supra note 2, at 81111 (discussing the differential access of subscribers to NMS Stock ATSs). 1286 17 CFR 242.301(b)(10). 1287 17 CFR 242.301(b)(10). 1288 See Proposal, supra note 2, at 81087; see also supra Section III.B.6 (discussing amendments to Exchange Act Rule 303). 1289 See Proposal, supra note 2, at 81111. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 procedures to ensure such safeguards and procedures are followed. One commenter agrees that significant ATSs have largely reduced to writing their safeguards and procedures to protect subscribers’ confidential trading information.1290 Additionally, this commenter also states these written safeguards and procedures are likely to occur in multiple formats and in different forms within the same brokerdealer. We acknowledge that, to the extent an ATS broker-dealer operator currently maintains written safeguards and written procedures to protect subscribers’ confidential trading information, the written safeguards and written procedures might exist in multiple formats or differing forms within the same broker-dealer operator. Nevertheless, under the current regulatory environment for ATSs, absent specific questions in an examination by the Commission or its staff, we are not able to determine whether all ATSs currently have written safeguards and written procedures to protect subscribers’ confidential trading information or, if an ATS does possess written safeguards and written procedures, to what extent they exist in multiple formats or differing forms. 5. Competition The current market for trading NMS stocks is served by national securities exchanges, ATSs, and liquidity providers (including broker-dealers who internalize), who compete to supply investors with execution services at efficient prices. These trading venues, which compete to match orders, provide a framework for price negotiation and disseminate trading information. The sections below discuss the current state of competition between NMS Stock ATSs and national securities exchanges; competition among NMS Stock ATSs; and competition between broker-dealers that operate NMS Stock ATSs and broker-dealers that do not operate NMS Stock ATSs. a. 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, they also compete with national securities exchanges. As discussed in the Proposal,1291 NMS Stock ATSs have grown in complexity and sophistication. Some NMS Stock ATSs now offer features similar to those offered by national securities exchanges, 1290 See 1291 See PO 00000 HMA Letter at 23. Proposal, supra note 2, 80 FR at 81009. Frm 00120 Fmt 4701 Sfmt 4700 including, among other things, anonymous order submission, limit order book matching systems, a wide range of order types, and high-speed connectivity options. However, unlike national securities exchanges, most NMS Stock ATSs have adopted a dark trading model, and do not display any quotations in the consolidated quotation data.1292 Two commenters state that NMS Stock ATSs also compete with national securities exchanges for order flow by offering features that are not readily available on national securities exchanges.1293 For example, while most national securities exchanges match trades via a price/time priority limit order book, some NMS Stock ATSs may match trades via auctions or block crossing mechanisms.1294 As discussed above and explained in more detail in the Proposal,1295 NMS Stock ATSs and national securities exchanges are subject to different regulatory regimes, including different obligations to disclose information about their trading operations and activities. This has resulted in differences in operational transparency between national securities exchanges and NMS Stock ATSs, which limits the ability of market participants to compare the operations and execution quality of NMS Stock ATSs and national securities exchanges. In addition to the burdens discussed above,1296 and as discussed in more detail in the Proposal,1297 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 ATSs.1298 However, national securities exchanges also enjoy certain benefits that are not afforded to NMS Stock ATSs, such as establishing norms regarding conduct, trading, and fee structures. ATSs, on the other hand, are regulated as broker-dealers, and must comply with the rules of FINRA. Trading venues that elect to register as national securities exchanges can gain 1292 See id. Consumer Federation of America Letter at 4; ICI Letter at 3. 1294 See Proposal, supra note 2, 80 FR at 81009; see also ICI Letter at 3. 1295 See supra Sections II.B–C (discussing the different mix of obligations and benefits applicable to ATSs and registered national securities exchanges). See also Proposal, supra note 2, at 81111–12. 1296 See supra Section II.B. 1297 See Proposal, supra note 2, at 81111–12 1298 See, e.g., Section 19(g) of the Exchange Act, 15 U.S.C. 78s(g), and Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b). For further discussion of the costs and benefits of registering as a national securities exchange, see Proposal, supra note 2, at 81111–12. 1293 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations added prestige by establishing listing standards for their securities. Additionally, national securities exchanges can be direct participants in NMS plans, which provide additional sources of revenue and input into the operation of the national market system that is not available to NMS Stock ATSs.1299 As discussed in more detail in the Proposal, since the adoption of Regulation NMS in 2005, the market for NMS stock execution services has become more fragmented and the number of national securities exchanges and NMS Stock ATSs has increased.1300 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.1301 The number of active dark pools trading NMS stocks has increased from approximately 10 in 2002,1302 to 33 today.1303 The market share of total NMS stock share volume that is attributable to dark pools has increased daltland on DSKBBV9HB2PROD with RULES2 1299 See Regulation ATS Adopting Release, supra note 3, at 70880, 70902–70903 (Section discussing generally some of the obligations and benefits of registering as a national securities exchange). 1300 See Proposal, supra note 2, at 81112. For a list of current national securities exchanges, see https://www.sec.gov/rules/sro.shtml. Although there are 12 national securities exchanges that trade NMS stocks, they are currently controlled by 5 exchange groups, namely, CBOE Global Markets, Inc. (which controls BZX, BYX, EDGA, and EDGX), CHX Holdings, Inc. (which controls CHX), Intercontinental Exchange, Inc. (which controls NYSE American, NYSE, and NYSE Arca), IEX Group Inc. (which controls IEX), and NASDAQ, Inc. (which controls Nasdaq, BX, and PHLX). 1301 For further discussion see Proposal, supra note 2, at 81112. 1302 See Regulation of Non-Public Trading Interest at 61209 n.9, and accompanying text (proposing rules and amendment to joint industry plans describing the term dark pool). 1303 See supra notes 11–12 and accompanying text. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 from 7.9% in 2009 1304 to 11.4% during the first quarter of 2018.1305 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.1306 Several commenters state that since the inception of Regulation ATS, ATSs have operated at a competitive advantage relative to national securities exchanges, because they operate with lower transparency and greater opacity relative to national securities exchanges.1307 Another commenter states that ‘‘ATSs are competitors to exchanges, but do not have the same oversight, transparency requirements or responsibilities.’’ 1308 This commenter also states that ‘‘It is clearly unfair competition for ATSs to be subject to far less requirements than exchanges while executing a large percentage of the market volume.’’ 1309 We agree that NMS Stock ATSs face lower regulatory burdens than national securities exchanges, including differences in the obligations to publicly disclose information about their trading operations and activities. This has 1304 See supra notes 13–14 and accompanying text. 1305 See supra Section X.B.1. commenters also stated that ever since the inception of Regulation ATS, the market for trading NMS stocks has become more fragmented, and the number of NMS Stock ATSs and the trading volume executed on these venues has increased, but they did not provide quantitative estimates of the number of ATSs or the fraction of trading volume executed on different venues. See CFA Institute Letter at 2; Consumer Federation of America Letter at 4; Fidelity Letter at 3; LeveL ATS Letter at 2; Schneiderman Letter at 1, SIFMA Letter at 2. 1307 See CBOE Letter at 1; CFA Institute Letter at 2; Consumer Federation of America Letter at 1–2, 4; ICI Letter at 3. 1308 See Anonymous at 1. 1309 See id. 1306 Several PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 38887 resulted in differences between the operational transparency of NMS Stock ATSs and national securities exchanges and made it more difficult for market participants to evaluate how their orders interact, match, and execute on the NMS Stocks ATSs than on national security exchanges. As discussed in the Proposal,1310 the growth in the number of NMS Stock ATSs may be driven by these less stringent regulatory obligations. However, national securities exchanges also enjoy certain advantages which are not available to NMS Stock ATSs, such as the ability to list securities and share in market data revenue generated by the CTA. b. Competition Among NMS Stock ATSs NMS Stock ATSs also compete with 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, which is based on aggregated trade data reported by ATSs to the FINRA equity trade reporting facilities for 13 weeks of trading from January 1, 2018, to March 30, 2018, depicts the market share of total dollar volume for NMS stocks, and the total share volume for NMS stocks for individual ATSs.1311 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 7 NMS Stock ATSs ranked by dollar volume accounted for 63.4% of total dollar volume transacted on ATSs and 59.2% of total share volume transacted on ATSs from January 1, 2018, to March 30, 2018. 1310 See 1311 See E:\FR\FM\07AUR2.SGM Proposal, supra note 2, at 81112. supra note 15. 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Table 1: NMS Stock ATSs Ranked by Dollar Trading Volume (January 1, 2018—March 30, 2018) 1314 daltland on DSKBBV9HB2PROD with RULES2 This table shows the 33 ATSs that effected transactions in NMS stocks 1312 Total Consolidated Volume includes all trading in NMS stocks on all national securities exchanges, ATSs, and non-ATS OTC trading. 1313 See supra note 2 for definition of ‘‘dark pool’’. 1314 Table 1 Data Sources: (1) FINRA Alternative Trading System (ATS) Transparency Data is aggregated trade data reported by ATSs to the VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 from January 1, 2018—March 30, 2018, ranked in descending order by dollar volume transacted. ATS data is reported weekly, and these dates approximately correspond to the first quarter of 2018. Dollar volume transacted on an ATS is calculated by multiplying the share volume for a given NMS stock on the FINRA equity trade reporting facilities and made available on FINRA’s website as part of the OTC Transparency Data. The OTC Transparency Data is provided via https://www.finra.org/industry/OTCTransparency and is copyrighted by FINRA 2018. (2) NYSE Trade and Quote Database (TAQ). PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 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 aggregated trade data reported by ATSs to the FINRA equity trade reporting facilities E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.000</GPH> 38888 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 38889 daltland on DSKBBV9HB2PROD with RULES2 for 13 weeks of trading from January 1, 2018, to March 30, 2018, 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. Eight NMS Stock ATSs had average trade sizes in excess of 10,000 shares. This suggests that some NMS Stock ATSs receive large block orders and execute large trades.1315 One of the 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.1316 While these NMS Stock ATSs on average execute large size trades, the combined market share of these NMS Stock ATSs is only 12.6% when measured in dollar volume, and 6.0% when measured in share volume. The vast majority of NMS Stock ATSs have average trade sizes between 100 and 460 shares. The average trade size across all 33 NMS Stock ATSs is 204 shares, while the two NMS Stock ATSs with the highest market shares (measured either in dollar volume or share volume) have average trade sizes of 155 and 163 shares, respectively. These trade sizes are not significantly different from the average trade size of 146 shares on national securities exchanges,1317 which suggests that the niche market NMS Stock ATSs serve is not very different from the market as a whole.1318 1315 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 Proposal, supra note 2, at 81008. See also Rule 600(b)(9) of Regulation NMS (defining block size with respect to an order), 17 CFR 242.600(b)(9). 1316 See Proposal, supra note 2, at 81008 n.126, 127. 1317 Tuttle (2013) also found that trade sizes on ‘‘lit’’ national securities exchanges are similar to those taking place on ‘‘dark ATSs.’’ However, Tuttle (2013) did not include odd lot trades when calculating trade sizes for ‘‘lit’’ national securities exchanges or ‘‘dark ATSs.’’ See Laura Tuttle, Alternative Trading Systems: Description of ATS Trading in National Market System Stocks (October 2013), https://www.sec.gov/marketstructure/ research/alternative-trading-systems-march2014.pdf (‘‘Tuttle: ATS Trading in NMS Stocks’’). Unlike ‘‘lit’’ national securities exchanges, dark ATSs do not publicly disseminate top of the limitorder book information. See id. Table 2 in the Proposal reports that between March 30, 2015, and June 26, 2015, the average trade size on NMS Stock ATSs was 214 shares and the average trade size on national securities exchanges was 181 shares. Calculations for both of the average trade size metrics reported in the Proposal include odd lots trades. However, calculations for the average trade size on national securities exchanges reported in the Proposal also include TAQ trade volume reported from bulk trades, opening and closing trades, and intraday crosses. See Proposal, supra note 2, at 81114. 1318 One commenter conducted similar analysis, computing average trade sizes in ‘‘top volume ATSs’’ for three time periods: May 12, 2014–May 16, 2014; March 30–June 26, 2015; and January 11, 2016–January 15, 2016 and reached similar conclusions. See Anonymous Letter at 4. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations from January 1, 2018–March 30, 2018, ranked in descending order by average Table 2: NMS Stock ATSs Ranked by Average Trade Size (January 1, 2018–March 30, 2018) 1320 daltland on DSKBBV9HB2PROD with RULES2 This table shows 33 ATSs that effected transactions in NMS stocks 1319 National securities exchanges that transacted in NMS stocks during the period January 1, 2018 to March 30, 2018 included NYSE MKT LLC, Cboe BZX Exchange, Inc.; Cboe BYX Exchange, Inc.; Cboe EDGA Exchange, Inc.; Cboe EDGX Exchange, Inc.; Chicago Stock Exchange, Inc.; The Investors Exchange LLC; NASDAQ OMX BX, Inc.; NASDAQ OMX PHLX, Inc.; The Nasdaq Stock Market LLC; New York Stock Exchange LLC; and NYSE Arca, VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Inc. NYSE National, Inc. (f.k.a. National Stock Exchange, Inc.) was not trading, but on May 17, 2018 the Commission approved a proposed rule change in connection with its relaunch. See supra note 9. 1320 Table 2 Sources: (1) FINRA Alternative Trading System (ATS) Transparency Data is aggregated trade data reported by ATSs to the FINRA equity trade reporting facilities and made available on FINRA’s website as part of the OTC Transparency Data. The OTC Transparency data is provided via https://www.finra.org/industry/OTCTransparency and is copyrighted by FINRA 2018. (2) NYSE Trade and Quote Database (TAQ). PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 trade size. ATS data is reported weekly, and these dates correspond approximately to the fourth quarter of 2017. 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 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.001</GPH> 38890 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations aggregated across all NMS stocks that traded on the given ATS in that week. Average trade size on national securities exchanges is calculated from TAQ data using intraday trades that took place between 9:30 a.m. and 4:00 p.m. Bulk trades and trades during the opening and close and intraday crosses are excluded from the calculation. One commenter mentions that because the difference in average trade size between national securities exchanges and NMS Stock ATSs is small, this is evidence that ‘‘these venues are no longer beneficial for executing block size trades between large traders.’’ 1321 We do not agree with the comment that NMS Stock ATSs are no longer beneficial for executing block size trades. As can be seen in Table 2, eight ATSs have average trade sizes in excess of 10,000 shares, indicating that these ATSs are attractive venues for crossing block orders. Based on this, we believe that some ATSs—particularly ones which have average trade sizes in excess of 10,000 shares—are beneficial for certain market participants wanting to trade large block sizes. As discussed in more detail in the Proposal,1322 while many NMS Stock ATSs operating today are similar with respect to the limited transparency they provide with respect to their trading model, we understand that the services offered vary significantly across NMS Stock ATSs.1323 Even though NMS Stock ATSs may not be privy to detailed information about the operations of other NMS Stock ATSs, they are able to garner information about the differential services offered by their competitors through various means,1324 enabling ATSs to modify their products and services to better compete within the market for NMS stock execution services. Thus, as explained in more detail in the Proposal,1325 an NMS Stock ATS may not be incented to fully reveal how orders interact, match and execute on its platform, because revealing such information adversely impacts the ATS’s position within the market by also informing its competitors. 1321 See Anonymous Letter at 3. supra note 2, at 81115. 1323 Two commenters agree with us. These commenters mention that some ATSs offer subscribers the ability to customize trading parameters, including price instructions and counterparty selection, while others offer subscribers different methods of accessing the ATS, such as FIX connections or trading through the broker-dealer’s smart order router. See Consumer Federation of America Letter at 4; ICI Letter at 2– 3. 1324 These are discussed in more detail in the Proposal. See Proposal, supra note 2, at 81115. 1325 See id. daltland on DSKBBV9HB2PROD with RULES2 1322 Proposal, VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 c. Competition Between Broker-Dealers That Operate NMS Stock ATSs And Broker-Dealers That Do Not Operate NMS Stock ATSs As explained in more detail in the Proposal, competition for NMS stock order flow also exists between the broker-dealers that operate NMS Stock ATSs and broker-dealers that do not operate NMS Stock ATSs but otherwise effect transactions in NMS stocks.1326 Some broker-dealers who operate their own NMS Stock ATS(s) may provide their affiliates with access to certain services that are not afforded to brokerdealers that do not have their own ATS platform,1327 which may result in trading advantages.1328 6. 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.1329 This section specifically discusses the impact that this current market structure 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 As described in detail in the Proposal,1330 some academic research has suggested that the decline in trading costs since the adoption of Regulation ATS in 1998 and Regulation NMS in 2005 could, 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.1331 Trading 1326 See id. number of commenters state that brokerdealer operators and their affiliates may have access to certain features of an ATS that are not available to other subscribers. See Better Markets Letter at 4– 6; Consumer Federation of America Letter at 7–10; HMA Letter at 13–15; Liquidnet Letter at 11. One of these commenters states that broker-dealer operators and their affiliates may receive preferential treatment or access to the ATS, such as faster or more direct access to the ATS, priority status to execute their orders over those of other subscribers, or the ability to further customize with whom their order flow interacts. See Consumer Federation of America Letter at 8. 1328 For further explanation, see Proposal, supra note 2, at 81115. 1329 See supra Section X.B.5. 1330 See Proposal, supra note 2, at 81115–16. 1331 Other academic literature has suggested that the increase in fragmentation has had a counteracting effect and has increased bid-ask 1327 A PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 38891 on NMS Stock ATSs may also benefit institutional investors 1332 by providing a useful tool whereby they may be able to reduce the ‘‘price impact’’ of their trades and obtain enhanced execution quality for their orders.1333 Five commenters also express the belief that the increase in trading on ATSs has contributed to a competitive marketplace that has led to improved costs and liquidity, and that this has benefitted both retail and institutional investors.1334 Another element that may affect trading costs is order internalization by broker-dealers. As described detail in the Proposal,1335 some academic literature has found that internalization of order flow increases trading costs and reduces market depth and price informativeness. In the current operational environment of NMS Stock ATSs, subscribers’ orders or other trading interests 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 ATSs, and yet internalize some order flow rather than executing it on their own NMS Stock ATS, may have a deleterious effect on market quality. 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 operating as ATSs, market participants might incur costs associated with not being able to find an adequate trading venue that offers benefits similar to those that NMS Stock ATSs provide. To the extent that market participants value these ATS-specific features, the decision of certain NMS spreads. This literature, however, has focused on small stocks, and fragmentation across exchanges, rather than fragmentation across exchanges and between exchanges and NMS Stock ATSs. See Haslag, Peter and Matthew Ringgenberg, 2016, ‘‘The Causal Impact of Market Fragmentation on Market Liquidity,’’ working paper, available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=2591715; Baldauf, Markus and Joshua Mollner, 2017, ‘‘Trading in Fragmented Markets,’’ working paper, available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2782692. 1332 See Proposal, supra note 2, at 81115 (discussing the impact of NMS Stock ATSs on institutional investor trading costs). 1333 One commenter agreed that NMS Stock ATSs, specifically dark pools, serve a ‘‘useful purpose to those wishing to trade large blocks of shares at lower cost without moving the public price as a result of other market participants identifying and trading ahead of their interest.’’ Barnard Letter at 1. 1334 See Fidelity Letter at 3; LeveL ATS Letter at 2; Morgan Stanley Letter at 4; STANY Letter at 2; UBS Letter at 8. 1335 See Proposal, supra note 2, at 81117. E:\FR\FM\07AUR2.SGM 07AUR2 38892 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Stock ATSs to cease operating as ATSs could increase the trading costs of these market participants and impact whether and how they affect certain trading strategies. While the existence of NMS Stock ATSs has reduced the trading costs on average for market participants, the lack of transparency regarding ATS operations and the ATS-related activities of the ATS broker-dealer operator and its affiliates has contributed to higher search costs for market participants to find a trading venue that serves their investing or trading objectives. A by-product of these higher search costs is uncertainty pertaining to how their orders will be handled, particularly for subscribers to NMS Stock ATSs that have not made their Form ATS public.1336 daltland on DSKBBV9HB2PROD with RULES2 b. Price Discovery While the increased fragmentation of trading volume associated with the current market for NMS stock execution services has been a factor in lowering trading costs for market participants, the academic literature has found that it has had a mixed impact on price discovery. As described in more detail in the Proposal,1337 some academic studies have suggested that the market segmentation caused by the coexistence of national securities exchanges and NMS Stock ATSs can improve price discovery.1338 They suggest that price discovery can improve either as a result of more aggressive competition among market participants in providing liquidity or as a result of the segmentation of informed and uninformed market participants.1339 These academic studies predict that because the orders of informed market participants are more likely to execute on national securities exchanges, they 1336 Several commenters agree with our analysis that the differences have resulted in higher search costs for market participants. See Better Markets Letter at 2; CFA Institute Letter at 2; Consumer Federation of America Letter at 2–4. 1337 See Proposal, supra note 2, at 81116–17. 1338 See Boulatov, Alex, and Thomas George, 2013, ‘‘Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers,’’ Review of Financial Studies 26, 2095– 2137; Comerton-Forde, Carole and Talis Putnins, 2015, ‘‘Dark Trading and Price Discovery,’’ Journal of Financial Economics 118, 70–92.; and Zhu, Haoxiang, 2014, ‘‘Do Dark Pools Harm Price Discovery?’’ Review of Financial Studies 27, 747– 789. Comerton-Forde and Putnins (2015) and Zhu (2014) specifically examine dark pools. 1339 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. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 will be more likely to trade on national securities exchanges and uninformed market participants will be more likely to trade on NMS Stock ATSs.1340 Because 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.1341 Other academic studies suggest that the presence of NMS Stock ATSs in the current trading environment can harm price discovery.1342 These 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.1343 When trading, informed market participants often balance two types of costs, namely price impact costs and execution costs. In comparison to NMS Stock ATSs, on national securities exchanges an informed market participant’s order experiences lower execution risk but higher price impact costs. However, since NMS Stock ATSs often match orders at prices derived from national securities exchanges, and if trading on national securities exchanges generates worse prices due to price impact, this could 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.1344 One academic study finds, while low levels of trading on NMS Stock ATSs are not harmful, price discovery is harmed when levels of trading on NMS Stock ATSs are high 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 beneficial to market efficiency.1346 If NMS Stock ATSs were not a viable trading venue for market participants, some 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, which can improve market efficiency.1347 The same study also suggests that small trades that execute on NMS Stock ATSs are beneficial in that they also generate market efficiency.1348 Several commenters assert that the lack of transparency of NMS Stock ATSs has resulted in a decrease in market efficiency because more order flow executed on NMS Stock ATSs increases the difficulty investors face when identifying which venues offer them the best execution quality.1349 As discussed above, increased market fragmentation could increase search costs by making it more difficult for market participants to find liquidity to execute their orders.1350 Increased search costs could reduce competition between liquidity suppliers, which could increase trading costs.1351 These increased trading costs could reduce the incentives for market participants to acquire costly information, which could in turn result 1340 See Proposal, supra note2, at 81116 (discussing the segmentation of trading by informed and uninformed market participants between national securities exchanges and ATSs). 1341 See Comerton-Forde and Putnins (2015) and Zhu (2014), supra note 1338. 1342 See Ye, Mao, 2011, ‘‘A Glimpse into the Dark: Price Formation, Transaction Cost and Market Share of the Crossing Network,’’ working paper, available at 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; Comerton-Forde and Putnins (2015), supra note1338. These studies specifically examine dark pools. 1343 One commenter agrees with the conclusions from these studies and remarked that trading on NMS Stock ATSs ‘‘reduces the information that could assist the transparent market in determining an accurate fair price’’ and that prices quoted on transparent markets may no longer be efficient or informative. See Barnard Letter at 1–3. 1344 See Ye (2011), supra note1342. 1345 See Comerton-Forde and Putnins (2015), supra note 1338. 1346 See id. 1347 A number of academic studies have found that increased liquidity can improve market efficiency by reducing the limits to arbitrage or increasing the incentives to produce costly information. See Chordia, Tarun, Richard Roll and Avanidhar Subrahmanyam, 2008, ‘‘Liquidity and market efficiency,’’ Journal of Financial Economics 97, 249–268; Kyle, Albert, 1984, ‘‘Market structure, information, futures markets, and price formation,’’ Gary G. Storey, Andrew Schmitz, and Alexander H. Sarris (Editors.), International Agricultural Trade: Advanced Readings in Price Formation, Market Structure, and Price Instability, Westview Press, Boulder and London (1984), pp. 45–64. 1348 See Comerton-Forde and Putnins (2015), supra note 1338. 1349 See Barnard Letter at 1–3; Better Markets Letter at 2. 1350 See supra Section X.B.6.a. 1351 See Yin, Xiangkang, 2005, ‘‘A Comparison of Centralized and Fragmented Markets with Costly Search,’’ Journal of Finance, 60, 1567–1590. PO 00000 Frm 00126 Fmt 4701 Sfmt 4700 (i.e., they estimate that this occurs when trading on NMS Stock ATSs in a given NMS stock exceeds approximately 10% of dollar volume).1345 E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 in a reduction in market efficiency.1352 However, as discussed above, the increased market fragmentation caused by NMS Stock ATSs could also improve market efficiency by allowing institutional investors a viable way to trade and reduce price impact costs.1353 The commenters did not provide any analysis to support their claims that the increase in order flow executed on NMS Stock ATSs has decreased market efficiency. As such, we continue to believe that the current market for NMS stock execution services, consisting of national securities exchanges, ATSs and other off-exchange venues, has together resulted in an improvement to market efficiency. C. Economic Effects and Effects on Efficiency, Competition, and Capital Formation We have considered the economic effects of new Rule 304, Form ATS–N and the amendments to Rule 3a1–1(a) and Regulation ATS. This section provides an overview of the economic effects of new Rule 304, Form ATS–N, and the amendments to Rule 3a1–1(a) and Regulation ATS, including the costs, benefits, and the effects on efficiency, competition, and capital formation. This section also discusses additional economic effects, including benefits and costs related to specific requirements of new Rule 304, Form ATS–N and the amendments to Rule 3a1–1(a) and Regulation ATS. We believe that the amendments will improve Commission oversight and thereby improve investor protection and generate greater transparency about the operations of NMS Stock ATSs and the ATS-related activities of their brokerdealer operators and their affiliates.1354 As explained below, through these effects, the adopted amendments may promote greater competition for order flow, which could result in enhanced execution quality, and we believe that this could result in improvements to efficiency and capital formation. We have attempted, where possible, to quantify the benefits and costs and impacts on efficiency, competition, and capital information that may result from new Rule 304, Form ATS–N, and the amendments to Rule 3a1–1(a) and Regulation ATS. However, as we discussed in the Proposal and as explained more fully below,1355 it is difficult to quantify many of the economic effects of the new rule and 1352 See Kyle, Albert, 1989, ‘‘Information speculation with imperfect competition,’’ Review of Economic Studies 56, 317–356. 1353 See supra Section X.B.6.a. 1354 See supra Sections V.C–D. 1355 See Proposal, supra note 2, at 81118. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 amendments due to the complexity of the market for NMS execution services and our lack of certain relevant information. For instance, it is difficult to determine what fraction of order flow will be internalized or routed to national securities exchanges or to nonATS trading centers if NMS Stock ATSs are required to publicly disclose information about their operations on Form ATS–N. Additionally, we do not have certain information, such as information on market participant routing agreements or fee arrangements that may influence future order routing decisions. As we further noted in the Proposal, it is similarly difficult to determine whether NMS Stock ATSs will continue or cease operating as ATSs in light of the new rule and amendments,1356 as that decision depends on numerous factors and we lack information about many of those factors. For example, we do not have information on the extent to which existing NMS Stock ATSs or potentially new ATSs rely on a competitive advantage, such as a unique matching methodology or other operational characteristics, to attract order flow, or the extent to which the new disclosure requirements will impact those competitive advantages and thus drive decisions on operating status. Moreover, we lack information on how many NMS Stock ATSs may decide to register as national securities exchanges, as some ECNs have in previous years, as a result of new Rule 304, Form ATS–N and the amendments to Rule 3a1–1(a) and Regulation ATS.1357 Commenters did not provide any additional information or analysis that would allow us to estimate the impacts on order flow or the continued operation of NMS Stock ATSs under the new rule and amendments. In light of the complexities of the market and the lack of currently available information, we are unable to quantify many of the economic effects of new Rule 304, Form ATS–N, and the amendments to Rule 3a1–1(a) and Regulation ATS. Therefore, much of the discussion below is qualitative in nature, although we try to describe, where possible, the direction of these effects. 1356 For the purposes of the PRA, we estimate the annual average number of NMS Stock ATSs that file Cessation of Operation notices on Form ATS–N. See supra Section IX.D.2.b.ii.C. This estimate is based on the historical number of cessations per year and, while recognizing that the amendments may result in cessations, does not attempt to predict the effect of the amendments on the number of cessations. 1357 See Proposal, supra note 2, at 81109 (discussing ATSs that previously operated as ECNs and subsequently registered as national securities exchanges). PO 00000 Frm 00127 Fmt 4701 Sfmt 4700 38893 1. Economic Effects of Enhanced Filing Requirements of Form ATS–N As discussed above, we are amending Rule 3a1–1(a) and Regulation ATS to require ATSs that transact in NMS stocks to comply with the requirements of Rule 304 to operate pursuant to the exemption from the definition of ‘‘exchange.’’ 1358 The amendments would require an NMS Stock ATS to file reports pursuant to Rule 304, which includes the requirement to file Form ATS–N, in lieu of current Form ATS, to disclose information about its operations and the ATS-related activities of its broker-dealer operator and its affiliates.1359 We believe that these disclosures will help market participants assess whether the ATS’s mode of operation is consistent with their ability to obtain the best executions and also help them assess potential conflicts of interest that might adversely impact their trading on the NMS Stock ATS. Rule 304 will also provide a process by which the Commission will review initial Forms ATS–N and Form ATS–N amendments and declare them ineffective if it finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors. We are also adopting 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).1360 An NMS Stock ATS could not operate pursuant to the exemption from the definition of ‘‘exchange’’ unless the NMS Stock ATS files Form ATS–N with the Commission and the Form ATS–N has become effective.1361 a. Benefits As described in detail in the Proposal,1362 we believe that new Rule 304, Form ATS–N and the amendments to Rule 3a1–1(a) and Regulation ATS would result in better regulatory oversight of NMS Stock ATSs and increased investor protection by providing the Commission and relevant SROs with information about NMS Stock ATSs that currently may only be available during an examination process. In comparison to Form 1358 See supra Section III.A. See also Rules 3a1– 1(a)(2) and (3), 300, 301, and 304. 1359 See supra Section V for information disclosed on Form ATS–N. 1360 See supra Section IV.E (discussing the public posting requirements of Form ATS–N). 1361 See supra Section IV.A.3. 1362 See Proposal, supra note 2, at 81119–20. E:\FR\FM\07AUR2.SGM 07AUR2 38894 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 ATS,1363 Form ATS–N will contain more detailed information about the operations of NMS Stock ATSs, including information about the ATSrelated activities of the broker-dealer operator and its affiliates.1364 The Commission and SROs could utilize this information to help prioritize examinations and possibly help identify potential issues. Additionally, the enhanced disclosure requirements under Form ATS–N will provide market participants with significantly more detailed information with which to analyze and evaluate how orders are handled and executed on NMS Stock ATSs, which could allow them to better assess an NMS Stock ATS as a potential trading venue.1365 We are also adopting a requirement that Form ATS–N and Form ATS–N amendments be filed electronically in a XML text-searchable format. We believe that requiring Form ATS–N and Form ATS–N amendments to be filed in a XML text-searchable format, coupled with the enhanced disclosure requirements, 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 ATS-related activities of their broker-dealer operators and their affiliates. Such benefits could increase investor protection by improving the effectiveness and efficiency of the examination process. We believe that the process of reviewing an initial Form ATS–N or Form ATS–N amendments will allow the Commission to evaluate, among other things, the completeness and comprehensibility of the NMS Stock ATSs’ disclosures and, if necessary, declare the Form ATS–N ineffective.1366 We believe that the review and public disclosure process will improve the quality of information the Commission receives from NMS Stock ATSs, which will allow the Commission to better protect investors from potentially incomprehensible or incomplete disclosures that would misinform market participants about the operations of an NMS Stock ATS or the ATS1363 See supra Section II.C (discussing the Form ATS filing requirements). 1364 See supra Section V for information disclosed on ATS–N. 1365 Three commenters agreed with our assessment that the enhanced disclosure requirements under Form ATS–N would result in improved regulatory oversight by the Commission. See Fidelity Letter at 1; SIFMA Letter at 3; Virtu Letter at 2. 1366 See supra Section IV.A.4 (describing the effectiveness process for initial Form ATS–N filings). VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 related activities of its broker-dealer operator.1367 We received several comment letters regarding whether the proposed amendments would adequately protect investors. One commenter was optimistic, stating the amendments are aimed at ‘‘bolstering transparency in capital markets, which should enable and enhance investor protections.’’ 1368 Three commenters were not as optimistic. One commenter states that the Commission review process for Form ATS–N ‘‘will very quickly devolve into an unreasonably burdensome exercise for Commission staff while providing little benefit to market integrity or investor protection.’’ 1369 Another commenter mentions that ‘‘no amount of required public disclosure can cure the problem presented by an ATS that makes inaccurate disclosures to subscribers.’’ 1370 A third states that no amount of disclosure can provide the necessary protection against brokerdealer conflicts of interest, and that more needs to be done to protect investors.1371 We continue to believe that increased regulatory oversight and disclosure of NMS Stock ATS operations and activities would help protect investors. We expect that the quality of the information the Commission receives from NMS Stock ATSs will improve as a result of the incentives created by the procedure to review their filings and declare them ineffective, if necessary, and that the incidences of incomplete and incomprehensible disclosures would be mitigated. As market participants will not be able to trade on NMS Stocks ATSs that do not comply with Form ATS–N requirements, the review process will protect investors from events that may have transpired if ATSs, whose Forms ATS–N have been declared ineffective, were allowed to trade NMS stocks. Additionally, we continue to believe that the disclosure of broker-dealer conflicts of interest will allow market participants to better assess an NMS Stock ATS as a potential trading venue and thus better protect their interests.1372 1367 One commenter agrees that our enhanced regulatory oversight can help ensure consistency of disclosures provided by ATSs and their brokerdealer operators. See Fidelity Letter at 1. 1368 See CFA Institute Letter at 6. 1369 See Consumer Federation of America Letter at 10. 1370 See Fidelity Letter at 4. 1371 See Better Markets Letter at 1, 5–6. 1372 See infra Section X.C.2.a (‘‘Economic Effects of Public Disclosure of Form ATS–N—Benefits’’). PO 00000 Frm 00128 Fmt 4701 Sfmt 4700 b. Costs As described in detail in the Proposal,1373 we believe that the filing requirements of Form ATS–N could impose costs on NMS Stock ATSs. We recognize that an ineffectiveness declaration could impose costs on an NMS Stock ATS—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 individual market participants and 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.1374 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. We believe 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, we believe that NMS Stock ATSs would be incentivized to submit Form ATS–N disclosures that are complete and comprehensive to avoid bearing the costs of resubmitting a Form ATS–N filing or of having their Form ATS–N declared ineffective. We also understand that both new and existing NMS Stock ATSs will incur implementation costs in order to comply with the amendments to Regulation ATS. NMS Stock ATSs will need to 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 will fall more heavily on lower-dollar volume NMS Stock ATSs (as opposed to ATSs transacting greater dollar volume), because these ATSs have a smaller revenue base to accommodate the largely 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 will likely incur lower implementation costs because certain sections of Form ATS–N (such as 1373 See Proposal, supra note 2, at 81120–21. infra Section X.C.4.a (‘‘Impact on Efficiency, Competition, and Capital Formation— Competition’’). 1374 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations several items of Part II) will not be applicable to these NMS Stock ATSs. In addition to affecting NMS Stock ATSs, the implementation costs could also indirectly affect market participants by potentially causing some NMS Stock ATSs to alter or reduce the services they offer to certain subscribers. For example, the adopted amendments might cause some NMS Stock ATSs to reduce or stop offering customized reports to certain subscribers in order to redirect resources to support the standardized reports. Relative to the baseline, the amendments to Regulation ATS will also impose implementation costs for all NMS Stock ATSs, including Legacy NMS Stock ATSs, in that they will require NMS Stock ATSs to adhere to heightened disclosure and reporting requirements regarding their operations. Legacy NMS Stock ATSs should already comply with the current requirements of Regulation ATS. Therefore, the compliance costs of the amendments should be incremental relative to the costs associated with the existing requirements. Specifically, we believe that the incremental costs will consist largely of providing new disclosures and updating records and retention policies necessary to comply with the amendments. Based on the analysis for purposes of the PRA,1375 we estimate that the amendments to Regulation ATS relating to Rules 301(b)(2)(viii) and 304 of Regulation ATS, including Form ATS–N, will result in a one-time burden of 127.4 hours for each NMS Stock ATS,1376 which will result in an estimated one-time paperwork compliance cost to an NMS Stock ATS of approximately $41,689.10.1377 This daltland on DSKBBV9HB2PROD with RULES2 1375 See supra Section IX (estimating burden hours). We estimate the wage rate associated with these burden hours based on salary information for the securities industry compiled by SIFMA. The estimated wage figure for attorneys, for example, is based on published rates for attorneys, modified to account for a 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead, yielding an effective hourly rate for 2013 of $380 for attorneys. See Securities Industry and Financial Markets Association, Management & Professional Earnings in the Securities Industry—2013, available at: https:// www.sifma.org/resources/research/managementand-professional-earnings-in-the-securitiesindustry-2013/. These estimates are adjusted for an inflation rate of 6.85% based on the Bureau of Labor Statistics data on CPI–U between October 2013 and March 2018. Therefore, the current inflationadjusted effective hourly wage rates for attorneys are estimated at $406 ($380 × 1.0685). We discuss other costs of compliance with the proposed rule below. 1376 See supra note 1228 and accompanying text. 1377 (Attorney at $406 × 54.1 hours) + (Chief Compliance Manager at $518 × 0.5 hours) + (Compliance Manager at $302 × 33.9 hours) + (Senior Systems Analyst at $278 × 30.25 hours) + (Senior Marketing Manager at $298 × 1 hour) + VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 will result in an aggregate estimated initial hour burden for all NMS Stock ATSs to complete Form ATS–N and comply with Rules 301(b)(2)(viii) and 304 of Regulation ATS of 5,223.4 hours at an estimated cost of $1,709,253.10.1378 In addition to the implementation costs mentioned above, there are also expected ongoing costs for NMS Stock ATSs to comply with the amendments to Rule 3a1–1(a) and Regulation ATS. For instance, NMS Stock ATSs will incur ongoing costs associated with amending their Form ATS–N prior to material changes in their operations, or to correct any material information that has become inaccurate. Regardless of the reason for filing a Form ATS–N amendment, we estimate for the purposes of the PRA that it will take an NMS Stock ATS approximately 28.2 hours annually 1379 to prepare and file its Form ATS–N amendments at an estimated annual cost of $8,898.60 per ATS.1380 This will result in an estimated aggregate ongoing hour burden for all NMS Stock ATSs to amend their Forms ATS–N and comply with Rules 301(b)(2)(viii) and 304 of Regulation ATS of 1,156.2 hours at an estimated cost of $364,842.60 annually.1381 Some existing NMS Stock ATSs that also trade non-NMS stocks might incur additional costs due to the amendments. As discussed above,1382 pursuant to the amendments to Regulation ATS, an ATS that trades both NMS stocks and nonNMS stocks will 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(Compliance Clerk at $68 × 7.65 hours) = $41,689.10. This compliance cost estimate for a Form ATS–N includes the estimated costs associated with completing Part III Items 24 and 25 of Form ATS–N, but as explained above, we believe that the majority of NMS Stock ATSs would not be required to complete those items of the form. See supra Section IX.D.2.b.i.C. 1378 127.4 burden hours × 41 NMS Stock ATSs = 5,223.4 burden hours. $41,689.10 × 41 NMS Stock ATSs = $1,709,253.10. This preliminary aggregate compliance cost estimate assumes that all NMS Stock ATSs would be required to complete Part III Items 24 and 25 of Form ATS–N. However, as noted above, we estimate that 1 NMS Stock ATS would be required to complete Part III, Item 24, see supra Section IX.D.2.b.i.C, and 2 NMS Stock ATSs would be required to complete Part III, Item 25, see id. 1379 See supra Section IX.D.2.b.ii.B. As explained above, we estimate that each NMS Stock ATS would file 3 Form ATS–N amendments per year, and the hourly burden per amendment would be 9.4 hours. 1380 (Attorney at $406 × 16.5 hours) + (Compliance Manager at $302 × 6 hours) + (Compliance Clerk at $68 × 5.7 hours) = $8,898.60. 1381 28.2 hours × 41 NMS Stock ATSs = 1,156.2 hours. $8.898.60 × 41 NMS Stock ATSs = $364,842.60. 1382 See supra Section IX.D.2.b.iii. PO 00000 Frm 00129 Fmt 4701 Sfmt 4700 38895 NMS stock trading operations. Accordingly, NMS Stock ATSs that also transact in non-NMS stocks will incur additional implementation costs when compared to ATSs that only trade NMS stocks, because the former group will 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 will also be required to file a pair of Forms ATS–R four times annually. For the purposes of the PRA, we estimate that the aggregate initial burden for those ATSs to separately file an initial 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 will be 1,774 hours 1383 at an aggregate estimated cost of $474,431.1384 We also estimate 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 will be 180 hours 1385 at an aggregate estimated cost of $59,560.1386 Furthermore, we estimate that these ATSs that facilitate transactions in both NMS stocks and non-NMS stocks will incur an additional estimated recordkeeping burden of 3 hours annually per ATS, resulting in an estimated cost of $333.96 per ATS 1387 and an aggregate estimated hour burden of 30 hours at an estimated cost of $3,339.60, due to the amendments to Rule 303(a)(2)(ii).1388 The amendments to Regulation ATS will require Form ATS–N be filed electronically in a structured format 1383 See supra note 1255 and accompanying text. for Form ATS at $406 × 13 hours) + (Attorney for Form ATS–N at $406 × 54.1 hours) + (Chief Compliance Manager for Form ATS–N at $518 × 0.5 hours) + (Compliance Manager for Form ATS–N at $302 × 33.9 hours) + (Senior Systems Analyst for Form ATS–N at $278 × 30.25 hours) + (Senior Marketing Manager for Form ATS–N at $298 × 1 hour) + (Compliance Clerk for Form ATS at $68 × 7 hours) + (Compliance Clerk for Form ATS–N at $68 × 7.65 hours)) × 10 ATSs = $474,431. This aggregate compliance cost estimate includes the estimated costs associated with completing Part III, Items 24 and 25 of Form ATS–N, but as explained above, we believe that the majority of NMS Stock ATSs would not be required to complete those items of the form. See supra Section IX.D.2.b.i.C. 1385 See supra note 1258 and accompanying text. 1386 ((Attorney at $406 × 3.5 hours) + (Compliance Clerk at $68 × 1 hours) × (4 filings annually)) × 10 ATSs = $59,560. 1387 At an average cost per burden hour of $111.32, see supra note 1265, the resultant total related cost of compliance for each ATS would be $333.96 ((3 burden hours) × $111.32/hour). 1388 3 hours × 10 ATSs = 30 burden hours. $333.96 × 10 ATSs = $3,339.60. See supra Section IX.D.2.b.vi. 1384 ((Attorney E:\FR\FM\07AUR2.SGM 07AUR2 38896 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 through EDGAR.1389 Based on the widespread use and availability of the internet, we believe that filing Form ATS–N in an electronic format will 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. In order to electronically file a Form ATS–N, a broker-dealer operator of an NMS Stock ATS will need to access the EDGAR system. As discussed above,1390 a broker-dealer that has not previously received access to EDGAR would need to submit a Form ID.1391 For the purposes of the PRA, we estimate that each ATS that needs to submit a Form ID to gain access to EDGAR will incur a one-time burden of 0.15 hours, which would result in each ATS incurring a one-time estimated cost of $45.30.1392 Based on analysis in the PRA, we estimate that each year 1 new NMS Stock ATS will be operated by an entity that needs to submit a Form ID to gain access to EDGAR.1393 This would result in an aggregate estimated initial burden of 0.15 hours at an estimated cost of $45.30.1394 Rule 304(b)(3) will require each NMS Stock ATS to make public via posting on the NMS Stock ATS’s website, a direct URL hyperlink to the Commission’s website that contains the documents enumerated in Rule 304(b)(2). For the purposes of the PRA, we estimate that each NMS Stock ATS will incur an initial, one-time burden of approximately 2 hours to program and configure its website in order to post the required direct URL hyperlink pursuant to Rule 304(b)(3),1395 which will result in each NMS Stock ATS incurring an estimated one-time cost of approximately $556.1396 This will result in an aggregate estimated initial, onetime hour burden for all NMS Stock 1389 See supra Section VII (Section in the frontend which specifically discusses structured disclosure aspects of Form ATS–N). 1390 See supra Section IX.D.2.b.iv. 1391 See id (discussing Central Index Key (‘‘CIK’’) numbers). 1392 Compliance Manager at $302 × 0.15 hours = $45.30. 1393 Because all ATSs, regardless of whether they trade NMS stocks, are operated by registered brokerdealers who have been assigned a CIK number, for the purposes of the PRA, we estimate that Legacy NMS Stock ATSs or non-NMS Stock ATSs that later decide to trade NMS stocks will not incur any costs associated with gaining access to EDGAR. See supra Section IX.D.2.b.iv. 1394 0.15 burden hours × 1 NMS Stock ATS = 0.15 burden hours. $45.30 × 1 NMS Stock ATS = $45.30. 1395 See supra Section IX.D.2.b.v. 1396 Senior Systems Analyst at $278 × 2 hours = $556. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 ATSs to comply with Rule 304(b)(3) of approximately 82 hours at an estimated cost of approximately $22,796.1397 2. Economic Effects of Public Disclosure of Form ATS–N We believe that the amendments requiring public disclosure of Form ATS–N will improve the information available to market participants and make that information consistent, which would assist market participants in evaluating and choosing the NMS Stock ATSs to which they may route orders or become a subscriber due to the enhanced disclosure requirements. Requiring such public disclosure will increase the operational transparency requirements of NMS Stock ATSs to bring those requirements more in line with the operational transparency requirements of national securities exchanges.1398 a. Benefits We believe that the public disclosure of Form ATS–N will generate greater transparency about the operations of NMS Stock ATSs and the ATS-related activities of their broker-dealer operators and their affiliates. This will aid market participants by reducing search costs when evaluating potential NMS stock trading venues to decide which venue best suits their trading purposes. This section discusses specific economic benefits of the public disclosure of Form ATS–N including: The economic benefits of public disclosure of standardized information about the operations of NMS Stock ATSs; the economic benefits of public disclosure of the ATS-related activities of the broker-dealer operator and its affiliates; the economic benefits of public disclosure of aggregate platformwide order flow and execution statistics regarding the NMS Stock ATS; and the economic benefits of filing Form ATS– N in a structured format. (i) Benefits of Public Disclosure of Standardized Information of Operations of NMS Stock ATSs We believe that requiring detailed, public disclosures about the operations of NMS Stock ATSs will, among other things, better standardize the type of information market participants receive about those operations. As a result, search costs for market participants will be lower relative to the baseline, as homogenous disclosure requirements for all NMS Stock ATSs as part of the amendments to Regulation ATS should 1397 2 hours × 41 NMS Stock ATSs = 82 hours. $556 × 41 NMS Stock ATSs = $22,796. 1398 See supra Section III.A. PO 00000 Frm 00130 Fmt 4701 Sfmt 4700 facilitate market participants’ comparison of NMS Stock ATSs when deciding which venue most suits their trading purposes. Accordingly, as described in detail in the Proposal,1399 we believe the enhanced operational transparency resulting from the public disclosures on Form ATS–N should aid market participants when evaluating potential trading venues, and that the 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.1400 Beyond providing benefits to market participants, the enhanced disclosure requirements for NMS Stock ATSs could provide benefits to certain NMS Stock ATSs or national securities exchanges.1401 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 first quarter of 2018, trading volume of NMS stocks on ATSs accounted for 11.4% of total share volume.1402 As they are expected to calibrate the level of transparency between NMS Stock ATSs and national securities exchanges, the amendments could foster greater competition for order flow of NMS stocks between these trading platforms. This greater competition for order flow could 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. One commenter states that ‘‘[f]ailing to extend enhanced transparency requirements to Exchanges for activities commensurate with those of ATSs would result in an incomplete picture of market quality, making it difficult for investors to conduct meaningful comparisons to inform their decisions and protect their own interests.’’ 1403 As discussed above,1404 national securities exchanges are already subject to more stringent public disclosure requirements than NMS Stock ATSs. For example, 1399 See Proposal, supra note 2, at 81123–24. Proposal, supra note 2, at 81123 (discussing the effects of the increased public disclosures about the operations of NMS Stock ATSs on market participant search costs). 1401 See id (discussing the effects of the increased public disclosures about the operations of NMS Stock ATSs on certain NMS Stock ATSs). 1402 See supra Section X.B.1. 1403 See Markit Letter at 4. 1404 See supra Section X.B.5.a. 1400 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 national securities exchanges are required to publicly file proposed rule changes with the Commission to disclose, among other things, their manner of operations and fees.1405 These proposed rules changes are subject to notice and comment from the public, as well as Commission consideration, pursuant to Section 19(b) and Rule 19b–4.1406 Therefore, we continue to believe that the adopted amendments would reduce the discrepancy in the level of transparency between NMS Stock ATSs and national securities exchanges, thereby assisting market participants in making more informed trading decisions and providing them with a clearer understanding about where to route their orders in order to receive best execution. The adopted amendments modify the process for publicly disclosing a material amendment to a Form ATS–N from the process originally detailed in the Proposal.1407 We proposed in Rule 304(b)(2)(iv) making all amendments to Form ATS–N, including material amendments, public upon filing.1408 In response to commenters’ concerns that making public Form ATS–N material amendments before expiration of the Commission’s 30-day calendar review period could stifle innovation or be confusing or misleading to the public,1409 we are modifying the proposed rules for making Form ATS– N material amendments public. Under the adopted amendments, the cover page of the filed material amendment will be made public by the Commission upon filing and, unless the Commission declares the material amendment ineffective, the entirety of the material amendment, as amended, will be made public by the Commission following the expiration of the Commission’s 30calendar day review period.1410 The cover page would provide a brief narrative about the content of the amendment including: The Part and Item number of Form ATS–N that is subject to the change, whether or not such change will apply to all subscribers and the broker-dealer operator, and a brief summary of the change. Although the adopted process for material amendments would not provide market participants with as much transparency about a forthcoming material change to the operations of the 1405 See Proposal, supra note 2, at 81011. id. 1407 See supra Section IV.B.1.a (discussing Form ATS–N material amendments). 1408 See Proposal, supra note 2, at 81034. 1409 See supra Section IV.E.2.c. 1410 See id. 1406 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 NMS Stock ATS as the proposed process, we believe that the adopted process will provide increased transparency, relative to the baseline, to market participants about a material change during the Commission review period. (ii) Benefits of Public Disclosure of the ATS-Related Activities of the BrokerDealer Operator and Its Affiliates Most NMS Stock ATSs are operated by broker-dealers that also engage in other brokerage and dealing activities.1411 A broker-dealer operator of an NMS Stock ATS, or its affiliates, could have business interests that conflict with the interests of its ATS’s subscribers,1412 or customers of its subscribers.1413 As described in more detail in the Proposal,1414 we believe that public disclosure of detailed information about the ATS-related activities of the broker-dealer operator and its affiliates on Form ATS–N will allow market participants to better evaluate any conflicts of interest that may arise from such activities, allowing market participants to better determine whether submitting order flow to a particular NMS Stock ATS aligns with their business interests.1415 Further, the enhanced disclosure requirements could discourage broker-dealer operators from trading internally as principal in their NMS Stock ATS under circumstances where the trading might raise conflict of interest concerns, because those operations will be subject to public scrutiny by market participants.1416 The adopted amendments modify the requests for information on Form ATS– 1411 See supra Section II.A.2. on information provided on Form ATS, a small number of ATSs solely limit their brokerdealer business to the operation of an ATS. 1413 One commenter states that unavoidable conflicts of interest arise if an operator (or its affiliates) engages in principal trading activities within the ATS or if it is informed by others’ trading activities within the ATS. See HMA Letter at 13. Another commenter states ‘‘conflicts of interest arising from the operational complexities of ATSs, including the dual roles of the broker-dealer as ATS operators and as brokers, proliferated, all while remaining invisible to investors.’’ Better Markets Letter at 2. 1414 See Proposal, supra note 2, at 81124–25. 1415 A number of commenters generally agree with us that increased standardized information about the manner of operations of the broker-dealer that operates the NMS Stock ATS and potential conflicts of interest that may arise with its affiliates may better enable market participants to evaluate the extent to which individual trading venues align with their investment and trading decisions. See Fidelity Letter at 1; ICI Letter at 3; KCG Letter at 1; MFA/AIMA Letter at 2; PDQ Letter at 2; SIFMA Letter at 4–8. 1416 See Proposal, supra note 2, at 81124 (discussing the effects of the public disclosure of the ATS-related activities of the broker-dealer operator and its affiliates). 1412 Based PO 00000 Frm 00131 Fmt 4701 Sfmt 4700 38897 N regarding the activities of the NMS Stock ATS broker-dealer operator and its affiliates from those in Proposed Form ATS–N.1417 In response to commenters’ concerns that the scope of the requests in Part III of proposed Form ATS–N are too broad (especially for large, multiservice broker-dealers) and might require information about the broker-dealer operator’s and its affiliates’ activities that do not directly relate to the NMS Stock ATS, we are modifying certain requests on proposed Form ATS–N to solicit information from NMS Stock ATSs that focus on (1) the ability of the business units or affiliates of the broker-dealer operator to enter, or direct the entry of, orders into the NMS Stock ATS; and (2) whether those business units and affiliates receive any preferential treatment with respect to the services offered by the NMS Stock ATS, including any special access to information about trading interest.1418 This differs from the Proposal primarily with regard to the proposed requests for information about the trading centers of the broker-dealer operator and its affiliates that did not transact on the NMS Stock ATS. For example, Part III, Item 1 of proposed Form ATS–N would have required 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) 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’’), 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.1419 We have modified this disclosure to omit from Form ATS–N a list of non-ATS trading centers of the broker-dealer operator or its affiliates that cannot trade on the NMS Stock ATS. This modification means that, relative to the disclosures on proposed Form ATS–N, market participants will receive less information concerning the nonATS related operations of the NMS Stock ATS broker-dealer operator and its affiliates. However, we believe that the disclosures in adopted Form ATS– N concerning the ATS-related activities of the broker-dealer operator or its affiliates will still allow market participants to better evaluate any potential conflicts of interest that may arise on the NMS Stock ATS. Therefore, we do not believe that the benefits from the public disclosure of the ATS-related 1417 See Proposal, supra note 2, at 81043. supra Section V.C. 1419 See Proposal, supra note 2, at 81045. 1418 See E:\FR\FM\07AUR2.SGM 07AUR2 38898 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations activities of the broker-dealer operator or its affiliates on adopted Form ATS– N will vary significantly from the benefits described in the Proposal.1420 (iii) Benefits of Public Disclosure of Aggregate Platform-Wide Order Flow and Execution Statistics Part III, Item 26 of adopted Form ATS–N requests that an NMS Stock ATS explain and provide the most recent disclosure of 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 and that the NMS Stock ATS provided to one or more subscribers by the NMS Stock ATS at the end of calendar quarter. As described in detail in the Proposal, this disclosure request could benefit market participants.1421 NMS Stock ATSs that currently provide these aggregate platform-wide order flow and execution statistics to one or more subscribers could continue to provide their subscribers with these market quality statistics, in which case, the NMS Stock ATS will publicly disclose these statistics and how they are calculated in Form ATS–N, and all market participants, not just subscribers, would have access to the information. We believe this would reduce the discrepancy in information that subscribers receive and provide the opportunity for more market participants to benefit from this information which may be useful to market participants when evaluating an NMS Stock ATS as a possible venue to which to route orders in order to accomplish their investing or trading objectives.1422 Further, 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, adopted Form ATS–N would help these subscribers better understand the statistics. Two commenters agree with us that the requirement to disclose aggregate platform-wide order flow and execution statistics on Form ATS–N, if they are otherwise disclosed to subscribers, could cause NMS Stock ATSs to stop providing these statistics to their subscribers.1423 If some NMS Stock daltland on DSKBBV9HB2PROD with RULES2 1420 See Proposal, supra note 2, at 81122. Proposal, supra note 2, at 81124. 1422 See id (discussing how the disclosure of aggregate platform-wide order flow and execution statistics might help NMS Stock ATSs attract order flow). 1423 See MFA/AIMA Letter at 5; SIFMA Letter at 27. One of these commenters suggests that these NMS Stock ATSs could begin to direct parties requesting statistics and analysis to order 1421 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 ATSs cease disclosing these market quality statistics to subscribers, it 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. One commenter agrees and states the elimination of this flow of information from the NMS Stock ATSs would have a deleterious effect on subscriber knowledge and understanding of a given ATS’s operations, and negatively affect the availability of information that some subscribers consider important for their best execution determinations.1424 (iv) Benefits of Filing Form ATS–N in a Structured Format We believe that benefits will accrue to both the Commission and market participants as a result of having a structured format for Form ATS–N. Specifically, having Form ATS–N filed in the XML text-searchable format will allow the Commission and its staff and market participants to efficiently review and analyze information provided on Form ATS–N. In particular, the XML format will allow the Commission and the public to better gather, analyze, aggregate, compare, and use the Form ATS–N data. Requiring XML should result in the Form ATS–N data being provided in a consistent, structured format. XML is an open standard that defines, or ‘‘tags,’’ data using standard definitions. The tags establish a consistent structure of identity and context. This consistent structure can be automatically recognized and processed by a variety of software applications such as databases, financial reporting systems, and spreadsheets, and then made immediately available to the end user to search, aggregate, compare, and analyze. We believe that requiring Form ATS– N be provided in an XML format will provide the Commission and the public with data about NMS Stock ATSs in a format that facilitates search capabilities, and comparative analyses across NMS Stock ATSs and across filings, including more advanced text analytics for the more narrative responses of Form ATS–N. Absent this requirement of a specified format, users of the Form ATS–N data that wanted to aggregate the data or search across filings or filers would need to spend additional time transferring the data into a consistent format before it could information available on FINRA’s website or through third-party vendors. See SIFMA Letter at 27. 1424 See SIFMA Letter at 27. PO 00000 Frm 00132 Fmt 4701 Sfmt 4700 be analyzed, or incur the cost of a service provider that specializes in this data aggregation and comparison process. Further, unrestricted manual entry of data could lead to errors, thereby potentially reducing data quality and usability. Commenters who supported the standardization of Form ATS–N information also underscored the importance of making the information comparable.1425 While the commenters did not make specific reference to the structured format, having the Form ATS–N information submitted using the Commission’s XML schema will enhance the comparability of the Form ATS–N data by ensuring that the information has been submitted completely and consistently. Two commenters addressed the importance of completeness to Form ATS–N filings.1426 With the Commission’s XML schema, the restrictions incorporated into the schema (and consequently, also reflected in the web-fillable form) will help test for completeness of the data before submission and reduce filer uncertainty on the completeness and consistency of their filing. One commenter recommended that we consider ways to present information that would improve the readability and navigability of disclosure through the use of technology such as hyperlinks and/or XBRL technology.1427 The XML format selected by us is a technology format that presents the data consistently, which improves the readability and navigability of the data. In fact, XBRL is an XML-based technology, but, as discussed later, we do not think that XBRL is the appropriate format for this form.1428 While hyperlinks may be useful in some situations to cross-reference information, it does not by itself enhance the comparability of the underlying data, but can be incorporated within the XML format, as permitted. b. Costs We recognize that the filing and public disclosure of Form ATS–N and Form ATS–N amendments could impose costs on NMS Stock ATSs as well as costs on market participants. This section discusses specific costs associated with the filing and public disclosure of Form ATS–N including: the costs to NMS Stock ATSs; the effects of public disclosure of Form ATS–N on 1425 See Fidelity Letter at 1; Morgan Stanley Letter at 2; SIFMA Letter at 3; UBS Letter at 2–3. 1426 See MFA/AIMA Letter at 4; SIFMA Letter at 32–33. 1427 See Fidelity Letter at 5. 1428 See infra Section X.D.11. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 the price impact costs of market participants; and the costs associated with filing Form ATS–N and Form ATS–N amendments in a structured format. (i) Costs to NMS Stock ATSs We recognize that there would be costs that accrue to NMS Stock ATSs as a result of the adopted amendments. For NMS Stock ATSs, disclosure of previously non-public information could have some impact on the direction of order flow in the market. If this previously non-public information is valuable to certain NMS Stock ATSs—to the extent that it drives its revenues—disclosure of this information on Form ATS–N could be costly for these NMS Stock ATSs. For instance, disclosure of an NMS Stock ATS’s innovations could potentially result in other ATSs implementing similar methodologies, which could cause the NMS Stock ATS to lose its technological advantage. Such an ATS may need to engage in costly research in order to develop new innovations to stay profitable in the market. If an ATS cannot innovate fast enough to regain its competitive advantage in the market, order flow may then potentially migrate to other NMS Stock ATSs, brokerdealers that operate non-ATS trading centers, or to national securities exchanges.1429 Additionally, some order flow could be directed away from an NMS Stock ATS and towards one of these other trading centers if the disclosure of previously non-public information, such as aggregate platformwide order flow and execution statistics or information about the ATS related activities of the broker-dealer operator and its affiliates, causes some market participants to discover that their orders would have a greater likelihood of receiving lower execution quality on the NMS Stock ATS relative to these other trading centers. As such, this may result in lower revenues for some NMS Stock ATSs. These ATSs may then find it unprofitable to continue operating as ATSs and could exit the market for stock execution services or switch their business strategies to increase market share or profitability, possibly by continuing to operate as non-ATS OTC execution venues, such as OTC trading venues in which the broker-dealer operator internalizes order flow.1430 However, as discussed above,1431 we lack certain information necessary to 1429 See infra Section X.C.4.a for a discussion of the competitive effects of these costs (‘‘Impact on Efficiency, Competition, and Capital Formation— Competition’’). 1430 See infra Section X.C.4.a.i. 1431 See supra Section X.C and supra note 1356. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 quantify the extent to which entities that operate as ATSs for NMS Stocks would be dissuaded from doing so. Specifically, as discussed in the Proposal,1432 the decision for an NMS Stock ATS to continue operating or to cease operating as an ATS depends on numerous factors and we lack information about many of those factors. Commenters did not provide any additional information or analysis that would allow us to quantify the impact on Legacy NMS Stocks ATSs or other entities that may otherwise seek to operate a new NMS Stock ATS. Therefore, while we continue to believe that the costs of the adopted amendments could cause some Legacy NMS Stock ATSs to cease operating as ATSs and could dissuade some entities who would seek to operate as ATSs for NMS Stocks from doing so, we remain unable to quantify that impact. Furthermore, we do not have information to make reasonable assumptions about the fraction of displaced volume—from NMS Stock ATSs that would cease operations—that would be internalized by broker-dealer operator or its affiliates or directed towards national securities exchanges, NMS Stock ATSs, or non-ATS OTC trading centers. (ii) Price Impact Costs We recognize that heightened disclosure requirements pertaining to the public disclosure of Form ATS–N could increase market participants’ trading costs relative to the baseline if some ATSs cease operating as ATSs or if there is reduced entry of new NMS Stock ATSs. Institutional investors can elect to 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.1433 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 there is reduced entry of new NMS Stock ATSs or some NMS Stock ATSs cease operating as ATSs and shut down their ATSs as a result of the amendments, there could be a reduction 1432 See Proposal, supra note 2, at 81118. Tuttle: ATS Trading in NMS Stocks, supra note 1317. 1433 See PO 00000 Frm 00133 Fmt 4701 Sfmt 4700 38899 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, might now have to trade on other trading venues, such as other NMS Stock ATSs, non-ATS OTC execution venues, or national securities exchanges. If institutional investors execute their orders on a national securities exchange, they might have to absorb price impact costs, because national securities exchanges may not offer a means for reducing these costs. Additionally, if some NMS Stock ATSs cease operating as ATSs and begin operating as non-ATS OTC execution venues, such as an OTC trading venue in which the broker-dealer operator internalizes order flow, there could be an increase in the internalization of order flow. Increased internalization could reduce market depth and price informativeness and increase spreads and price impact costs.1434 However, as discussed above,1435 we do not know the extent to which the adopted amendments would affect an NMS Stock ATS’s decision to continue operations or cease operating as an ATS, and, therefore, cannot estimate the number of ATSs that would cease operating as ATSs. Nor do we have information in order for us to make reasonable assumptions about the fraction of displaced volume—from NMS Stock ATSs that would cease operations—that would be internalized by a broker-dealer operator or its affiliates or directed towards national securities exchanges, NMS Stock ATSs, or non-ATS OTC trading centers. Commenters did not provide any additional information or analysis that would allow us to quantify the number of Legacy NMS Stocks ATSs that would cease operating as ATSs or estimate the impacts on internalization or order flow. Therefore, we cannot estimate the impact that the adopted amendments would have on an NMS Stock ATS’s price impact costs. As described in detail in the Proposal,1436 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.1437 Because NMS Stock ATSs 1434 See supra Section X.B.6.a. supra Section X.C and supra note 1356. 1436 See Proposal, supra note 2, at 81127–28. 1437 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. 1435 See E:\FR\FM\07AUR2.SGM 07AUR2 38900 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations trade larger dollar volume in small capitalization, low-priced stocks, the price impact costs for institutional investors that trade in such stocks could in fact increase significantly if many NMS Stock ATSs decide to exit the market. However, as discussed above,1438 we cannot estimate what price market participants would receive in these stocks and, thus, we cannot estimate the price impact costs associated with the adopted amendments. daltland on DSKBBV9HB2PROD with RULES2 (iii) Filing in Structured Format We understand that there are also costs associated with varying degrees of structuring Form ATS–N. By offering two options for filers to submit Form ATS–N in EDGAR, filers will be able to select the method best suited to their situation.1439 We believe that the XML format of Form ATS–N has enhanced benefits for the Commission’s and market participants’ use of Form ATS– N while minimizing costs relative to filers having to file Form ATS–N using other structured formats.1440 By requiring the XML format, the Form ATS–N data must be structured to conform to incorporated validations. As stated previously, the validations will not test for the underlying accuracy of the data, but it will test for consistency and completeness.1441 For the NMS Stock ATSs that file Form ATS–N, the validations will help ensure that the form they submit is complete and appropriately formatted so that additional time will not have to be spent on subsequent Form ATS–N filings to correct for those errors. By comparison, the EFFS system originally proposed does not support the open-source XML format, but rather a proprietary XML implementation called XFDL. As a result, the EFFS system has fewer validation capabilities and cannot test for consistency and completeness as broadly as the XML format, in particular, at the element level. In addition, as proposed, filers would have been required to individually upload each narrative response as a separate exhibit, whereas EDGAR permits filers to provide all of their narrative responses within one structured XML file, which will slightly diminish their time spent in filing in the Form ATS– N information. 1438 See supra Section X.C and supra note 1356. supra Section VII. 1440 See infra Section X.D.11. 1441 See supra Section VII (discussing structured disclosure aspects of Form ATS–N). 1439 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 3. Economic Effects of Written Safeguards and Written Procedures To Protect Subscribers’ Confidential Trading Information, and Recordkeeping Requirements a. Benefits As explained above, we believe that the amendments to Rules 301(b)(10) 1442 and 303(a)(1) 1443 of Regulation ATS could increase investor protection by strengthening the effectiveness of NMS Stock ATSs’ safeguards and procedures to better protect confidential subscriber trading information and improving those ATSs’ ability to implement and monitor the adequacy of, and the ATSs’ compliance with, their safeguards and procedures.1444 Furthermore, as discussed above,1445 we believe that requiring ATSs to memorialize their safeguards and procedures in writing will improve Commission oversight by helping the Commission better understand, monitor, and evaluate how each NMS Stock ATS protects subscribers’ confidential trading information from unauthorized disclosure and access, which in turn could increase investor protection.1446 We also expect that this requirement will help oversight by the SRO of which the NMS Stock ATS’s broker-dealer operator is a member. b. Costs We believe that there would be implementation costs for NMS Stock ATSs that have not preserved in 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.1447 Based on the analysis for purposes of the PRA, we estimate that, in order to comply with the amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS,1448 it could take up to 87 ATSs an estimated one-time burden of up to 8 hours each, resulting in an estimated one-time paperwork cost of $2,910 for 1442 17 CFR 242.301(b)(10). CFR 242.303(a). 1444 See supra Section VI. 1445 See id. 1446 Three commenters agree with us that requiring ATSs to adopt written safeguards and written procedures would be beneficial to Commission oversight by helping the Commission better understand, monitor, and evaluate how each ATS protects subscribers’ confidential trading information from unauthorized disclosure and access. See HMA Letter at 17–18; ICI Letter at 10– 11; MFA/AIMA Letter at 6. 1447 17 CFR 242.301(b)(10). 1448 See supra Section VI. 1443 17 PO 00000 Frm 00134 Fmt 4701 Sfmt 4700 each ATS.1449 This would result in an aggregate estimated initial hour burden of 696 hours at an estimated cost of $253,170.1450 Furthermore, the 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 NMS Stock ATSs. For the purposes of the PRA, we estimate it could take approximately 4 hours annually for each ATS to update and maintain these safeguards and procedures,1451 resulting in an estimated annual paperwork cost for each ATS of $948.1452 This would result in an estimated aggregate ongoing hour burden for all ATSs to maintain and update their safeguards and procedures pursuant to Rules 301(b)(10) and 303(a)(1)(v) of 348 hours at an estimated cost of $82,476 annually.1453 We are also amending the recordkeeping rules relevant to the amendments to Rule 301 and new Rule 304. 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) 1454 of Regulation ATS.1455 We are also amending Rule 303(a)(1) 1456 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 amendments to Rule 301(b)(10). We understand that these amendments regarding recordkeeping requirements will require NMS Stock ATSs to set up systems and procedures, and these are expected to account for a portion of the implementation costs 1449 (Attorney at $406 × 7 hours) + (Compliance Clerk at $68 × 1 hour) = $2,910. As explained in the PRA, we believe that the majority of ATSs already maintain their written safeguards and procedures in writing, so most ATSs would not incur this initial cost. See supra Section IX.D.1.b. For purposes of this economic analysis, however, we assume that the initial cost of this new requirement would be imposed on all ATSs. 1450 8 hours × 87 ATSs = 696 hours. $2,910 × 87 ATSs = $253,170. 1451 See supra note 1116 and accompanying text. 1452 (Attorney at $406 × 2 hours) + (Compliance Clerk at $68 × 2 hours) = $948 annual paperwork cost per ATS. 1453 4 annual burden hours × 87 ATSs = 348 annual burden hours. $948 annual paperwork cost per ATS × 87 NMS Stock ATSs = $82,476 aggregate annual paperwork cost. 1454 17 CFR 242.303(a)(2). 1455 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. 1456 17 CFR 242.303(a)(1). E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 related to Rules 301(b)(2)(viii) and 304 of Regulation ATS 1457 and the amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS discussed above. 4. Impact on Efficiency, Competition, and Capital Formation We have considered the effects of the amendments on efficiency, competition, and capital formation. We believe that the amendments will help market participants make better informed decisions about where to route their orders in order to achieve their trading or investment objectives, enhance execution quality, and improve efficiency and capital allocation. We understand that the amendments to Regulation ATS could affect the competitive dynamics in the market for NMS stock execution services.1458 These disclosure requirements for NMS Stock ATSs could create a disincentive for entities to become ATSs in the market for NMS stock execution services and also result in some standalone ATSs exiting the market and some multi-service broker-dealers electing to cease operating their NMS Stock ATSs and instead initiate or increase operations as non-ATS OTC execution venues. However, in spite of these costs, and as discussed in more detail below, we believe that the NMS Stock ATSs that remain 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 will be disclosed in Form ATS–N will impact how market participants react in terms of their trading, which could improve market efficiency.1459 Moreover, increased transparency regarding the operations of NMS Stock ATSs could 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, such as internalizers. Because broker-dealers who transact in NMS stocks but do not operate ATSs are not subject to the operational transparency requirements, these broker-dealers could obtain a competitive advantage and attract and internalize order flow that would otherwise be entered and executed on NMS Stock ATSs. Furthermore, greater 1457 See supra Section X.C.1.b. infra Section X.C.4.a (‘‘Impact on Efficiency, Competition, and Capital Formation— Competition’’). 1459 See infra Section X.C.4.b (‘‘Impact on Efficiency, Competition, and Capital Formation— Efficiency’’). 1458 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 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. a. Competition The adopted amendments could impact 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. As discussed above,1460 we believe that the public disclosure of Form ATS– N could appropriately calibrate the level of transparency between NMS Stock ATSs and national securities exchanges, which could foster even greater competition for order flow of NMS stocks between those trading platforms. However, the increased public disclosure requirements associated with adopted Form ATS–N along with the uncertainty as to whether a Form ATS– N will be declared ineffective may raise the barriers to entry for new entities seeking to act as ATSs in the market for NMS stock execution services and may cause some existing Legacy NMS Stock ATSs to cease operating as ATSs. This could affect competition in the market for NMS stock execution services, which could in turn affect market participants. Additionally, the public disclosure of some previously nonpublic information about the manner of operations of the ATS, such as information on certain matching methodologies or order types, along with the greater competition for order flow, could affect the incentives of NMS Stock ATSs to innovate. The sections below discuss specific impacts of the adopted amendments on the competitive dynamics in the market for NMS stock execution services, including: Their impact on the entry of new NMS Stock ATSs and the continuation of existing Legacy NMS Stock ATSs, the impact of changes in the number of NMS Stock ATSs on market participant trading costs, and their impact on the incentives of ATSs to innovate. (i) Entry of New and Continuation of Legacy NMS Stock ATSs We believe that the adopted amendments could potentially raise the barriers to entry for new entities seeking to act as ATSs in the market for NMS 1460 See PO 00000 supra Section X.C.2.a. Frm 00135 Fmt 4701 Sfmt 4700 38901 stock execution services and could also affect the decision of Legacy NMS Stock ATSs to continue operating as ATSs. As discussed in more detail below, the uncertainty surrounding whether Form ATS–N and Form ATS–N amendment filings will be declared ineffective, the increased implementation and ongoing compliance costs associated with the adopted amendments, and the effects of public disclosure of previously nonpublic information required on Form ATS–N might dissuade some potential new ATSs from entering the market and could cause some Legacy NMS Stock ATSs to cease operating as ATSs.1461 If the costs of the adopted amendments make it unprofitable for the broker-dealer operator of a Legacy NMS Stock ATS to continue operating the ATS,1462 the broker-dealer operator could sell the ATS to another brokerdealer or shut down the ATS. Alternatively, a multi-service brokerdealer operator could cease operating the Legacy NMS Stock ATS as an ATS and instead initiate operations as a nonATS OTC execution venue, such as an OTC trading venue in which the brokerdealer operator internalizes order flow.1463 If a Legacy NMS Stock ATS that ceases operations is operated by a multi-service broker-dealer operator that also operates, or has affiliates that operate, other non-ATS OTC execution venues, the multi-service broker-dealer operator or its affiliates could increase operations at one of these venues instead of choosing to operate the Legacy NMS Stock ATS as a non-ATS OTC execution venue. If a Legacy NMS Stock ATS ceases to operate as an ATS, the broker-dealer operator or its affiliates might internalize the order flow that would have typically been sent to the ATS or they might send that order flow to a third-party broker-dealer to internalize.1464 Alternatively, the displaced order flow could be sent to one of the remaining NMS Stock ATSs 1461 Several commenters agreed that the disclosure requirements associated with Form ATS–N could act as a barrier to entry for new NMS Stock ATSs in the market; dissuade some existing ATSs from continuing to operate as ATSs; and force some smaller NMS Stock ATSs out of business. See Fidelity Letter at 10; Luminex Letter at 1–2; STANY Letter at 2. 1462 See supra Section X.C.1.b, Section X.C.2.b, and Section X.C.3.b. 1463 One commenter said that the disclosure obligations that only apply to broker-dealer ATS operators may incentivize broker-dealer ATS operators to seek alternatives other than operating an ATS. See Morgan Stanley Letter at 3. 1464 One commenter said the disclosure requirements could result in ATSs closing down their NMS Stock ATS operations and increase the use of broker-dealer internalized executions. See Fidelity Letter at 4, 5, 9, 10–11. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38902 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations or to a national securities exchange for execution. If increased barriers to entry cause fewer ATSs to enter the market or the increased costs of the adopted amendments cause some unprofitable Legacy NMS Stock ATSs to shut down operations, there could be fewer trading venues in the market for NMS Stock execution services. We believe that if the adopted amendments result in fewer trading venues in the market or cause some Legacy NMS Stock ATSs to operate as non-ATS OTC execution venues, it could affect 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.1465 While we believe that the adopted amendments could act as a barrier to entry or dissuade some existing ATSs from continuing to operate as ATSs, we reiterate that we lack certain information necessary to quantify the extent to which entities that otherwise would seek to operate as ATSs for NMS Stocks would be dissuaded from doing so.1466 Specifically, as discussed in the Proposal,1467 the decision for an NMS Stock ATS to continue operating or to cease operating as an ATS depends on numerous factors and we lack information about many of those factors. For example, we do not have information on the extent to which existing NMS Stock ATSs or potentially new ATSs rely on a competitive advantage, such as a unique matching methodology, to attract order flow or the extent to which the new rule and amendments would impact that competitive advantage. Furthermore, the decision to cease operating as an ATS is idiosyncratic to the particular NMS Stock ATS and we cannot ascertain the extent to which small (or in fact large) ATSs may be more prone to cease operating as ATSs.1468 Commenters did not provide any additional information or analysis that would allow us to quantify the impact on Legacy NMS Stocks ATSs or other entities that might otherwise seek to operate a new NMS Stock ATS. Therefore, while we continue to believe that the costs of the adopted amendments could cause some Legacy NMS Stock ATSs to cease operating as ATSs and could dissuade some entities who would seek to operate as ATSs for 1465 See infra Section X.C.4.a.ii. supra Section X.C and supra note 1356. 1467 See Proposal, supra note 2, at 81118. 1468 See id. NMS Stocks from doing so, we remain unable to quantify that impact. The subsections below discuss how various elements of the adopted amendments could potentially affect the barriers to entry for new entities seeking to act as ATSs and the decision of Legacy NMS Stock ATSs to continue or cease operating as ATSs in the market for NMS stock execution services, including: The enhanced filing requirements of Form ATS–N, the implementation and ongoing compliance costs associated with the adopted amendments, and the public disclosure of previously non-public information required on Form ATS–N. (a) Enhanced Filing Requirements of Form ATS–N The filing requirements of Form ATS– N will impose costs on NMS Stock ATSs. An ineffectiveness declaration would impose costs on an NMS Stock ATS—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. The adopted amendments to Regulation ATS might beget uncertainty as to whether an NMS Stock ATS’s Form ATS–N will be declared ineffective.1469 Greater uncertainty surrounding this process might act as a deterrent for potential ATSs wishing to effect transactions in NMS stocks, which could raise barriers for potential new entrants to the market for NMS stock execution services. The amendments we are adopting permit a Legacy NMS Stock ATS to continue its operations, on a provisional basis, pursuant to the filed initial Form ATS–N, and any amendments thereto, during 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 its activities relating to NMS stocks. The NMS Stock ATS would then have the opportunity to address deficiencies in the previously filed form by filing a new Form ATS–N.1470 The Commission could also declare amendments to an effective Form ATS– N ineffective. In particular, the adopted amendments require an NMS Stock ATS to file amendments on Form ATS–N to notice a material change to its operations at least 30 days prior to 1466 See VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 1469 See 1470 See PO 00000 supra Section X.C.1.b. supra Section IV.A.3. Frm 00136 Fmt 4701 Sfmt 4700 implementing that material change.1471 If the Commission declares a material amendment ineffective before 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. The NMS Stock ATS could, however, continue to operate pursuant to a Form ATS–N that had become effective.1472 Given the additional uncertainty introduced by the possibility that the Commission could declare a Form ATS–N or a Form ATS–N amendment ineffective, coupled with the number and complexity of the new disclosures that would be required under Form ATS–N, some broker-dealer operators of Legacy NMS Stock ATSs might find that the costs of compliance 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, some NMS Stock ATSs might elect to cease operating as an ATS. The adopted amendments might also potentially raise the barriers to entry for new entities seeking to act as ATSs in the market for NMS stock execution service by delaying the start of operations for new NMS Stock ATSs. Currently, to comply with Regulation ATS, an entity seeking to operate as an ATS must, among other things, file an initial operation report with the Commission on Form ATS at least 20 days before commencing operations.1473 Under the adopted amendments, an entity seeking to operate as an ATS in the market for NMS stock execution services could not commence operations until its initial Form ATS–N became effective, which could occur 120 calendar days after initially filing Form ATS–N with the Commission or at the end of the extended Commission review period.1474 Additionally, the disclosures required by Form ATS–N would be more comprehensive and require 1471 The amendments to Rule 301(a)(5) could, under exceptional circumstances such as to prevent substantial harm to market participants, allow an NMS Stock ATS to implement a material change more quickly by seeking an exemption from the Commission from the 30-calendar day advance notice requirements of Rule 304(a)(2)(i)(A). See supra Section III.B.3. 1472 Nothing would preclude the NMS Stock ATS from later submitting a new or revised Form ATS– N amendment for consideration by the Commission. 1473 See supra Section II.C. 1474 Our review period could last less than 120 days. Alternatively, we could extend the review period an additional 90 calendar days, if the Form ATS–N is unusually lengthy or raises novel or complex issues that require additional time for review. See supra Section IV.A.2. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations significantly more detail than those required on current Form ATS, which in turn could also delay the start of operations for new NMS Stock ATSs. As explained above, NMS Stock ATSs will incur both implementation and ongoing costs to meet the regulatory requirements under Rule 304.1475 On the margin, if these costs outweigh the benefits of operating an NMS Stock ATS, they could act as a deterrent for potential ATSs wishing to effect transactions in NMS stocks or cause some Legacy NMS Stock ATSs to cease operating as an ATS. However, we do not believe that the implementation and ongoing costs are significant enough to make this a likely possibility. The implementation and ongoing costs associated with filing Form ATS– N could also differentially affect small and large NMS Stock ATSs. 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. We believe 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. If the costs associated with filing Form ATS–N become disproportionately greater for smaller volume NMS Stock ATSs, some of these Legacy NMS Stock ATSs might be more likely to cease operating as ATSs. However, if the NMS Stock ATSs that decide to cease operating as ATSs due to this fixed implementation cost only transact small dollar (or share) volume, there may not be a large impact on the overall competitive structure for remaining NMS Stock ATSs. Moreover, the order flow that was being traded on these small NMS Stock ATSs might be absorbed and redistributed amongst these larger remaining NMS Stock ATSs. On the other hand, if the implementation costs cause a small NMS Stock ATS that is the sole provider of a niche service to cease operating as an ATS, it could affect market participants by requiring them to seek execution on other NMS stock trading venues that do not minimize their trading costs to the same extent.1476 (c) Public Disclosure of Form ATS–N Once an NMS Stock ATS’s initial Form ATS–N has become effective, the information disclosed on Form ATS–N will be made available to the broader investing public.1477 Updating and correcting amendments to Form ATS–N, as well as the cover page of material amendments, would be made public upon filing and the entirety of material amendments to Form ATS–N would be made public following the expiration of the review period.1478 While the information elicited on Form ATS–N is similar to the information that national securities exchanges are required to publicly disclose, we believe that the disclosure of this previously non-public information could have some impact on the competition for 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 might 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 would have a greater likelihood of receiving lower execution quality on an NMS Stock ATS relative to these other trading centers. As such, this could result in lower revenues for some NMS Stock ATSs. Those ATSs might then find it unprofitable to continue operating as ATSs. This might cause the broker-dealer operator to sell the ATS to another broker-dealer or shut down the ATS. It could also cause the brokerdealer operator to switch its business strategies to increase market share or profitability, possibly by continuing to operate as a non-ATS OTC execution venue, such as OTC trading venue in which the broker-dealer operator internalizes order flow. The disclosure of previously non-public operational information required under initial Form ATS–N could erode a new NMS Stock ATS’s competitive advantage and prevent it from attracting order flow. 1475 See supra Section X.C.1.b (‘‘Economic Effects of Enhanced Filing Requirements of Form ATS–N— Costs’’). 1476 See infra Section X.C.4.a.ii. 1477 See supra Section V for information contained on Form ATS–N. 1478 See supra Section IV.E. See also Rule 304(b)(2). daltland on DSKBBV9HB2PROD with RULES2 (b) Implementation and Ongoing Compliance Costs VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00137 Fmt 4701 Sfmt 4700 38903 This could potentially raise the barriers to entry for new entities seeking to act as ATSs in the market for NMS stock execution services and dissuade some entities that would potentially seek to operate as ATSs for NMS stocks from doing so. We believe that a reduction in the entry of new ATSs or some Legacy NMS Stock ATSs electing to cease operating as ATSs could affect competition in the market for NMS Stock execution services, which could 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.1479 We believe that the disclosure of an NMS Stock ATS’s innovations in 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, those trading venues may choose to cease operating as ATSs if operating the ATS becomes unprofitable for the broker-dealer operator. Both large and small NMS Stock ATSs could be affected by the detailed disclosures required under Rule 304 and Form ATS–N, though, the adopted amendments could 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 might result in lower revenue for the NMS Stock ATS. If public disclosure reduces revenue for a small NMS Stock ATS, or a large ATS without a substantial profit margin, the broker-dealer operator might no longer view the ATS as being profitable and cease operating it as an ATS. The broker-dealer operator of a large ATS that ceases operating as an ATS might be more likely to continue to operate the system as a non-ATS OTC execution venue. However, the broker dealer of a small ATS that ceases to operate as an ATS could potentially shutdown the ATS altogether. Alternatively, if public disclosure reduces revenue for a large NMS Stock ATS or a smaller NMS Stock ATS with large profit margins, such an ATS may 1479 See E:\FR\FM\07AUR2.SGM infra X.C.4.a.iii. 07AUR2 38904 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations continue operating as an ATS but may need to engage in costly research in order to develop new methodologies or enhancements that are less likely to be affected by the public disclosure requirements in order 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 could potentially cease operating as an ATS.1480 As discussed in detail above,1481 the effect on market participants if an ATS ceases operating as an ATS could vary based on the size (dollar volume) of the ATS. If the NMS Stock ATSs that cease operating as ATSs transact only small dollar (or share) volumes, we might not expect to see a large impact on the overall competitive structure of the NMS Stock ATSs that would remain in the market. Many smaller NMS Stock ATSs might not engage in other brokerage or dealing activities in addition to the operation of their NMS Stock ATS. Therefore, certain aspects of Form ATS–N (such as several items of Part II) might not be applicable to smaller NMS Stock ATSs, which would reduce the burdens and mitigate the effects of the disclosure requirements on these smaller NMS Stock ATSs. The increased transparency regarding the operations of NMS Stock ATSs might 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, such as internalizers. Because broker-dealers who transact in NMS stocks but do not operate ATSs are not subject to the operational transparency requirements, these broker-dealers could be at a competitive advantage and attract and internalize order flow that would otherwise be entered and executed on NMS Stock ATSs.1482 These disclosure requirements could also influence a broker-dealer operator’s decisions with respect to its operations of the NMS Stock ATS. Given the disclosure requirements regarding the ATS-related daltland on DSKBBV9HB2PROD with RULES2 1480 See Singhvi, Surrendra S. and Harsha B. Desai, 1971, ‘‘An Empirical Analysis of the Quality of Corporate Financial Disclosure,’’ Accounting Review 46, 129–138. 1481 See supra Section X.C.4.a.i.B. 1482 Four commenters assert that the enhanced filing requirements under the amendments to Regulation ATS would disproportionately impact multi-service broker-dealers who operate NMS Stock ATSs relative to other broker-dealers. These commenters state that these broker-dealers are held to a higher disclosure standard than broker-dealers that do not operate ATSs. See Fidelity Letter at 4, 9, 11; Liquidnet Letter at 9; Morgan Stanley Letter 2; STA Letter at 2. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 activities of broker-dealer operators and their affiliates, a multi-service brokerdealer operator of an NMS Stock ATS might cease operating its NMS Stock ATS as an ATS and instead internalize the order flow or send that order flow to a third-party broker-dealer that executes it.1483 Alternatively, the broker-dealer operator might send the order flow to a non-affiliated NMS Stock ATS that is operated by a non-multiservice broker-dealer, which 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. While we cannot quantify how much order flow from these displaced multi-services broker-dealers that operate NMS Stock ATSs would be routed back to national securities exchanges,1484 we believe that routing order flow to lit venues could potentially have some positive effects on price discovery and transparency.1485 In response to commenters’ concerns that proposed Form ATS–N would have required the public disclosure of proprietary or commercially sensitive information, we have revised the adopted Form ATS–N requests to not seek disclosure of certain information that could be proprietary or commercially sensitive, such as routing tables or numerical order flow segmentation metrics.1486 Additionally, we have revised the disclosures concerning the broker-dealer operator and its affiliates to focus on (1) the ability of the business units or affiliates of the broker-dealer operator to enter, or direct the entry of, orders into the NMS Stock ATS; and (2) whether those business units and affiliates receive any preferential treatment with respect to the services offered by the NMS Stock ATS, including any special access to information about trading interest.1487 We believe these changes should reduce the costs of the public disclosure of Form ATS–N for a NMS Stock ATS 1483 One commenter agrees that the enhanced disclosure requirements may incentivize multiservice broker-dealer ATS operators to seek alternatives other than operating an ATS. See Morgan Stanley Letter at 3. Another commenter states that the enhanced disclosure requirements could result in ATSs closing down their NMS Stock ATS operations and increase the use of brokerdealer internalized executions. See Fidelity Letter at 4, 9, 10–11. 1484 See supra Section X.C. 1485 See infra Section X.4.b (‘‘Impact on Efficiency, Competition, and Capital Formation— Efficiency’’). 1486 See supra Section IV.E.2.a. 1487 See supra Section V.C. PO 00000 Frm 00138 Fmt 4701 Sfmt 4700 relative to what they were in the Proposal.1488 Additionally, these changes, because of the decreased costs of public disclosure relative to the Proposal, should reduce the barriers to entry and also reduce the likelihood that a Legacy NMS Stock ATS ceases operating as an ATS compared to the Proposal. (ii) Effects of Changes in Number of NMS Stock ATSs on Market Participant Trading Costs Overall, we believe that the possible decision of entities that currently are NMS Stock ATSs to cease operating as ATSs, or the reduced entry of new NMS Stock ATSs, due to the requirements under Rule 304 and Form ATS–N could affect competition in the market for NMS stock execution services and could impact market participants by reducing the number of entities that are willing to act as NMS Stock ATSs and publicly disclose how they operate. If there is a reduction in the number of trading venues, either from some Legacy NMS Stock ATSs shutting down their operations or reduced entry into the market by prospective NMS Stock ATSs, it could impact market participants by reducing the number of NMS stock trading venues and, thus, reducing market participants’ opportunities to minimize its trading costs by sending orders to different trading platforms. Additionally, if some Legacy NMS Stock ATSs cease operating as ATSs and begin to operate as non-ATS OTC execution venues, there might be an increase in the internalization of order flow. Increased internalization could reduce market depth and price informativeness and increase spreads,1489 which could increase market participant trading costs. Therefore, the possible decision of NMS Stock ATSs to cease operating as ATSs and lower rate of entry for new NMS Stock ATSs could result in greater costs relative to the baseline cost savings that NMS Stock ATSs currently afford market participants. However, as discussed above and in the Proposal,1490 we lack information to determine the extent to which the increased public disclosure requirements associated with adopted Form ATS–N or the uncertainty as to whether a Form ATS–N will be declared ineffective would affect a Legacy NMS Stock ATS’s decision to continue operations or cease operating as an ATS or the decision of potential ATSs to enter the market. Therefore, we cannot 1488 See Proposal, supra note 2, at 81125. supra Section X.A.6.a. 1490 See supra Section X.C and supra note 1356; see also Proposal, supra note 2, at 81118. 1489 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 estimate the number of ATSs that would cease operating as ATSs or the number of potential new ATSs that would be dissuaded from entering the market. Furthermore, we do not have information in order for us to make reasonable assumptions about the fraction of displaced volume—from NMS Stock ATSs that would cease operating as ATSs—that would be internalized by a broker-dealer operator or its affiliates or directed towards national securities exchanges, NMS Stock ATSs, or non-ATS OTC trading centers. Commenters did not provide any additional information or analysis that would allow us to estimate the impacts on order flow or the continued operation of NMS Stock ATSs under the new rule and amendments. Therefore, we cannot quantify the ultimate effect that this will have on competition and market participant trading costs. (iii) Innovation As discussed above, the public availability of effective Form ATS–N and Form ATS–N amendments could result in the disclosure of an NMS Stock ATS’s previously non-public operational information.1491 These disclosures could potentially affect the incentives of NMS Stocks ATSs to innovate. The disclosure of an NMS Stock ATS’s innovations in its Form ATS–N or Form ATS–N amendments could potentially result in certain NMS Stock ATSs losing their technological advantage. For example, to the extent that an NMS Stock ATS’s competitive advantage in the market is driven by its matching methodology, the disclosure of this information could result in other NMS Stock ATSs implementing similar methodologies. On the one hand, this could potentially reduce the incentives for ATSs to innovate. For instance, if publicly disclosing an NMS Stock ATS’s new technological innovations results in the ATS earning less revenue from new innovations it develops, relative to the baseline, the ATS might lose its incentives to innovate. On the other hand, the increase in transparency resulting from the public disclosure of Form ATS–N could foster greater competition for order flow in the market for NMS Stock ATS execution services. This greater competition for order flow could 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. For example, if the public disclosure of technology giving an NMS Stock ATS a 1491 See supra Section X.C.2. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 competitive advantage results in the ATS losing that competitive advantage, the ATS could be forced to innovate and develop new technology or enhancements in order to attract more trading volume to its venue. However, if some NMS Stock ATSs cannot innovate fast enough to regain their competitive advantage in the market, orders might also flow away from these NMS Stock ATSs, and as a result, these ATSs may choose to cease operating as ATSs.1492 We do not have information on the extent to which existing NMS Stock ATSs or potentially new ATSs rely on a technological advantage, such as a unique matching methodology, to attract order flow. Nor do we have information regarding the ability of NMS Stock ATSs to innovate and replace a competitive advantage it might lose. Additionally, commenters did not provide any further information or analysis that would allow us to estimate at what rate NMS Stock ATSs innovate. Therefore, we cannot quantify the ultimate effect the adopted amendments will have on innovation. As discussed above, we have revised the adopted Form ATS–N requests to not seek disclosure of certain information that could be proprietary or commercially sensitive, such as routing tables or numerical order flow segmentation metrics.1493 Additionally, in response to commenters’ concerns that making Form ATS–N material amendments public before the expiration of the Commission’s 30-day calendar review period, at which point material changes could be implemented, could reduce the incentives for ATSs to innovate or be confusing or misleading to the public,1494 we are modifying the proposed rules for making Form ATS– N material amendments public. Under the adopted amendments, the entirety of the material amendment, as amended, will be made public by the Commission following the Commission’s 30-calendar day review period.1495 We believe that these changes, relative to the Proposal, will reduce the likelihood that details concerning an NMS Stock ATS’s technological innovations are disclosed to competitors before the ATS has a chance to implement them. Relative to the Proposal, the ATS might be able to derive greater benefits from new innovations, which could increase the incentives for NMS Stock ATSs to innovate. 1492 See supra Section X.C.4.a.i. supra Section IV.E.2.a. 1494 See supra Section IV.E.2.c. 1495 The cover page of the filed material amendment will be made public by the Commission upon filing. See id. 1493 See PO 00000 Frm 00139 Fmt 4701 Sfmt 4700 38905 Four commenters state that the proposed process for declaring a Form ATS–N ineffective would reduce the incentives to develop new technological innovations.1496 One of these commenters expresses concern that the process will be used to delay the effectiveness of NMS Stock ATSs whose features, while meeting regulatory requirements, do not meet current industry norms.1497 The Commission’s review process for declaring a Form ATS–N ineffective could affect the incentives of an existing or potentially new NMS Stock ATS to innovate. As discussed above,1498 an ineffectiveness declaration could impose costs on an NMS Stock ATS—such as costs from having to cease operations, roll back a change in operations, or delay the start of operations. The uncertainty regarding whether a Form ATS–N featuring a new innovation will be declared ineffective could discourage or delay existing and potentially new NMS Stock ATSs from developing or introducing new technological innovations. Additionally, the extended review for an initial Form ATS–N could raise the barriers to entry for new NMS Stock ATSs and reduce the incentives for potentially new ATSs to bring new innovations to the market.1499 However, as discussed in detail above,1500 the Commission’s review of Form ATS–N disclosures will not focus on the merits of the Form ATS–N disclosures. Therefore, to the extent the disclosures are complete and comprehensible, the Commission’s review process for a Form ATS–N filing that contains innovative features that do not meet current industry norms should not take longer or result in an increased chance of the Form ATS–N being declared ineffective. b. Efficiency As discussed above, the heightened disclosure requirements for NMS Stock ATSs might cause some NMS Stock ATSs to cease operating as ATSs and either shut down their operation or instead operate as non-ATS OTC execution venues, such as an OTC trading venue in which the brokerdealer operator internalizes order flow. This could affect competition in the market for NMS Stock execution services.1501 If it is the case that the NMS Stock ATSs that cease operating as 1496 See Fidelity Letter at 2–3, 8; KCG Letter at 5, 8; Luminex Letter at 1; STANY Letter at 2. 1497 See Fidelity Letter at 9. 1498 See supra Section X.C.1.b. 1499 See supra Section X.C.4.a.i.A. 1500 See supra Section IV.A.3.b. 1501 See supra Section X.C.4.a (‘‘Impact on Efficiency, Competition, and Capital Formation— Competition’’). E:\FR\FM\07AUR2.SGM 07AUR2 38906 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations ATSs are the ones that have worse execution quality, the surviving NMS Stock ATSs might enhance execution quality and allow market participants to transact at lower prices. If more order flow is directed towards these remaining NMS Stock ATSs, there could be a higher likelihood that the orders of buyers and sellers on an NMS Stock ATS would interact and execute, which could improve liquidity. It is also possible that the enhanced disclosure from NMS Stock ATSs might result in more order flow migrating towards national securities exchanges, which might foster greater order interaction between buyers and sellers on a national securities exchange, 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 will be publicly disclosed on Form ATS–N and that trading in the market by NMS Stock ATSs might in fact be concentrated on fewer NMS Stock ATSs as a result of the amendments, market participants might 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 amendments to Regulation ATS might improve market efficiency. daltland on DSKBBV9HB2PROD with RULES2 c. Capital Formation Under the adopted amendments, market participants would be aware of which NMS Stock ATSs offer better execution services or better protection against the dissemination of their nonpublic trading information, and as a result, these NMS Stock ATSs could attract even more order flow. Furthermore, to the extent the adopted amendments appropriately calibrate the level of transparency between NMS Stock ATSs and national securities exchanges, this would foster greater competition for order flow of NMS stocks between those trading platforms. Even if some NMS Stock ATSs cease operating as ATSs, we believe the enhanced disclosure requirements of the adopted amendments will assist market participants in obtaining best execution of their orders. This could lead to lower spreads and thereby foster greater capital formation and increased market liquidity relative to the baseline. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 D. Reasonable Alternatives 1. Require NMS Stock ATSs to Publicly Disclose Current Form ATS We could allow NMS Stock ATSs to continue to describe their operations on current Form ATS, but make Form ATS public either by posting it on the Commission’s website or requiring 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. As described in detail in the Proposal, this alternative would lower the cost of compliance for current and future NMS Stock ATSs compared to the adopted amendments, but market participants would continue to receive limited information regarding how orders interact, match, and execute on NMS Stock ATSs and the ATS-related activities of NMS Stock ATSs’ brokerdealer operators and their affiliates.1502 Public disclosure of Form ATS could have some harmful effects on the competitive dynamics of NMS Stock ATSs; however, such effects would likely be smaller than those expected under the adopted amendments. Regulators’ oversight of NMS Stock ATSs under this alternative would not be improved compared to the baseline, as it would under the adopted amendments. Six commenters disagree with our analysis of this alternative.1503 These commenters suggest that we could achieve our transparency goals by requiring all ATS operators to publicly disclose Form ATS. For the reasons discussed above and in the Proposal, we continue to believe that this alternative would reduce the benefits that would accrue to market participants as compared to the adopted amendments. 2. Require Form ATS–N But Deem Information Confidential We could require NMS Stock ATSs to file Form ATS–N with the Commission, but not make it publicly available. Form ATS–N would include detailed disclosures about the NMS Stock ATS’s operations and the ATS-related activities of its broker-dealer operator and its affiliates, and the Commission could declare filings on Form ATS–N ineffective. As described in detail in the Proposal,1504 we believe that this alternative would improve the quality of 1502 See Proposal, supra note 2, at 81128–29. Luminex Letter at 2–5; MFA/AIMA Comment Letter at 2; Morgan Stanley Letter at 2; PDQ Letter at 2; SIFMA Comment Letter at 3; STANY Letter at 3. 1504 See Proposal, supra note 2, at 81129. NMS Stock ATSs’ disclosures and strengthen the Commission’s oversight of NMS Stock ATSs. However, this alternative would not make NMS Stock ATSs’ operations more transparent for market participants. No commenters directly remarked on this alternative, and we continue to believe that this alternative would entail fewer benefits to market participants as compared to the adopted amendments, because it would not make NMS Stock ATSs’ operations more transparent for market participants. However, a number of commenters suggest we take a tiered public disclosure approach and not publicly disclose certain information on Form ATS–N that is potentially sensitive and of a proprietary nature.1505 We believe that a tiered public disclosure system for Form ATS–N would still produce the benefits from the improved quality of NMS Stock ATSs’ disclosures and the information about the ATS-related activities of the broker-dealer operator and its affiliates described above. Additionally, the public disclosure of a portion of Form ATS–N could improve transparency and provide market participants with more information about an NMS Stock ATS’s operations, which would lower search costs relative to the baseline. Because all of the information on Form ATS–N would not be made public, the benefits of increased transparency could be lower under a tiered public disclosure approach than they would be under the adopted amendments. Therefore, search costs may be higher and market participants may make less informed decisions regarding where to route their orders and therefore result in lower execution quality under a tiered public disclosure approach than they would obtain under the adopted amendments. However, the public disclosure costs to ATSs may be lower under a tiered public disclosure approach, which could result in lower barriers to entry for new NMS Stock ATSs and fewer Legacy NMS Stock ATSs ceasing to operate at ATSs than under the adopted amendments. 3. Require NMS Stock ATSs to Publicly Disclose Form ATS–N But Not Declare Form ATS–N Ineffective We could require NMS Stock ATSs to file Form ATS–N and make it public, but continue to use the current notice regime instead of the process for declaring Form ATS–N ineffective. As described in detail in the Proposal,1506 1503 See PO 00000 Frm 00140 Fmt 4701 Sfmt 4700 1505 See Liquidnet Letter at 8; Luminex Letter at 2; Morgan Stanley at 2; SSGA Letter at 2; STANY Letter at 3; UBS Letter at 7. 1506 See Proposal, supra note 2, at 81129. E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 relative to the adopted rule, the alternative of maintaining the current notice regime would lower demand for Commission and staff resources, could reduce costs for NMS Stock ATSs, and could lower the barriers to entry for new NMS Stock ATSs. However, it would be more difficult for the Commission to exercise its oversight responsibilities and the alternative would not provide the same level of protection to market participants as the adopted amendments. Two commenters disagree with our analysis of this alternative, and expressed concerns that the effectiveness determination of Form ATS–N would be a burdensome process for the Commission.1507 They suggest that these potential costs outweigh the benefits of the review process under the adopted amendments. We believe that the review process will contribute towards costs in terms of Commission resources. However, for the reasons discussed above, we continue to believe that the review process will provide benefits in terms of mitigating inaccurate and incomplete disclosures, which could improve investor protection.1508 4. Initiate Differing Levels of Public Disclosure Depending on NMS Stock ATS Characteristics We could require different levels of disclosure among NMS Stock ATSs based on dollar trading volume. As described in detail in the Proposal,1509 this could reduce compliance costs relative to the adopted amendments. However, because a portion of the implementation costs are fixed and because certain sections of Form ATS– N would not be applicable to smaller NMS Stock ATSs that are not operated by multi-service broker-dealer operators and do not engage in other brokerage or dealing activities, any reduction in compliance costs smaller NMS Stock ATSs might experience under this alternative could be small. At the same time, this alternative could result in a competitive advantage for small NMS Stock ATSs, because it could give them more time to innovate without having to disclose such innovation to competitors.1510 This could give small NMS Stock ATSs an advantage in attracting order flow relative to large NMS Stock ATSs, which could spill over to market participants that execute on these ATSs, 1507 See Consumer Federation of America Letter at 2, 10–11; Fidelity Letter at 9. 1508 See supra Section IV.A.2 (‘‘Rule 304(a)(1)(ii): Commission Review Period’’) 1509 See Proposal, supra note 2, at 81129. 1510 See id. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 by increasing the execution quality of their trades. Nonetheless, because broker-dealer operators could have the incentive to allocate order flow to multiple NMS Stock ATSs to avoid reaching threshold volumes, this alternative could create some information opacity in the market, which could lead to lower execution quality for market participants relative to the adopted amendments. One commenter expressed concerns about applying different levels of disclosure based on metrics such as trading volume, mentioning that Form ATS–N is not sufficiently onerous relative to Form ATS to justify smallscale exemptions.1511 Contrary to this concern, another commenter stated that the disclosure requirements should apply to larger ATSs with a ‘‘substantial market footprint’’ to avoid discouraging competitive innovations among NMS Stock ATSs.1512 Although compliance costs may be lessened if small stock ATSs are required to provide less disclosure on Form ATS–N, (i.e., ATSs with lower trading volume), this reduction in compliance costs could be small. Requiring less disclosure from small NMS Stock ATSs might also result in greater innovation relative to the adopted amendments. However, we continue to believe that requiring less disclosure from low-volume NMS Stock ATSs could reduce the benefits market participants receive from the greater transparency about the operations of NMS Stock ATSs and the ATS-related activities of their broker-dealer operators and their affiliates. This could increase market participant search costs when evaluating potential NMS stock trading venues, which could result in market participants making less informed decisions about which trading venue aligns with their investing or trading objectives. 5. Require NMS Stock ATSs To Register as National Securities Exchanges and Become SROs We could 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. While commenters did not remark on this alternative, we continue to believe that, as described in detail in the Proposal,1513 this alternative would provide market participants with more information 1511 See CFA Institute Letter at 3. STANY Letter at 2. 1513 See Proposal, supra note 2, at 81129–30. 1512 See PO 00000 Frm 00141 Fmt 4701 Sfmt 4700 38907 about priority, order interaction, display, and execution procedures, which would help them make better informed decisions about where to route their orders for best execution. Competition among and between trading venues could increase, leading to greater market liquidity and market efficiency. Further, this alternative could strengthen Commission oversight, thus benefitting market participants. However, this alternative would create high startup costs and high ongoing operational costs for NMS Stock ATSs compared to the adopted amendments.1514 We continue to believe that these costs to NMS Stock ATSs would be significant. 6. Discontinue Quarterly Volume Reports on Form ATS–R We could amend Regulation ATS so that NMS Stock ATSs would no longer be required to file quarterly volume reports on Form ATS–R. As described in detail in the Proposal,1515 we believe this alternative could result in reduced costs for NMS Stock ATSs, because they would no longer be required to prepare a quarterly Form ATS–R in addition to their Form ATS–N. However, some competitively sensitive information contained on Form ATS–R, such as the ATS’s subscriber list and the list of persons granted, denied, or limited access during the reporting period— which is not solicited under adopted Form ATS–N, would be made public on Form ATS–N. Making such information public could harm the NMS Stock ATS as well as persons denied access. One commenter suggested that in light of information on FINRA’s website regarding ATSs,1516 and the detailed disclosures in periodic disclosures that would be required by proposed Form ATS–N, we should no longer require an NMS Stock ATS to file Form ATS– R.1517 However, this commenter did not suggest that the information that is contained on Form ATS–R and not included on FINRA’s website or Form ATS–N,1518 such as the ATS’s subscriber list and the list of persons granted, denied, or limited access during the reporting period, should be 1514 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 3, at 70907. 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. 1515 See Proposal, supra note 2, at 81130. 1516 See supra note 15. 1517 See SIFMA Letter at 8 n.16. 1518 See supra note 259. E:\FR\FM\07AUR2.SGM 07AUR2 38908 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations included in Form ATS–N. If ATSs were no longer required to file Form ATS–R and this information was not made available in Form ATS–N, then the Commission could lose efficient access to information available in the form that helps it oversee and monitor the trading activity of NMS Stock ATSs.1519 This loss of efficiency could reduce the benefits of Commission oversight, which could reduce investor protection relative to today. 7. Require NMS Stock ATSs To Operate as Limited Purpose Entities We could 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 Form ATS–N, Form ATS–N amendments, and notices of cessation on 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. While commenters did not remark on this alternative, we continue to believe that, as described in detail in the Proposal,1520 the benefit of this alternative would be to eliminate potential conflicts of interest, but that this alternative might discourage brokerdealers 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, many broker-dealers might choose to file a cessation of operations report and shut down the operations of their NMS Stock ATS,1521 resulting in similar (though potentially more severe) effects on the competitive dynamics of the ATS market as under the adopted amendments. daltland on DSKBBV9HB2PROD with RULES2 1519 See supra Section III.B.5 (‘‘Rule 301(b)(9): Form ATS–R Quarterly Reports’’). 1520 See Proposal, supra note 2, at 81130. 1521 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. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 8. Prohibit Broker-Dealer Operators and Affiliates From Trading on the NMS Stock ATS Several commenters believe that the increased disclosure requirements on Form ATS–N concerning the ATSrelated activities of the broker-dealer operator and its affiliates do not do enough to reduce conflicts of interest and suggested that we prohibit conflicts of interest altogether on NMS Stock ATSs.1522 Under this alternative, the broker-dealer operator could continue to act as a broker-dealer operator of an NMS Stock ATS and engage in non-ATS functions, but would be subject to new requirements designed to limit potential conflicts of interest. These requirements would include a prohibition on trading on the NMS Stock ATS by the brokerdealer operator and its affiliates. We believe that banning conflicts of interest, as opposed to increasing disclosure of relationships between the ATS and the broker-dealer operator and the broker-dealer operator’s affiliates, could be potentially harmful. Multiservice broker-dealers, that is, brokerdealers who have operations and activities in addition to the ATS may be more prone to having conflicts of interest, and therefore, banning conflicts of interest could result in these brokerdealers ceasing to operate their ATSs.1523 Therefore, we believe that this approach suggested by these commenters could have substantially deleterious effects on liquidity provision, and for this reason, we are maintaining our approach in the adopted amendment. 9. Lower the Fair Access Threshold for NMS Stock ATSs 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.1524 We could lower the fair access threshold under Rule 301(b)(5) of Regulation ATS 1525 for NMS Stock ATSs to a level sufficiently low that most NMS Stock ATSs would be prohibited from engaging in many discriminatory practices.1526 1522 See Better Markets Letter at 5–6; Consumer Federation of America Letter at 7–8; HMA Letter at 1. 1523 See supra Section X.C.4.a.i. 1524 See supra Section II.C. 1525 17 CFR 242.301(b)(5). 1526 As discussed above in Section II.C, 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. PO 00000 Frm 00142 Fmt 4701 Sfmt 4700 As described in detail in the Proposal,1527 we believe that there would be fewer benefits under this alternative because the fair access requirements would apply only to the NMS stocks for which the NMS Stock ATS had crossed the fair access threshold. We could address that situation by proposing further amendments to the fair access requirements. However, we believe that the disclosures that would be required by 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. No commenters directly commented on this alternative, and we continue to believe it would result in fewer benefits than the adopted amendments. However, one commenter recommended as an alternative that, in addition to the adopted amendments, we should also eliminate the 5% fair access threshold for NMS Stock ATSs, i.e., reduce the fair access threshold to zero, because the current volume threshold creates a competitive imbalance between exchanges—which are subject to fair access requirements—and NMS Stock ATSs.1528 Under the commenter’s alternative, if the fair access threshold were eliminated, then all NMS Stock ATSs would need to meet the requirements of Rule 301(b)(5) that prohibit or limit discriminatory practices of ATSs.1529 Because the commenter’s alternative would include the adopted amendments and the public disclosure of Form ATS–N, the operational transparency for NMS Stock ATSs would still increase, bringing it more in line with the operational transparency for national securities exchanges. In addition, imposing fair access requirements on all NMS Stock ATSs could further reduce conflicts of interest on ATSs, relative to the adopted amendments, because an ATS might not be able to offer preferential treatment to certain subscribers. However, the increased costs of fair access compliance could cause more ATSs to cease operating as ATSs. More ATSs ceasing to operate as ATSs may cause an increase in the internalization of order flow, which could reduce price informativeness and increase trading costs.1530 1527 See Proposal, supra note 2, at 81131. Citadel Letter at 2–3. 1529 See supra Section II.C. 1530 See supra Section X.B.6.a. 1528 See E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 10. Requirements To Disclose Aggregate Platform-Wide Order Flow and Execution Statistics to all Subscribers We could eliminate the requirement for NMS Stock ATSs to disclose aggregate platform-wide order flow and execution statistics that the ATS publishes or otherwise provides to one or more subscribers that are not disclosed pursuant to Rule 605 of Regulation NMS from Form ATS–N. An advantage of this approach is that NMS Stock ATSs may be motivated to continue to provide order flow and execution statistics to subscribers under this alternative.1531 However, relative to the adopted amendments, this approach may fail to mitigate the problem of differential access to information about ATS operations and activities across market participants, resulting in some market participants making lessinformed decisions about how to obtain best execution for themselves and their clients. daltland on DSKBBV9HB2PROD with RULES2 11. Specify Alternative Structured Formats for Form ATS–N We could specify alternative structured formats such as Inline XBRL, or FIXML.1532 The benefit of Inline XBRL is that it provides more sophisticated validation, presentation and reference features for filers and users. However, we do not believe that Inline XBRL is yet in common use by all entities that would be filing Form ATS– N. To use Inline XBRL with Form ATS– N, the Commission would have to design a new Commission-specific taxonomy for the Form ATS–N disclosures. While the Inline XBRL, FIXML, and XML formats would all 1531 Two commenters agree with our assessment under this alternative that eliminating the requirement for NMS Stock ATSs to disclose aggregate platform-wide order flow and execution statistics that the ATS publishes or otherwise provides to one or more subscribers that are not disclosed pursuant to Rule 605 of Regulation NMS could be beneficial to subscribers because it may motivate NMS Stock ATSs to continue to provide order flow and execution statistics to subscribers. See MFA/AIMA Letter at 5; SIFMA Letter at 27. The same commenters also suggest that eliminating these requirements could result in ATSs continuing to send customized reports and bespoke statistics to their clients. See MFA/AIMA Letter at 5; SIFMA Letter at 27. Under the adopted amendments disclosure requirements under Part III, Item 26 would not apply when an NMS Stock ATS provides a participant with individualized or custom reports containing data relating to that participant’s specific usage of the ATS. 1532 One commenter recommends that we structure Form ATS–N so that it breaks out the required information on NMS Stock ATS operations in a format that is comparable across ATSs. It also suggests we might also consider ways to present information that would improve the readability and navigability of disclosure through the use of technology such as hyperlinks and/or XBRL technology. See Fidelity Letter at 5. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 require the use of an XML-based schema, Inline XBRL would require the additional familiarity with the Commission-specific taxonomy that is not necessary for the relatively simple disclosure requirements of Form ATS– N. FIXML is a format designed and used for expressing trading information, and while familiar to NMS Stock ATSs, it is not widely used by the public. The end users of Form ATS–N data will likely incur upfront costs to learn and use FIXML, unlike the widely used and freely available XML format. For these reasons, we believe that the XML format would minimize costs relative to filers having to file Form ATS–N using these other structured formats. 12. Specify Other Filings Methods for Form ATS–N We could require NMS Stock ATSs to use the EFFS/SRTS system currently used for other NMS filings instead of EDGAR. While commenters did not remark on this alternative, the primary benefit of this alternative approach would be that ATSs would likely be familiar with the web fillable forms and related filing process on EFFS/SRTS. Relative to the adopted amendments, learning the EDGAR filing process may pose an initial transition burden, although the larger NMS Stock ATSs may already be familiar with the EDGAR filing process, and the completion of web fillable forms in EDGAR would be very similar to the EFFS/SRTS experience without the additional burden of an annual digital signature certification. Finally, the time and effort of filing as proposed would be incrementally more costly to NMS Stock ATSs because each narrative response would have to be individually uploaded as a separate exhibit, as opposed to providing all of their narrative responses within one structured XML file or completing all narrative responses in one web-fillable form. Moreover, because the EFFS system does not support the open-source XML format, but rather a proprietary XML implementation called XFDL, the EFFS system has fewer validation capabilities than EDGAR, particularly at the element level. As a result, some NMS Stock ATSs might inadvertently submit incomplete or inconsistently formatted information that is not discovered until after Commission staff review, which would then require the NMS Stock ATS to spend additional time to refile the information. We believe this would result in extra costs in filing Form ATS– N through EFFS/SRTS relative to requiring NMS Stock ATSs to filing Form ATS–N through EDGAR. PO 00000 Frm 00143 Fmt 4701 Sfmt 4700 38909 XI. Regulatory Flexibility Act Certification The Regulatory Flexibility Act (‘‘RFA’’) 1533 requires Federal agencies, in promulgating rules, to consider the impact of those rules on small entities. We certified in the Proposal, pursuant to Section 605(b) of the RFA,1534 that the amendments to Regulation ATS would not, if adopted, have a significant economic impact on a substantial number of small entities. We included this certification in Section XV of the Proposing Release. Although we encouraged written comments regarding this certification, no commenters responded to this request. For purposes of Commission rulemaking in connection with the RFA,1535 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,1536 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.1537 All ATSs, including NMS Stock ATSs, would continue to have to 1533 5 U.S.C. 601 et seq. U.S.C. 605(b). 1535 Although Section 601(b) of the RFA defines the term ‘‘small entity,’’ the statute permits agencies to formulate their own definitions. We have adopted definitions for the term ‘‘small entity’’ for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this 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). 1536 17 CFR 240.17a–5(d). 1537 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). 1534 5 E:\FR\FM\07AUR2.SGM 07AUR2 38910 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations register as broker-dealers.1538 We examined recent FOCUS data for the 41 broker-dealers that currently operate ATSs that trade NMS stocks and concluded that no more than 5 of the broker-dealer operators of ATSs that currently trade NMS stocks 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) and were not affiliated with any person that is not a small business or small organization. Three of these five entities, however, never reported transactions in any security, including NMS stocks, to the Commission since filing an initial operations report on Form ATS. Therefore, we believe that it is unlikely that these three entities would complete a Form ATS–N to operate as an NMS Stock ATS pursuant to Rule 304. The remaining two entities include one broker-dealer that operates an ATS pursuant to an active Form ATS on file with the Commission and has reported transactions in NMS stocks to the Commission. The other broker-dealer has filed an initial operation report on Form ATS with the Commission and noticed its intention to trade NMS stocks; however, this ATS has not yet commenced operations. We do not believe that Rule 304, including the requirement for NMS Stock ATSs to file a Form ATS–N, will represent a significant economic impact on these two entities. Stand-alone broker-dealers that operate an ATS, such as these two entities, will have less complex ATS operations than multi-service brokerdealers that operate an ATS. For example, we believe that these two entities would not need to respond to all requests in Part II of Form ATS–N because they are not likely to engage in the same ATS-related activities as multiservice broker-dealers that operate an ATS. As a result, we expect that the burden associated with completing the form would be substantially lower for these two ATS.1539 In addition, because we believe that the two ATSs are operationally less complex than ATSs operated by multi-service broker-dealer 1538 17 CFR 242.301(b)(1). estimated in the PRA, we estimate an average total cost of $41,689.10 for the initial hour burden of complying with Rules 301(b)(2)(viii) and 304 of Regulation ATS (including completing Form ATS–N). The burden hours associated with Part II of Form ATS–N is 29 hours. See supra note 1228. We estimate that ATSs that are small entities would likely need to complete approximately half of Part II. Thus, the reduction of 14.5 burden hours (29 hours × 0.5 = 14.5 hours) would result in a cost savings of $5,155 for each small entity compared to the average total cost estimate. (Attorney 7.5 hours × $406) + (Compliance Manager 6.0 hours × $302) + (Senior Marketing Manager 1 hour × $298) = $5,155. daltland on DSKBBV9HB2PROD with RULES2 1539 As VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 operators, the burden to respond to the items under Part III of Form ATS–N (Manner of ATS Operations) 1540 would be lower than for the average NMS Stock ATS operated by a multi-service broker-dealer operator.1541 We are also amending Rule 301(b)(10) to require that all ATSs reduce to writing their safeguards and procedures to protect subscribers’ confidential trading information and their oversight procedures to ensure that such safeguards and procedures are followed. The amendment to Rule 301(b)(10) would thus apply to the 15 small entities that are ATSs (including NMS Stock and non-NMS Stock ATSs), but we believe that there would not be significant economic impact on these entities because, based on our experience, most of these ATSs already maintain their Rule 301(b)(10) safeguards and procedures in writing, and to the extent they do not, any resulting burden is small.1542 Consequently, for these reasons, for purposes of the RFA, we certify that the amendments to Regulation ATS would not have a significant economic impact 1540 For example, based on Commission experience, less operationally complex ATS may not need to respond to all or part of the requests in Part III of Form ATS–N, such as Item 5 (Means of Entry), Item 6 (Connectivity and Co-location), Item 7 (Order Types and Attributes), Item 9 (Conditional Orders and Indications of Interest), Item 13 (Segmentation; Notice), Item 14 (CounterParty Selection), among others. In addition, a smaller NMS Stock ATS is unlikely to exceed the volume thresholds that would subject the ATS to the requirements of Rule 301(b)(3) and 301(b)(5) of Regulation ATS, and therefore, Part III, Items 24 and 25 would be inapplicable. These items represent 36 burden hours above the current baseline for an initial operation report on current Form ATS. These 36 burden hours represent a cost of approximately $11,846 for each ATS that would likely be substantially reduced for these two small entities. (Attorney 12.25 hours × $406) + (Compliance Manager 11.25 hours × $302) + (Senior Systems Analyst 12.5 hours × $278) = $11,846. As noted above, the we estimate an average total cost of $41,689.10 for the initial hour burden of complying with Rules 301(b)(2)(viii) and 304 of Regulation ATS (including completing Form ATS– N). 1541 If the three inactive ATSs discussed above in this section (which we expect would not complete a Form ATS–N) were to complete a Form ATS–N, they would experience a substantially reduced burden in completing Form ATS–N given that they also are not multi-service broker-dealers, and their systems are less complex than other NMS Stock ATSs. 1542 In the Proposal, we estimated that 15 of the 84 ATS at that time might not have these procedures in writing. See Proposal, supra note 2, at 81093. We did not receive any comments on this estimate. The PRA burden for an ATS to put in writing its procedures protect subscribers’ confidential trading information, and the oversight procedures to ensure such safeguards and procedures are followed, would be approximately 8 hours, which represents $2,910 in costs for each ATS. (Attorney 7 hours × $406) + (Compliance Clerk 1 hour × $68) = $2,910. PO 00000 Frm 00144 Fmt 4701 Sfmt 4700 on a substantial number of small entities. XII. Statutory Authority and Text of Amendments 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 adopts Form ATS–N under the Exchange Act, to amend Rule 3a1–1(a) and Regulation ATS under the Exchange Act, and to amend 17 CFR 200.30–33. List of Subjects in 17 CFR Parts 232, 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 amended as follows: PART 232—REGULATION S–T— GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS 1. The general authority citation for part 232 continues to read as follows: ■ Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29, 80a–30, 80a–37, 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted. * * * * * 2. Amend § 232.101 by adding paragraph (a)(1)(xxi) to read as follows: ■ § 232.101 Mandated electronic submissions and exceptions. (a) * * * (1) * * * (xxi) Form ATS–N (§ 249.640 of this chapter). * * * * * PART 240—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1934 3. The general 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, 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. 1887 (2010); and secs. 503 and 602, Pub. L. 112–106, 126 Stat. 326 (2012), unless otherwise noted. * E:\FR\FM\07AUR2.SGM * * 07AUR2 * * Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations § 240.3a1–1 [Amended] 4. Amend § 240.3a1–1 by removing ‘‘242.303’’ from paragraphs (a)(2) and (3) and adding in its place ‘‘242.304’’. ■ PART 242—REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES 5. 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. 6. Amend § 242.300 by: a. In paragraph (f) introductory text, adding the phrase ‘‘the broker-dealer of’’ before the phrase ‘‘an alternative trading system’’ wherever it occurs; ■ b. In paragraphs (f)(2) and (3), adding the phrase ‘‘the broker-dealer of’’ before the phrase ‘‘the alternative trading system’’; and ■ c. Adding paragraph (k) to read as follows: ■ ■ § 242.300 Definitions. daltland on DSKBBV9HB2PROD with RULES2 * * * * * (k) NMS Stock ATS means an alternative trading system, as defined in paragraph (a) of this section, that trades NMS stocks, as defined in paragraph (g) of this section. ■ 7. Amend § 242.301 by: ■ a. In paragraph (a)(5), adding the phrase ‘‘or § 242.304’’ after the phrase ‘‘paragraph (b) of this section’’; ■ b. 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’’; ■ c. In paragraph (b)(2)(vii), removing the phrase ‘‘Market Regulation, Stop 10– 2’’ and in its place adding ‘‘Trading and Markets’’; ■ d. Adding paragraph (b)(2)(viii); ■ e. 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 paragraph (g) of this section, and transactions in securities other than NMS stocks’’ after the phrase ‘‘(§ 249.638 of this chapter)’’; ■ f. 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’’; ■ g. In the heading of paragraph (b)(10), adding the word ‘‘Written’’ before the phrase ‘‘Procedures to ensure the VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 confidential treatment of trading information’’ and changing the first letter of the word ‘‘Procedures’’ to lower case; ■ h. In paragraph (b)(10)(i) introductory text, adding the word ‘‘written’’ before the word ‘‘safeguards’’ in both instances and adding the word ‘‘written’’ before the word ‘‘procedures’’ in both instances; and ■ i. 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 NMS Stock ATS that is operating pursuant to an initial operation report on Form ATS on file with the Commission as of January 7, 2019 (‘‘Legacy NMS Stock ATS’’) shall be subject to the requirements of paragraphs (b)(2)(i) through (vii) of this section until that ATS files an initial Form ATS–N with the Commission pursuant to § 242.304(a)(1)(iv)(A). Thereafter, the Legacy NMS Stock ATS shall file reports pursuant to § 242.304. An alternative trading system that trades NMS stocks and securities other than 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. As of January 7, 2019, an entity seeking to operate as an NMS Stock ATS shall not be subject to the requirements of paragraphs (b)(2)(i) through (vii) of this section and shall file reports pursuant to § 242.304. * * * * * ■ 8. Amend § 242.303 by: ■ a. In paragraph (a) introductory text, removing ‘‘(b)(9)’’ and adding 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. * * * * * PO 00000 Frm 00145 Fmt 4701 Sfmt 4700 38911 9. Add § 242.304 under 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)(i) through (vii)) to be exempt pursuant to § 240.3a1–1(a)(2). (1) Initial Form ATS–N. (i) Filing and effectiveness requirement. No exemption is available to an NMS Stock ATS pursuant to § 240.3a1–1(a)(2) unless the NMS Stock ATS files with the Commission an initial Form ATS–N, in accordance with the conditions of this section, and the initial Form ATS– N is effective pursuant to paragraph (a)(1)(iii) or (a)(1)(iv)(A) of this section. (ii) Commission review period. (A) The Commission may, by order, as provided in paragraph (a)(1)(iii) of this section, declare an initial Form ATS–N filed by an NMS Stock ATS ineffective no later than 120 calendar days from the date of filing with the Commission, or, if applicable, the end of the extended review period. The Commission may extend the initial Form ATS–N review period for: (1) An additional 90 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-calendar 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) During review by the Commission of the initial Form ATS–N, the NMS Stock ATS shall amend its initial Form ATS–N pursuant to the requirements of paragraphs (a)(2)(i)(B) and (C) of this section. To make material changes to its initial Form ATS–N during the Commission review period, the NMS Stock ATS shall withdraw its filed initial Form ATS–N and may refile an initial Form ATS–N pursuant to paragraph (a)(1) of this section. (iii) Effectiveness; Ineffectiveness determination. (A) An initial Form ATS–N, as amended, filed by an NMS Stock ATS will become effective, unless declared ineffective, upon the earlier of: (1) The completion of review by the Commission and publication pursuant to paragraph (b)(2)(i) of this section; or E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 38912 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations (2) The expiration of the review period, or, if applicable, the end of the extended review period, pursuant to paragraph (a)(1)(ii) of this section. (B) The Commission will, by order, declare an initial Form ATS–N ineffective if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors. If the Commission declares an initial Form ATS–N ineffective, the NMS Stock ATS shall be prohibited from operating as an NMS Stock ATS pursuant to § 240.3a1– 1(a)(2). An initial Form ATS–N declared ineffective does not prevent the NMS Stock ATS from subsequently filing a new Form ATS–N. (iv) Transition for Legacy NMS Stock ATSs. (A) Initial Form ATS–N filing requirements. A Legacy NMS Stock ATS shall file with the Commission an initial Form ATS–N, in accordance with the conditions of this section, no earlier than January 7, 2019, and no later than February 8, 2019. An initial Form ATS– N filed by a Legacy NMS Stock ATS shall supersede and replace for purposes of the exemption the previously filed Form ATS of the Legacy NMS Stock ATS. The Legacy NMS Stock ATS may operate, on a provisional basis, pursuant to the filed initial Form ATS–N, and any amendments thereto, during the review of the initial Form ATS–N by the Commission. An initial Form ATS–N filed by a Legacy NMS Stock ATS, as amended, will become effective, unless declared ineffective, upon the earlier of: (1) The completion of review by the Commission and publication pursuant to paragraph (b)(2)(i) of this section; or (2) The expiration of the review period, or, if applicable, the end of the extended review period, pursuant to paragraph (a)(1)(iv)(B) of this section. (B) Commission review period; Ineffectiveness determination. The Commission may, by order, as provided in paragraph (a)(1)(iii) of this section, declare an initial Form ATS–N filed by a Legacy NMS Stock ATS ineffective no later than 120 calendar days from the date of filing with the Commission, or, if applicable, the end of the extended review period. The Commission may extend the initial Form ATS–N review period for a Legacy NMS Stock ATS for: (1) An additional 120 calendar days if the initial 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 Legacy NMS Stock ATS in writing within the initial 120calendar day review period and will briefly describe the reason for the VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 determination for which additional time for review is required; or (2) Any extended review period to which a duly-authorized representative of the Legacy NMS Stock ATS agrees in writing. (C) Amendments to initial Form ATS– N. During review by the Commission of the initial Form ATS–N filed by a Legacy NMS Stock ATS, the Legacy NMS Stock ATS shall amend its initial Form ATS–N pursuant to the requirements of paragraphs (a)(2)(i)(A) through (D) of this section. (2) Form ATS–N amendment. (i) Filing requirements. An NMS Stock ATS shall amend a Form ATS–N, in accordance with the conditions of this section: (A) At least 30 calendar days, except as provided by paragraph (a)(2)(i)(D) of this section, 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 (‘‘Material Amendment’’); (B) No later than 30 calendar days after the end of each calendar quarter to correct information that has become inaccurate or incomplete for any reason and was not required to be reported to the Commission as a Form ATS–N amendment pursuant to paragraphs (a)(2)(i)(A), (C), or (D) of this section (‘‘Updating Amendment’’); (C) Promptly, to correct information in any previous disclosure on Form ATS–N, after discovery that any information previously filed on Form ATS–N was materially inaccurate or incomplete when filed (‘‘Correcting Amendment’’); or (D) No later than seven calendar days after information required to be disclosed in Part III, Items 24 and 25 on Form ATS–N has become inaccurate or incomplete (‘‘Order Display and Fair Access Amendment’’). (ii) Commission review period; Ineffectiveness determination. The Commission will, by order, declare ineffective any Form ATS–N amendment filed pursuant to paragraphs (a)(2)(i)(A) through (D) of this section, no later than 30 calendar days from filing with the Commission, if the Commission finds that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors. A Form ATS–N amendment declared ineffective shall prohibit the NMS Stock ATS from operating pursuant to the ineffective Form ATS–N amendment. A Form ATS–N amendment declared ineffective does not prevent the NMS Stock ATS from subsequently filing a new Form PO 00000 Frm 00146 Fmt 4701 Sfmt 4700 ATS–N amendment. During review by the Commission of a Material Amendment, the NMS Stock ATS shall amend the Material Amendment pursuant to the requirements of paragraphs (a)(2)(i)(B) through (C) of this section. To make material changes to a filed Material Amendment during the Commission review period, an NMS Stock ATS shall withdraw its filed Material Amendment and must file the new Material Amendment pursuant to (a)(2)(i)(A) of this section. (3) Notice of cessation. An NMS Stock ATS shall notice its cessation of operations on Form ATS–N at least 10 business days prior to the date the NMS Stock ATS will cease 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 the exemption for an NMS Stock ATS pursuant to § 240.3a1–1(a)(2) of this chapter. (ii) If the exemption for an NMS Stock ATS 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 pursuant to § 240.3a1–1(a)(2) of this chapter. If the exemption for an NMS Stock ATS 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 will make public via posting on the Commission’s website, each: (i) Effective initial Form ATS–N, as amended; (ii) Order of ineffective initial Form ATS–N; (iii) Form ATS–N amendment to an effective Form ATS–N: (A) Material Amendments: The cover page of the Material Amendment will be made public by the Commission upon filing and, unless the Commission declares the Material Amendment E:\FR\FM\07AUR2.SGM 07AUR2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations ineffective, the entirety of the Material Amendment, as amended, will be made public by the Commission following the expiration of the review period pursuant to paragraph (a)(2)(ii) of this section. (B) Updating, Correcting, and Order Display and Fair Access Amendments: The entirety of Updating, Correcting, and Order Display and Fair Access Amendments will be made public by the Commission upon filing. Notwithstanding the foregoing, an Updating or Correcting Amendment filed to a Material Amendment will be made public by the Commission following the expiration of the review period for such Material Amendment pursuant to paragraph (a)(2)(ii) of this section. (iv) Order of ineffective Form ATS–N amendment; (v) Notice of cessation; and daltland on DSKBBV9HB2PROD with RULES2 (vi) Order suspending, limiting, or revoking the exemption for an NMS Stock ATS from the definition of an VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 ‘‘exchange’’ pursuant to § 240.3a1– 1(a)(2) of this chapter. (3) Each NMS Stock ATS shall make public via posting on its website a direct URL hyperlink to the Commission’s website that contains the documents enumerated in paragraph (b)(2) of this section. (c) Form ATS–N disclosure requirements. (1) An NMS Stock ATS must file a Form ATS–N in accordance with the instructions therein. (2) Any report required to be filed with the Commission under this section shall be filed on Form ATS–N, and include all information as prescribed in Form ATS–N and the instructions thereto. Such document shall be executed at, or prior to, the time Form ATS–N is filed and shall be retained by the NMS Stock ATS in accordance with §§ 242.303 and § 232.302 of this chapter, and the instructions in Form ATS–N. PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 10. The general authority citation for part 249 continues to read 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; Sec. 102(a)(3), Pub. L. 112–106, 126 Stat. 309 (2012); Sec. 107, Pub. L. 112–106, 126 Stat. 313 (2012), and Sec. 72001, Pub. L. 114–94, 129 Stat. 1312 (2015), unless otherwise noted. * * * * * 11. 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 PO 00000 Frm 00147 Fmt 4701 Sfmt 4700 38913 E:\FR\FM\07AUR2.SGM 07AUR2 38914 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations THE SECURITIES AND EXCHANGE COMMISSION HAS NOT PASSED UPON THE MERITS OR ACCURACY OF THE DISCLOSURES IN THIS FILING. United States Securities and Exchange Commission Washington, DC FORMATS-N Intentional Misstatements or Omissions of Facts May Constitute Criminal Violations See 18 U.S.C.1001 and 15 U.S.C. 78ff(a) File No: {NMS Stock A TS} is making this filing pursuant to the Rule 304 under the Securities Exchange Act of 1934 • Does the NMS Stock ATS currently operate pursuant to a FormATS? YesD NoD Type of Filing (select one) D D D D D Rule 304(a)(l)(i) Rule 304(a)(2)(i)(A) Rule 304(a)(2)(i)(B) Rule 304(a)(2)(i)(C) Initial Form ATS-N Material Amendment Updating Amendment Correcting Amendment Order Display and Fair Access Amendment Rule 304(a)(2)(i)(D) • Statement about the Form ATS-N Amendment pursuant to Instruction A.7(g) of this form: • Provide the EDGAR accession number for the Form A TS-N filing to be amended: D Notice of Cessation Date the NMS Stock ATS will cease to operate: mm/ddlyyyy D Withdrawal of Form ATS-N filing Provide the EDGAR accession number for the Form ATS-N filing to be withdrawn: VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00148 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.004</GPH> daltland on DSKBBV9HB2PROD with RULES2 • Rule 304(a)(3) Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 38915 Part I: Identifying Information 1. Is the organization, association, Person, group of Persons, or system filing the Form ATS-N a broker-dealer registered with the Commission? YesD NoD 2. Full name of registered broker-dealer of the NMS Stock ATS ("Broker-Dealer Operator") as stated on Form BD: 3. Full name(s) ofNMS Stock ATS under which business is conducted, if different: 4. Provide the SEC file number and CRD number ofthe Broker-Dealer Operator: a. SEC File No.: b. CRDNo.: 5. Provide the full name of the national securities association ofthe Broker-Dealer Operator, the effective date of the Broker-Dealer Operator's membership with the national securities association, and Market Participant Identifier ("MPID") of the NMS Stock ATS: a. National Securities Association: b. Effective Date of Membership: c. MPID ofthe NMS Stock ATS: 6. Provide, if any, the website URL of the NMS Stock ATS: 7. Provide the primary, and if any, secondary, physical street address(es) of the NMS Stock ATS matching system: 8. Attach as Exhibit 1, the most recently filed or amended Schedule A of Form BD for the Broker-Dealer Operator disclosing information related to direct owners and executive officers. D Select if, in lieu of filing, {NMS Stock ATS} certifies that the information requested under this Exhibit is available at the website above and is accurate as of the date of this filing. D Select if, in lieu of filing, {NMS Stock ATS} certifies that the information requested under this Exhibit is available at the website above and is accurate as of the date of this filing. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00149 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.005</GPH> daltland on DSKBBV9HB2PROD with RULES2 9. Attach as Exhibit 2, the most recently filed or amended Schedule B of Form BD for the Broker-Dealer Operator disclosing information related to indirect owners. 38916 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 10. For filings made pursuant to Rule 304(a)(2)(i)(A) through (D) (i.e., Form ATS-N Amendments), attach as Exhibit 3 a document marked to indicate changes to "yes" or "no" answers or additions to or deletions from any Item in Part I, II, and Part III, as applicable. Do not include in Exhibit 3 Items that are not changing. Part II: Activities of the Broker-Dealer Operator and its Affiliates Item 1: Broker-Dealer Operator Trading Activities on the ATS a. Are business units ofthe Broker-Dealer Operator permitted to enter or direct the entry of orders and trading interest (e.g., quotes, conditional orders, or indications of interest) into the NMS Stock ATS? YesD NoD If yes, name and describe each type of business unit of the Broker-Dealer Operator that enters or directs the entry of orders and trading interest into the A TS ~ NMS Stock ATS, type of trading desks, market maker, sales or client desk) and, for each business unit, provide the applicable MPID and list the capacity of its orders and trading interest (e.g., principal, agency, riskless principal). b. If yes to Item 1(a), are the services that the NMS Stock ATS offers and provides to the business units required to be identified in Item 1(a) the same for all Subscribers? YesD NoD If no, explain any differences in response to the applicable Item number in Part III of this form, as required, and list the applicable Item number here. If there are differences that are not applicable to Part III, explain those differences here. c. Are there any formal or informal arrangements with any of the business units required to be identified in Item 1(a) to provide orders or trading interest to the NMS Stock ATS (~ undertaking to buy or sell continuously, or to meet specified thresholds of trading or quoting activity)? YesD NoD If yes, identify the business unit and respond to the request in Part III, Item 12 ofthis form. d. Can orders and trading interest in the NMS Stock ATS be routed to a Trading Center operated or controlled by the Broker-Dealer Operator? YesD NoD VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00150 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.006</GPH> daltland on DSKBBV9HB2PROD with RULES2 If yes, respond to request in Part III, Item 16 of this form. Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Item 2: 38917 Affiliates Trading Activities on the ATS a. Are Affiliates ofthe Broker-Dealer Operator permitted to enter or direct the entry of orders and trading interest into the NMS Stock ATS? YesD NoD If yes, name and describe each type of Affiliate that enters or directs the entry of orders and trading interest into the ATS (~broker-dealer, NMS Stock ATS, investment company, hedge fund, market maker, principal trading firm), and, for each Affiliate, provide the applicable MPID and list the capacity of its orders and trading interest (e.g., principal, agency, riskless principal). b. If yes, to Item 2(a), are the services that the NMS Stock ATS offers and provides to the Affiliates required to be identified in Item 2(a) the same for all Subscribers? YesD NoD If no, explain any differences in response to the applicable Item number in Part III ofthis form, as required, and list the applicable Item number here. Ifthere are differences that are not applicable to Part III, explain those differences. c. Are there any formal or informal arrangements with an Affiliate required to be identified in Item 2(a) to provide orders or trading interest to the NMS Stock ATS ~ undertaking to buy or sell continuously, or to meet specified thresholds of trading or quoting activity)? YesD NoD If yes, identify the Affiliate and respond to the request in Part III, Item 12 ofthis form. d. Can orders and trading interest in the NMS Stock A TS be routed to a Trading Center operated or controlled by an Affiliate of the Broker-Dealer Operator? YesD NoD If yes, respond to the request in Part III, Item 16 of this form. Item 3: Order Interaction with Broker-Dealer Operator; Affiliates a. Can any Subscriber opt out from interacting with orders and trading interest of the Broker-Dealer Operator in the NMS Stock ATS? YesD NoD If yes, explain the opt-out process. YesD NoD If yes, explain the opt-out process. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00151 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.007</GPH> daltland on DSKBBV9HB2PROD with RULES2 b. Can any Subscriber opt out from interacting with the orders and trading interest of an Affiliate of the Broker-Dealer Operator in the NMS Stock ATS? 38918 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations c. If yes to Item 3(a) or 3(b), are the terms and conditions ofthe opt-out processes required to be identified in Item 3(a), 3(b), or both, the same for all Subscribers? YesD NoD If no, identify and explain any differences. Item 4: Arrangements with Trading Centers a. Are there any formal or informal arrangements (~ mutual, reciprocal, or preferential access arrangements) between the Broker-Dealer Operator and a Trading Center to access the NMS Stock ATS services (~ arrangements to effect transactions or to submit, disseminate, or display orders and trading interest in the ATS)? YesD NoD If yes, identify the Trading Center and the ATS services and provide a summary of the terms and conditions of the arrangement. b. If yes to Item 4(a), are there any formal or informal arrangements between an Affiliate of the Broker-Dealer Operator and a Trading Center to access the NMS Stock ATS services? YesD NoD If yes, identify the Trading Center and ATS services and provide a summary of the terms and conditions of the arrangement. Item 5: Other Products and Services a. Does the Broker-Dealer Operator offer Subscribers any products or services for the purpose of effecting transactions or submitting, disseminating, or displaying orders and trading interest in the NMS Stock A TS (~ algorithmic trading products that send orders to the A TS, order management or order execution systems, data feeds regarding orders and trading interest in, or executions occurring on, the ATS)? YesD NoD If yes, identify the products or services offered, provide a summary of the terms and conditions for use, and list here the applicable Item number in Part III of this form where the use of the product or service is explained. If there is no applicable Item in Part III, explain the use of the product or service with the ATS here. b. If yes to Item 5(a), are the terms and conditions of the services or products required to be identified in Item 5(a) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD c. Does any Affiliate of the Broker-Dealer Operator offer Subscribers, the Broker-Dealer Operator, or both, any products or services for the purpose of effecting transactions or VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00152 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.008</GPH> daltland on DSKBBV9HB2PROD with RULES2 If no, identify and explain any differences. Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 38919 submitting, disseminating, or displaying orders or trading interest in the NMS Stock ATS? YesD NoD If yes, identify the products or services offered, provide a summary of the terms and conditions for use, and list here the applicable Item number in Part III of this form where the use of the product or service is explained. If there is no applicable item in Part III, explain the use of the product or service with the A TS here. d. If yes to Item 5( c), are the terms and conditions of the services or products required to be identified in Item 5(c) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Item 6: Activities of Service Providers a. Does any employee ofthe Broker-Dealer Operator or its Affiliate that services both the operations of the NMS Stock ATS and any other business unit or any Affiliate of the Broker-Dealer Operator ("shared employee") have access to confidential trading information on the NMS Stock ATS? YesD NoD If yes, identify the business unit, Affiliate, or both that the shared employee services, and provide a summary of the role and responsibilities of the shared employee at the ATS and the business unit, Affiliate, or both that the shared employee services. b. Does any entity, other than the Broker-Dealer Operator, support the services or functionalities of the NMS Stock ATS ("service provider") that are required to be explained in Part III of this form? YesD NoD If yes, both identify the service provider and provide a summary of the role and responsibilities of the service provider in response to the applicable Item number in Part III ofthis form, as required. List the applicable Item number here. If there are services or functionalities that are not applicable to Part III, identify the service provider, the services and functionalities, and also provide a summary of the role and responsibilities of the service provider here. c. If yes to Item 6(b), does the service provider, or any of its Affiliates, use the NMS Stock ATS services? YesD NoD VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00153 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.009</GPH> daltland on DSKBBV9HB2PROD with RULES2 If yes, identify the service provider, or the Affiliate as applicable, and the ATS services that the service provider or its Affiliates use. 38920 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations d. If yes to Item 6(c), are the services that the NMS Stock A TS offers and provides to the entity required to be identified in Item 6(c) the same for all Subscribers? YesD NoD If no, identify and explain any differences. Item 7: Protection of Confidential Trading Information a. Describe the written safeguards and written procedures to protect the confidential trading information of Subscribers to the NMS Stock ATS, including: 1. 11. written standards controlling employees of the A TS that trade for employees' accounts; and written oversight procedures to ensure that the safeguards and procedures described above are implemented and followed. b. Can a Subscriber consent to the disclosure of its confidential trading information to any Person (not including those employees of the NMS Stock ATS who are operating the system or responsible for its compliance with applicable rules)? YesD NoD If yes, explain how and under what conditions. c. If yes to Item 7(b), can a Subscriber withdraw consent to the disclosure of its confidential trading information to any Person (not including those employees of the NMS Stock ATS who are operating the system or responsible for its compliance with applicable rules)? YesD NoD If yes, explain how and under what conditions. d. Provide a summary of the roles and responsibilities of any Persons that have access to confidential trading information, the confidential trading information that is accessible by them, and the basis for the access. Part III: Manner of Operations Item 1: Types of ATS Subscribers Select the type( s) of Subscribers that can use the NMS Stock ATS services: D Retail Investors D Issuers D NMS Stock ATSs D Asset Managers D Principal Trading Firms D Hedge Funds D Brokers D Market Makers D Banks D Dealers D Other VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00154 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.010</GPH> daltland on DSKBBV9HB2PROD with RULES2 D Investment Companies Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 38921 If other, identify the type(s) of subscriber. Item 2: Eligibility for ATS Services a. Does the NMS Stock ATS require Subscribers to be registered broker-dealers? YesD NoD b. Are there any other conditions that the NMS Stock A TS requires a Person to satisfy before accessing the A TS services? YesD NoD If yes, list and provide a summary of the conditions. c. If yes to Item 2(b), are the conditions required to be identified in Item 2(b) the same for all Persons? YesD NoD If no, identify and describe any differences. d. Does the NMS Stock A TS require Subscribers to enter a written agreement to use the ATS services? YesD NoD Item 3: Exclusion from ATS Services a. Can the NMS Stock ATS exclude, in whole or in part, any Subscriber from the ATS services? YesD NoD If yes, list and provide a summary of the conditions for excluding, in whole or in part, a Subscriber from the ATS services. b. If yes to Item 3(a), are the conditions required to be identified in Item 3(a) the same for all Subscribers? YesD NoD If no, identify and explain any differences. Item 4: Hours of Operations b. Are the hours of operations the same for all Subscribers and the Broker-Dealer Operator? YesD NoD VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00155 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.011</GPH> daltland on DSKBBV9HB2PROD with RULES2 a. Provide the days and hours of operation of the NMS Stock ATS, including the times when orders or trading interest can be entered on the ATS, and any hours of operation outside of regular trading hours. 38922 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations If no, identify and explain any differences. Item 5: Means of Entry a. Does the NMS Stock A TS permit orders and trading interest to be entered directly into the ATS (~via Financial Information eXchange ("FIX") protocol, Binary)? YesD NoD If yes, explain the protocol that can be used to directly enter orders and trading interest into the ATS. b. If yes to Item 5(a), are the protocols required to be identified in Item 5(a) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. c. Are there any other means for entering orders and trading interest into the NMS Stock ATS (~smart order router, algorithm, order management system, sales desk)? YesD NoD If yes, identify and explain the other means for entering orders and trading interest, indicate whether the means are provided through the Broker-Dealer Operator, either by itself or through a third-party contracting with the Broker-Dealer Operator, or through an Affiliate ofthe Broker-Dealer Operator, and list and provide a summary of the terms and conditions for entering orders or trading interest into the ATS through these means. d. If yes to Item 5(c), are the terms and conditions required to be identified in Item 5(c) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Item 6: Connectivity and Co-location a. Does the NMS Stock ATS offer co-location and related services (e.g., cabinets and equipment, cross-connects)? YesD NoD If yes, provide a summary of the terms and conditions for co-location and related services, including the speed and connection (e.g., fiber, copper) options offered. YesD NoD VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00156 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.012</GPH> daltland on DSKBBV9HB2PROD with RULES2 b. If yes to Item (6)(a), are the terms and conditions required to be identified in Item 6(a) the same for all Subscribers and the Broker-Dealer Operator? Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 38923 If no, identify and explain any differences. c. Does the NMS Stock ATS offer any other means besides co-location and related services required to be explained in this Item 6(a) to increase the speed of communication with the ATS? YesD NoD If yes, explain the means to increase the speed of communication with the A TS and provide a summary of the terms and conditions for its use. d. If yes to Item 6(c), are the terms and conditions required to be identified in Item 6(c) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. e. Does the NMS Stock ATS offer any means to reduce the speed of communication with the ATS (~speed bumps)? YesD NoD If yes, explain the methods to reduce the speed of communication with the A TS and provide a summary of the terms and conditions for its use. f. If yes to Item 6(e), are the terms and conditions required to be identified in Item 6(e) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Item 7: Order Types and Attributes a. Identify and explain each order type offered by the NMS Stock ATS. In your explanation, include the following: priority, including the order type's priority upon order entry and any subsequent change to priority (if applicable); whether and when 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; 11. conditions, including any price conditions ~ how price conditions affect the rank and price at which it can be executed; conditions on the display or nondisplay 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 Stock ATS when received; VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00157 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.013</GPH> daltland on DSKBBV9HB2PROD with RULES2 1. 38924 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 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, 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. whether an order type is eligible for routing to other Trading Centers; v1. the time-in-force instructions that can be used or not used with each order type; vii. the circumstances under which order types may be combined with another order type, modified, replaced, canceled, rejected, or removed from the NMS Stock ATS; and vn1. the availability of order types across all forms of connectivity to the NMS Stock A TS and differences, if any, in the availability of an order type across those forms of connectivity. b. Are the terms and conditions for each order type and attribute the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Order Sizes Item 8: a. Does the NMS Stock ATS require minimum or maximum sizes for orders or trading interest? YesD NoD If yes, specify any minimum or maximum order or trading interest size requirements and any related handling procedures. b. If yes to Item 8(a), are the requirements and procedures required to be identified in Item 8(a) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. c. Does the NMS Stock ATS accept or execute odd-lot orders? If yes, specify any odd-lot order requirements and related handling procedures(~ odd lot treated the same as round lot). VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00158 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.014</GPH> daltland on DSKBBV9HB2PROD with RULES2 YesD NoD Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 38925 d. If yes to Item 8( c), are the requirements and procedures required to be identified in Item 8(c) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. e. Does the NMS Stock ATS accept or execute mixed-lot orders? YesD NoD If yes, specify any mixed lot order requirements and related handling procedures (e.g., mixed lot treated the same as round lot). f. If yes, to Item 8(e), are the requirements and procedures required to be identified in 8(e) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Item 9: Conditional Orders and Indications of Interest a. Does the NMS Stock ATS send or receive any messages indicating trading interest (e.g., lOis, actionable lOis, or conditional orders)? YesD NoD If yes, identify and explain the use of the messages, including information contained in price or size minimums), how the message is transmitted(~ order management system, smart order router, FIX), when the message is transmitted (~ automatically by the ATS, or upon the sender's request), the type of Persons that receive the message(~ Subscribers, Trading Centers), responses to conditional orders or lOis (~submission to firm-up conditional orders), and the conditions under which the message might result in an execution in the ATS (~ response time parameters, interaction, and matching). messages(~ b. If yes to Item 9(a), are the terms and conditions governing conditional orders and indications of interest the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Opening and Reopening a. Explain how the NMS Stock ATS opens or re-opens for trading, including when and how orders and trading interest are priced, prioritized, matched, and executed, and identify any order types allowed prior to the start of regular trading hours or following a stoppage of trading in a security during regular trading hours. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00159 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.015</GPH> daltland on DSKBBV9HB2PROD with RULES2 Item 10: 38926 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations b. Are the processes and procedures governing opening and re-opening the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. c. Explain how unexecuted orders and 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. d. Are the processes or procedures governing unexecuted orders and trading at the time the NMS Stock A TS begins regular trading at the start of regular trading hours, or following a stoppage of trading in a security during regular trading hours, the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. e. Are there any differences between pre-opening executions, executions following a stoppage of trading in a security during regular trading hours, and/or executions during regular trading hours? YesD NoD If yes, identify and explain the differences. Item 11: Trading Services, Facilities and Rules a. Provide a summary of the structure of the NMS Stock ATS marketplace ~ crossing system, auction market, limit order matching book) and explain the means and facilities for bringing together the orders of multiple buyers and sellers on the NMS Stock ATS. b. Are the means and facilities required to be identified in Item 11(a) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. c. Explain the established, non-discretionary rules and procedures of the NMS Stock ATS, including order interaction rules for the priority, pricing methodologies, allocation, matching, and execution of orders and trading interest, and other procedures governing trading, such as price improvement functionality, price protection mechanisms, short sales, locked-crossed markets, the handling of execution errors, and the time-stamping of orders and executions. YesD NoD VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00160 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.016</GPH> daltland on DSKBBV9HB2PROD with RULES2 d. Are the established, non-discretionary rules and procedures required to be identified in Item 11(c) the same for all Subscribers and the Broker-Dealer Operator? Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 38927 If no, identify and explain any differences. Item 12: Liquidity Providers Are there any formal or informal arrangements with any Subscriber or the Broker-Dealer Operator to provide orders or trading interest to the NMS Stock A TS ~ undertaking to buy or sell continuously, or to meet specified thresholds of trading or quoting activity)? YesD NoD If yes, describe the arrangement, including the terms and conditions. Item 13: Segmentation; Notice a. Are orders and trading interest in the NMS Stock A TS segmented into categories, classifications, tiers, or levels (~ segmented by type of participant, order size, duration, source, or nature of trading activity)? YesD NoD If yes, explain the segmentation procedures, including (i) a description for how orders and trading interest are segmented; (ii) identify and describe any categories, classification, tiers, or levels and the types of orders and trading interest that are included in each; (iii) provide a summary of the parameters for each segmented category and length of time each segmented category is in effect; (iv) any procedures for overriding a determination of segmented category; and (v) how segmentation can affect order interaction. b. If yes to Item 13(a), is the segmentation of orders and trading interest the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. c. Does the NMS Stock A TS identify orders or trading interest entered by a customer of a broker-dealer on the NMS Stock A TS as a customer order? YesD NoD d. If yes to Item 13(a), does the NMS Stock ATS disclose to any Person the designated segmented category, classification, tier, or level of orders and trading interest? YesD NoD e. Ifyes to Item 13(d), are the disclosures required to be identified in 13(d) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00161 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.017</GPH> daltland on DSKBBV9HB2PROD with RULES2 If yes, provide a summary of the content of the disclosure, when and how the disclosure is communicated, who receives it, and whether and how such designation can be contested. 38928 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations If no, identify and explain any differences. Item 14: Counter-Party Selection a. Can orders or trading interest be designated to interact or not interact with certain orders or trading interest in the NMS Stock A TS ~, designated to execute against a specific Subscriber's orders or trading interest or prevent a Subscriber's order from executing against itself)? YesD NoD If yes, explain the counter-party selection procedures, including how counter-parties can be selected, and whether the designations affect the interaction and priority of trading interest in the ATS. b. If yes to Item 14(a), are the procedures for counter-party selection required to be identified in Item 14(a) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Item 15: Display a. Does the NMS Stock ATS operate as an Electronic Communication Network as defined in Rule 600(a)(23) of Regulation NMS? YesD NoD b. Are Subscriber orders and trading interest bound for or resting in the NMS Stock ATS displayed or made known to any Person (not including those employees ofthe NMS Stock A TS who are operating the system)? YesD NoD If yes, explain the display procedures, including how and when Subscriber orders and trading interest are displayed, how long orders and trading interest are displayed, what information about orders and trading interest is displayed, and the functionality of the Broker-Dealer Operator and types of market participants that receive the displayed information. c. If yes to Item 15(b), are the display procedures required to be identified in 15(b) the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Routing a. Can orders and trading interest in the NMS Stock A TS be routed to a destination outside the NMS Stock ATS? VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00162 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.018</GPH> daltland on DSKBBV9HB2PROD with RULES2 Item 16: Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 38929 YesD NoD b. If yes to Item 16(a), must affirmative instructions from a Subscriber be obtained before its orders or trading interest can be routed from the NMS Stock ATS? YesD NoD If yes, describe the affirmative instruction and explain how the affirmative instruction is obtained. If no, explain when orders in the NMS Stock ATS can be routed from the ATS (~at the discretion ofthe Broker-Dealer Operator). Item 17: Closing a. Are there any differences between how orders and trading interest are treated on the NMS Stock A TS during the close and how orders and trading interest are treated during regular trading hours? YesD NoD If yes, identify and explain the differences as compared to the information provided in the relevant Part III Items ofthis form. b. Is the treatment of orders and trading interest during the close the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Item 18: Trading Outside of Regular Trading Hours a. Does the NMS Stock ATS conduct trading outside of its regular trading hours? YesD NoD b. If yes to Item 18(a), are there any differences between trading outside of regular trading hours and trading during regular trading hours in the NMS Stock ATS? YesD NoD If yes, identify and explain the differences. c. If yes to Item 18(a), is the treatment of orders and trading interest outside of regular trading hours the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. VerDate Sep<11>2014 Fees 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00163 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.019</GPH> daltland on DSKBBV9HB2PROD with RULES2 Item 19: 38930 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations a. Identify and describe any fees or charges for use of the NMS Stock ATS services, including the type of fees~ subscription, connectivity), the structure of the fees(~ fixed, volume-based, transaction-based), variables that impact the fees ~ types of securities traded, block orders, form of connectivity to the ATS), differentiation among types of Subscribers ~ broker-dealers, institutional investors, retail) and range of fees ~high and low). b. Identify and describe any fees or charges for use of the NMS Stock A TS services that are bundled with the Subscriber's use ofnon-ATS services or products offered by the Broker-Dealer Operator or its Affiliates, including a summary of the bundled services and products, the structure of the fee, variables that impact the fee, differentiation among types of Subscribers, and range of fees. c. Identify and describe any rebate or discount of fees or charges required to be identified in Items 19(a) and 19(b), including the type of rebate or discount, structure of the rebate or discount, variables that impact the rebate or discount, differentiation among types of Subscribers, and range of rebate or discount. Item 20: Suspension of Trading a. Explain any procedures for suspending or stopping trading on the NMS Stock ATS, including the suspension of trading in individual NMS stocks. b. Are the procedures for suspending or stopping trading the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Item 21: Trade Reporting a. Explain any procedures and material arrangements for reporting transactions on the NMS Stock A TS, including where an ATS reports transactions and under what circumstances. b. Are the procedures and material arrangements for reporting transactions on the NMS Stock ATS the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Clearance and Settlement a. Describe any procedures and material arrangements undertaken to facilitate the clearance and settlement of transactions on the NMS Stock A TS (~ whether the A TS becomes a counterparty, whether it submits trades to a registered clearing agency, or whether it requires Subscribers to have arrangements with a clearing firm). VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00164 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.020</GPH> daltland on DSKBBV9HB2PROD with RULES2 Item 22: Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations 38931 b. Are the procedures and material arrangements undertaken to facilitate the clearance and settlement of transactions on the NMS Stock A TS the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Item 23: Market Data a. Identify the sources of market data used by the NMS Stock A TS (~ proprietary feed from a national securities exchange, feed from the securities information processor ("SIP")), and how the ATS uses market data from these sources to provide the services that it offers, including how the ATS uses market data to determine the NBBO and protected quotes, and display, price, prioritize, execute, and remove orders and trading interest on the ATS. b. Are the sources of market data and how the NMS Stock ATS uses market data for the services that it offers the same for all Subscribers and the Broker-Dealer Operator? YesD NoD If no, identify and explain any differences. Order Display and Execution Access Item 24: a. Has the NMS Stock ATS displayed Subscriber orders to any Person (other than NMS Stock ATS employees) and had an average daily share volume of 5% or more in that NMS stock as reported by an effective transaction reporting plan or disseminated through an automated quotation system during four of the preceding six calendar months? YesD NoD b. If yes to Item 24(a), is the NMS Stock ATS required to comply with Rule 301(b)(3)(ii) of Regulation ATS? YesD NoD If yes, 1. Provide the ticker symbol for each such NMS stock displayed during each of the last 6 calendar months; iii. Explain how the ATS provides access to such orders displayed in the national market system equivalent to the access to other orders displayed on that national securities exchange or through a national securities association pursuant to Rule 301(b)(iii) of Regulation ATS. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00165 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.021</GPH> daltland on DSKBBV9HB2PROD with RULES2 n. Explain how the ATS displays such orders on a national securities exchange or through a national securities association; and 38932 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Item 25: Fair Access a. Has the NMS Stock A TS executed 5% or more of the average daily trading volume in an NMS stock as reported by an effective transaction reporting plan or disseminated through an automated quotation system during four of the preceding six calendar months? YesD NoD b. Ifyes to Item 25(a), is the NMS Stock ATS required to comply with Rule 301(b)(5)(ii) of Regulation ATS? YesD NoD If yes, 1. Provide the ticker symbol for each such NMS stock during each of the last 6 calendar months; and 11. Describe the written standards for granting access to trading on the A TS pursuant to Rule 301(b)(5)(ii)(A) of Regulation ATS. Aggregate Platform Data Item 26: Does the NMS Stock ATS publish or otherwise provide to one or more Subscribers aggregate platform-wide order flow and execution statistics of the ATS that are not otherwise required disclosures under Rule 605 of Regulation NMS? YesD NoD If yes, 1. Attach, as Exhibit 4, the most recent disclosure of aggregate platform-wide order flow and execution statistics of the ATS that are not otherwise required disclosures under Rule 605 of Regulation NMS and that the ATS provided to one or more Subscribers as ofthe end of each calendar quarter. D Select if, in lieu of filing, {NMS Stock ATS} certifies that the information requested under Exhibit 4 is available at the website provided in Part I, Item 6 ofthis form and is accurate as of the date of this filing. VerDate Sep<11>2014 Attach, as Exhibit 5, a list and explanation of the categories or metrics for the aggregate platform-wide order flow and execution statistics provided as Exhibit 4 and explain the criteria or methodology used to calculate aggregate platform-wide order flow and execution statistics. 21:26 Aug 06, 2018 Jkt 244001 PO 00000 Frm 00166 Fmt 4701 Sfmt 4725 E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.022</GPH> daltland on DSKBBV9HB2PROD with RULES2 11. FORM ATS–N INSTRUCTIONS daltland on DSKBBV9HB2PROD with RULES2 A. FILING FORM ATS–N: 1. Form ATS–N is a public reporting form that is designed to provide market participants and the Commission with information about the operations of the NMS Stock ATS and the ATS-related activities of its Broker-Dealer Operator and its Affiliates. Among other things, an NMS Stock ATS must file Form ATS–N to be exempt from the definition of ‘‘exchange’’ pursuant to Exchange Act Rule 3a1–1(a)(2). 2. A separate Form ATS–N is required for each NMS Stock ATS operated by the same Broker-Dealer Operator. 3. An NMS Stock ATS must provide all the information required by Form ATS–N, including responses to each Item, as applicable, and the Exhibits, VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 and disclose information that is accurate, current, and complete. 4. An NMS Stock ATS must respond to each request in detail unless otherwise provided (i.e., where the request indicates that the ATS is required to disclose ‘‘summary’’ information). 5. Any report required to be submitted pursuant to Rule 304 of Regulation ATS shall be prepared, formatted, and submitted in accordance with Regulation S–T and the EDGAR Filer Manual. Filers have the option of submitting the information to EDGAR using the most recent version of the XML schema for Rule 304 as specified by the EDGAR Filer Manual, or submitting the information using the web-fillable form for Rule 304 in EDGAR. PO 00000 Frm 00167 Fmt 4701 Sfmt 4700 38933 6. Initial Form ATS–N: Prior to commencing operations, an NMS Stock ATS shall file an initial Form ATS–N and the initial Form ATS–N must become effective. If an NMS Stock ATS is currently operating pursuant to a Form ATS it must indicate such on the Form ATS–N. If the NMS Stock ATS is operating pursuant to a previously filed initial operation report on Form ATS as of January 7, 2019, such NMS Stock ATS shall file with the Commission a Form ATS–N no earlier than January 7, 2019, and no later than February 8, 2019. 7. Form ATS–N Amendment a. An NMS Stock ATS shall amend a Form ATS–N in accordance with the conditions of Rule 304. b. A Material Amendment, except as provided by Rule 304(a)(2)(i)(D) for an E:\FR\FM\07AUR2.SGM 07AUR2 ER07AU18.023</GPH> Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 38934 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations Order Display and Fair Access Amendment, must be filed 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. c. An Updating Amendment must be filed no later than 30 calendar days after the end of each calendar quarter to correct any other information that has become inaccurate or incomplete for any reason and was not previously required to be reported to the Commission as a Form ATS–N Amendment pursuant to Rule 304(a)(2)(i)(A), Rule 304(a)(2)(i)(C), or Rule 304(a)(2)(i)(D). d. A Correcting Amendment must be filed promptly to correct information in any previous disclosure on Form ATS– N, after discovery that any information previously filed on Form ATS–N was materially inaccurate or incomplete when filed. e. An Order Display and Fair Access Amendment must be filed no later than seven calendar days after information required to be disclosed in Part III, Items 24 and 25 on Form ATS–N has become inaccurate or incomplete. f. An NMS Stock ATS must select only one ‘‘Type of Amendment’’ for each Form ATS–N Amendment filed with the Commission. g. For each Amendment, indicate the Part and Item number of the Form ATS– N that is the subject of the change, provide a brief summary of the changes, and state whether or not the changes apply to all Subscribers and the BrokerDealer Operator. h. For each Amendment, provide the EDGAR accession number for the filing that is being amended. 8. Notice of Cessation: An NMS Stock ATS shall notice its cessation of operations on Form ATS–N at least 10 business days prior to the date the NMS Stock ATS will cease to operate as an NMS Stock ATS. 9. Withdrawal: If an NMS Stock ATS determines to withdraw a filing, it must check the ‘‘Withdrawal of Form ATS–N filing’’ check box for the type of filing and provide the EDGAR accession number of the Form ATS–N filing that is being withdrawn. An NMS Stock ATS may withdraw an initial Form ATS–N or an Amendment before the end of the applicable Commission review period. An NMS Stock ATS may withdraw a notice of cessation of operations at any time before the date that the NMS Stock ATS had indicated it intended to cease operating. A Legacy NMS Stock ATS may not withdraw its initial Form ATS– N at any time. VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 10. A filing that is defective may be rejected and not be accepted by the EDGAR system. Any filing so rejected shall be deemed not to have been filed. See generally Regulation S–T (17 CFR part 232). B. CONTACT INFORMATION • The individual listed on the NMS Stock ATS’s response to Part IV 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. The contact information provided in Part IV of Form ATS–N will not be made public. C. RECORDKEEPING • A copy of this Form ATS–N must be retained by the NMS Stock ATS in accordance with the EDGAR Filer Manual and Rule 303 of Regulation ATS and must be made available for inspection upon a regulatory request. D. 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 ATS-related activities of the Broker-Dealer Operator and its Affiliates; (2) material and other changes to the operations and disclosures of the NMS Stock ATS; and (3) notice upon ceasing operation of the NMS Stock ATS. Form ATS–N is designed to provide the public with information to, among other things, help them make informed decisions about whether to participate on the NMS Stock ATS. In addition, the Form ATS–N is designed 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 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: Æ File an initial Form ATS–N prior to commencing operations. Æ File a Form ATS Amendment: (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 (Material Amendment); (2) no later than 30 calendar days after the end of each calendar quarter to correct any PO 00000 Frm 00168 Fmt 4701 Sfmt 4700 other information that has become inaccurate or incomplete for any reason and was not previously required to be reported to the Commission as a Form ATS–N amendment pursuant to Rule 304(a)(2)(i)(A), Rule 304(a)(2)(i)(C), or Rule 304(a)(2)(i)(D) (Updating Amendment); (3) promptly, to correct information in any previous disclosure on Form ATS–N, after discovery that any information previously filed on Form ATS–N was materially inaccurate or incomplete when filed (Correcting Amendment); or (4) no later than seven calendar days after information required to be disclosed in Part III, Items 24 and 25 on Form ATS–N has become inaccurate or incomplete (Order Display and Fair Access Amendment). During the Commission review period of an initial Form ATS–N filing, an NMS Stock ATS that is operating as of January 7, 2019 shall amend its filed Form ATS–N pursuant to these requirements, and an NMS Stock ATS that was not operating as of January 7, 2019 shall amend its filed Form ATS– N pursuant to the requirements for Updating and Correcting Amendments. During the Commission review period of an initial Form ATS–N filing, an NMS Stock ATS shall amend a filed Material Amendment pursuant to the requirements for Updating and Correcting Amendments. Æ 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. We estimate that an NMS Stock ATS will spend approximately 127.4 hours completing the Form ATS–N, approximately 9 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. E. 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. E:\FR\FM\07AUR2.SGM 07AUR2 daltland on DSKBBV9HB2PROD with RULES2 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations • ALTERNATIVE TRADING SYSTEM: Shall mean any organization, 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 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. 17 CFR 242.300(f). • 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 trades NMS stocks, as defined in Rule 300(g) under the Exchange Act. 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, VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 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. 80a2(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). • TRADING CENTER: Shall mean 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). By the Commission. Dated: July 18, 2018 Brent J. Fields, Secretary. Note: The following appendix will not appear in the Code of Federal Regulations. Appendix A Key to Comment Letters Cited in Regulation of NMS Stock Alternative Trading Systems (File No. S7–23–15 Letter from Venu Palaparthi, Senior Vice President, Virtu Financial to Brent J. Fields, Secretary, Commission, dated December 2, 2015 (‘‘Virtu Letter’’) Letter from Clive Williams, Head of Global Equity Trading, Thea N. Williams, Head of Global Fixed Income Trading, and Jonathan D. Siegel, Senior Legal Counsel, T. Rowe Price Associates, Inc. to Brent J. Fields, Secretary, Commission, dated February 23, 2016 (‘‘T. Rowe Price Letter’’) Letter from Jonathan A. Clark, Chief Executive Officer, and James C. Dolan, Chief Compliance Office, Luminex Trading & Analytics LLC to Brent J. Fields, Secretary, Commission, dated February 23, 2016 (‘‘Luminex Letter’’) Letter from Eric T. Schneiderman, Attorney General, State of New York, to the Honorable Mary Jo White, Chair, and Brent J. Fields, Secretary, Commission, dated February 23, 2016 (‘‘Schneiderman Letter’’) Letter from Scott Pintoff, General Counsel, MarketAxess Corporation, to Secretary, Commission, dated February 24, 2016 (‘‘MarketAxess Letter’’) Letter from David W. Blass, General Counsel, Investment Company Institute, to Brent J. Fields, Secretary, Commission, dated February 25, 2016 (‘‘ICI Letter’’) PO 00000 Frm 00169 Fmt 4701 Sfmt 4700 38935 Letter from Chris Barnard, to the Commission, dated February 25, 2016 (‘‘Barnard Letter’’). Letter from Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association and ˇ´ ´ Jirı Krol, Deputy Chief Executive Officer, Global Head of Government Affairs, Alternative Investment Management Association, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘MFA/AIMA Letter’’) Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, Financial Industry Regulatory Authority, Inc., to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘FINRA Letter’’) Letter from Phillip S. Gillespie, General Counsel and Executive Vice President, State Street Global Advisors, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘SSGA Letter’’) Letter from John Russell, Chairman of the Board and James Toes, President and Chief Executive Office, Securities Traders Association, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘STA Letter’’) Letter from D. Keith Ross, Chief Executive Officer, PDQ Enterprises, LLC and Christopher Meade, Chief Compliance Officer, PDQ ATS, Inc., to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘PDQ Letter’’) Letter from Howard Meyerson, General Counsel, Liquidnet, Inc., to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘Liquidnet Letter’’) Letter from Denis Ignatovich, Co-Founder, and Grant Passmore, Ph.D., Co-Founder, Aesthetic Integration Ltd. (‘‘AI Letter’’) Letter from Dave Lauer, Chairman, Healthy Markets Association, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘HMA Letter’’) Letter from Kurt N. Schacht, CFA, Managing Director, Standards & Advocacy, CFA Institute, and James C. Allen, CFA, Head, Capital Markets Policy, CFA Institute, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘CFA Institute Letter’’) Letter from Micah Hauptman, Financial Services Counsel, Consumer Federation of America, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘Consumer Federation of American Letter’’) Letter from Timothy J. Mahoney, Chief Executive Office, BIDS Trading L.P., to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘BIDS Letter’’) Letter from Marc B. Bryant, Senior Vice President, Deputy General Counsel, Fidelity Investments, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘Fidelity Letter’’) Letter from Angelo Evangelou, Deputy General Counsel, Legal Division, Chicago Board Options Exchange, Incorporated, to Brent J. Fields, Secretary, Commission, dated March 1, 2016 (‘‘CBOE Letter’’) Letter from Adam C. Cooper, Senior Managing Director and Chief Legal Officer, Citadel LLC, to Brent J. Fields, Secretary, E:\FR\FM\07AUR2.SGM 07AUR2 38936 Federal Register / Vol. 83, No. 152 / Tuesday, August 7, 2018 / Rules and Regulations daltland on DSKBBV9HB2PROD with RULES2 Commission, dated March 1, 2016 (‘‘Citadel Letter’’) Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, to Brent J. Fields, Secretary, Commission, dated March 7, 2016 (‘‘SIFMA Letter’’) Letter from Kimberly Unger, Chief Executive Officer & Executive Director, The Security Traders Association of New York, Inc., to Brent J. Fields, Secretary, Commission, dated March 4, 2016 (‘‘STANY Letter’’) Letter from Mark Holder, Managing Director, UBS Securities LLC, to Brent J. Fields, Secretary, Commission, dated March 21, 2016 (‘‘UBS Letter’’) Letter from Anonymous to Commission, dated February 26, 2016 (‘‘Anonymous Letter’’) VerDate Sep<11>2014 21:26 Aug 06, 2018 Jkt 244001 Letter from Dennis M. Kelleher, President and Chief Executive Officer, Stephen W. Hall, Legal Director & Securities Specialist, and Allen Dreschel, Attorney, Better Markets, Inc., to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (‘‘Better Markets Letter’’) Letter from John A. McCarthy, General Counsel, KCG Holdings, Inc., to Brent J. Fields, Secretary, Commission, dated March 15, 2016 (‘‘KCG Letter’’) Letter from David Weisberger, Managing Director, Markit, to Brent J. Fields, Secretary, Commission, dated April 15, 2016 (‘‘Markit Letter’’) Letter from William Neuberger and Andrew F. Silverman, Managing Directors and Global Co-Heads, Morgan Stanley Electronic Trading, to Brent J. Fields, PO 00000 Frm 00170 Fmt 4701 Sfmt 9990 Secretary, Commission, dated May 19, 2016 (‘‘Morgan Stanley Letter’’) Letter from John F. Linares, General Counsel, LeveL ATS, to Brent J. Fields, Secretary, Commission, dated September 7, 2016 (‘‘LeveL ATS Letter’’). Letter from Rick A. Fleming, Investor Advocate, Office of the Investor Advocate, Commission, to Brent J. Fields, Secretary, Commission, dated September 9, 2016 (‘‘Investor Advocate Letter’’) Letter from Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association, to the Honorable Walter J. Clayton, Chairman, Commission, dated May 18, 2017 (‘‘MFA Letter 2’’) [FR Doc. 2018–15896 Filed 8–6–18; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\07AUR2.SGM 07AUR2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 152 (Tuesday, August 7, 2018)]
[Rules and Regulations]
[Pages 38768-38936]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15896]



[[Page 38767]]

Vol. 83

Tuesday,

No. 152

August 7, 2018

Part II





Securities and Exchange Commission





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





17 CFR Parts 232, 240, 242, et al.





Regulation of NMS Stock Alternative Trading Systems; Final Rule

Federal Register / Vol. 83 , No. 152 / Tuesday, August 7, 2018 / 
Rules and Regulations

[[Page 38768]]


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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, 242, and 249

[Release No. 34-83663; File No. S7-23-15]
RIN 3235-AL66


Regulation of NMS Stock Alternative Trading Systems

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

SUMMARY: The Securities and Exchange Commission is adopting amendments 
to regulatory requirements in Regulation ATS under the Securities 
Exchange Act of 1934 (``Exchange Act'') applicable to alternative 
trading systems (``ATSs'') that trade National Market System (``NMS'') 
stocks (hereinafter referred to as ``NMS Stock ATSs''), including so 
called ``dark pools.'' First, we are adopting new Form ATS-N, which 
will require NMS Stock ATSs to disclose information about their manner 
of operations, the broker-dealer that operates the ATS (``broker-dealer 
operator''), and the ATS-related activities of the broker-dealer 
operator and its affiliates. Second, as amended, the regulations will 
require public posting of certain Form ATS-N filings on the 
Commission's website, which will be accomplished through the 
Commission's Electronic Data Gathering, Analysis, and Retrieval system 
(``EDGAR'') and require each NMS Stock ATS that has a website to post 
on its website a direct URL hyperlink to the Commission's website. 
Third, the amendments that we are adopting today provide a process for 
the Commission to review Form ATS-N filings and, after notice and 
opportunity for hearing, declare an NMS Stock ATS's Form ATS-N 
ineffective. Fourth, the regulations, as amended, will require all ATSs 
subject to the regulations to place in writing its safeguards and 
procedures to protect subscribers' confidential trading information. We 
are also adopting conforming amendments.

DATES: 
    Effective Date: October 9, 2018.
    Compliance Dates: The applicable compliance dates are discussed in 
the section of the release titled ``VIII. Effective Date and Compliance 
Date.''

FOR FURTHER INFORMATION CONTACT: Tyler Raimo, Senior Special Counsel, 
at (202) 551-6227; Matthew Cursio, Special Counsel, at (202) 551-5748; 
Marsha Dixon, Special Counsel, at (202) 551-5782; Jennifer Dodd, 
Special Counsel, at (202) 551-5653; David Garcia, Special Counsel, at 
(202) 551-5681; or Megan Mitchell, Special Counsel, at (202) 551-4887; 
Office of Market Supervision, Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-7010.

SUPPLEMENTARY INFORMATION: We are adopting: (1) Amendments to 17 CFR 
242.300 through 242.303 (``Regulation ATS'') to add new 17 CFR 242.304 
(``Rule 304'') under the Exchange Act to provide new conditions for NMS 
Stock ATSs seeking to rely on the exemption from the definition of 
``exchange'' provided by 17 CFR 240.3a1-1(a) (``Rule 3a1-1(a)'') of the 
Exchange Act; (2) new Form ATS-N \1\ under the Exchange Act, which NMS 
Stock ATSs will file to comply with the new conditions provided under 
Rule 304; and (3) related amendments to 17 CFR 242.300; 17 CFR 242.301, 
17 CFR 242.303, and 17 CFR 240.3a1-1 under the Exchange Act 
(respectively, ``Rule 300,'' ``Rule 301,'' and ``Rule 303'' of 
Regulation ATS, and ``Rule 3a1-1''). We are also adopting amendments to 
17 CFR 242.301(b)(10) and 17 CFR 242.303 (``Rules 301(b)(10) and 303 of 
Regulation ATS'') under the Exchange Act to require all ATSs to make 
and keep written safeguards and written procedures to protect 
subscribers' confidential trading information.
---------------------------------------------------------------------------

    \1\ 17 CFR 249.640.
---------------------------------------------------------------------------

Table of Contents

I. Introduction
II. Background
    A. Role of ATSs in the Current Equity Market Structure
    1. Significant Source of Liquidity for NMS Stocks
    2. Operational Complexity; Conflict of Interests
    B. Exemption for Alternative Trading Systems
    C. Conditions to the ATS Exemption; Confidential Notice Regime
    D. Concerns Regarding the Lack of Operational Transparency
III. Heightened Regulatory Requirements for NMS Stock ATSs
    A. Exchange Act Rule 3a1-1(a) Exemption: New Conditions for NMS 
Stock ATSs
    1. Comments on the Rule 304 Requirements; Effectiveness
    a. Comments on Form ATS-N Requirement
    b. Comments on Effects on ATSs Relative to National Securities 
Exchanges
    c. Comments on Effectiveness Requirement
    2. Comments on Extending Rule 304 to Non-NMS Stock ATSs
    B. Amendments to Existing Regulation ATS Rules for NMS Stock 
ATSs
    1. Rule 300(k): Definition of NMS Stock ATS
    2. Rule 301(a): Exemption From Compliance With Regulation ATS
    3. Rule 301(a)(5): Exemptions From Certain Requirements of 
Regulation ATS Pursuant to Application to the Commission
    4. Rule 301(b)(2): Form ATS Reporting Requirements No Longer 
Apply to NMS Stock ATSs
    5. Rule 301(b)(9): Form ATS-R Quarterly Reports
    6. Rule 303: Recordkeeping Requirements for Form ATS-N
    7. Comments Recommending Changes To Other Existing Regulation 
ATS Rules
IV. Form ATS-N Filing Process; Effectiveness Review
    A. Initial Form ATS-N
    1. Rule 304(a)(1)(i): Filing and Effectiveness Requirement
    2. Rule 304(a)(1)(ii): Commission Review Period
    3. Rule 304(a)(1)(iii): Effectiveness; Ineffectiveness 
Determination
    a. Comments on the Standard of Review To Accept Filings on Form 
ATS-N
    b. Comments on the Review for Declarations of Ineffectiveness
    c. Effectiveness, Ineffectiveness Process
    d. Effectiveness; Ineffectiveness Determinations Under Rule 
301(a)(1)(iii)
    4. Rule 304(a)(1)(iv): Transition for Legacy NMS Stock ATSs
    a. Rule 304(a)(1)(iv)(A): Initial Filing Requirements
    b. Rule 304(a)(1)(iv)(B): Commission Review Period; 
Ineffectiveness Determination
    c. Rule 304(a)(1)(iv)(C): Amendments to Initial Form ATS-N
    B. Rule 304(a)(2): Form ATS-N Amendments
    1. Rule 304(a)(2)(i): Filing Requirements
    a. Material Changes
    (i) Comments on Advance Notice
    (ii) Comments on Materiality
    (iii) Order Display and Fair Access Amendments
    b. Updating Amendments
    c. Correcting Amendments
    2. Rule 304(a)(2)(ii): Commission Review Period; Ineffectiveness 
Determination
    C. Rule 304(a)(3): Notice of Cessation
    D. Rule 304(a)(4): Suspension, Limitation, or Revocation of the 
Exemption From the Definition of Exchange
    E. Rule 304(b): Public Disclosure of Form ATS-N and Related 
Commission Orders
    1. Rule 304(b)(1): Form ATS-N ``Report''
    2. Rule 304(b)(2): Making Public Form ATS-N Filings and 
Commission Orders
    a. Public Disclosure of Effective Initial Form ATS-N, As Amended
    b. Public Disclosure of Orders of an Ineffective Initial Form 
ATS-N
    c. Public Disclosure of Form ATS-N Amendments
    d. Public Disclosure of Ineffective Form ATS-N Amendment
    e. Public Disclosure of Notices of Cessation
    f. Public Disclosure of Each Order Suspending, Limiting, or 
Revoking the Rule 3a1-1(a)(2) Exemption
    3. Rule 304(b)(3): Disclosure of Form ATS-N on the NMS Stock 
ATS's Website
V. Form ATS-N Disclosures
    A. Form ATS-N Disclosure Requirements and Definitions

[[Page 38769]]

    1. Rule 304(c): Disclosure Requirements
    2. Terminology
    a. Definitions for Form ATS-N
    (i) Proposed Defined Terms
    (ii) New Defined Terms
    b. Comments on the Definition of ``Subscriber''
    B. Cover Page and Part I of Form ATS-N: Identifying Information
    1. Cover Page
    2. Part I of Form ATS-N: Identifying Information
    a. Part I: Identifying Information
    b. Comments on Proposed Exhibit 1
    c. ATS Governance Structure and Compliance Programs and Controls
    C. Part II of Form ATS-N: ATS-Related Activities of the Broker-
Dealer Operator and Affiliates
    1. Broker-Dealer Operator and its Affiliate Trading Activities 
on the NMS Stock ATS
    a. Proposed Requests and Response to Comments
    b. Adopted Part II, Item 1 and 2 of Form ATS-N; ATS-Related 
Trading Activities of the Broker-Dealer Operator and its Affiliates
    2. Order Interaction with Broker-Dealer Operator; Affiliates
    3. Arrangements with Trading Centers
    4. Other Products and Services
    5. Activities of Service Providers
    a. Shared Employees
    b. Third-Party Service Providers
    6. Protection of Confidential Trading Information
    7. Differences in Availability of Services, Functionalities, or 
Procedures
    8. Other Recommendations From Commenters
    D. Part III Form ATS-N: Manner of ATS Operations
    1. Types of ATS Subscribers
    2. Eligibility for ATS Services
    3. Exclusion From ATS Services
    4. Hours of Operations
    5. Means of Entry
    6. Connectivity and Co-Location
    7. Order Types and Attributes
    8. Order Sizes
    9. Conditional Order and Indications of Interest
    10. Opening and Reopening
    11. Trading Services, Facilities and Rules
    12. Liquidity Providers
    13. Segmentation; Notice
    14. Counter-Party Selection
    15. Display
    16. Routing
    17. Closing
    18. Trading Outside of Regular Trading Hours
    19. Fees
    20. Suspension of Trading
    21. Trade Reporting
    22. Clearance and Settlement
    23. Market Data
    24. Order Display and Execution Access
    25. Fair Access
    26. Aggregate Platform-Wide Data; Trading Statistics
    a. Disseminated Aggregated Platform-Wide Data
    b. Other Standardized Statistical Disclosures
VI. Amendments to Rule 301(b)(10) and Rule 303(a)(1) for Written 
Safeguards and Written Procedures To Protect Confidential Trading 
Information
VII. EDGAR Filing Requirements; Structured Data
VIII. Effective Date and Compliance Date
IX. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Requirements Relating to Rule 301(b)(10) and 303(a)(1) of 
Regulation ATS
    2. Requirements Relating to Rules 301(b)(2)(viii) and 304 of 
Regulation ATS, Including Form ATS-N
    B. Proposed Use of Information
    1. Amendments to Rule 301(b)(10) and 303(a)(1) of Regulation ATS
    2. Rules 301(b)(2)(viii), 304 of Regulation ATS, Including Form 
ATS-N, and 301(b)(9)
    C. Respondents
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS
    a. Baseline Measurements
    b. Burdens
    2. Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including 
Form ATS-N
    a. Baseline Measurements
    b. Burdens
    (i) Analysis of Estimated Additional Burden for Form ATS-N
    (a) Part I
    (b) Part II
    (c) Part III
    (ii) Estimated Burden Above the Current Baseline for an Initial 
Form ATS-N, Form ATS-N Amendment, and Notice of Cessation on Form 
ATS-N
    (a) Initial Form ATS-N
    (b) Form ATS-N Amendments
    (c) Notice of Cessation on Form ATS-N
    (iii) ATSs That Trade Both NMS and Non-NMS Stocks
    (iv) Access to EDGAR
    (v) Recordkeeping Requirements
    E. Collection of Information Is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
X. Economic Analysis
    A. Background
    B. Baseline
    1. Current NMS Stock ATSs
    2. Current Reporting Requirements for NMS Stock ATSs
    3. Lack of Standardized Public Disclosure
    4. NMS Stock ATS Treatment of Subscriber Confidential Trading 
Information
    5. Competition
    a. Competition Between NMS Stock ATSs and Registered National 
Securities Exchanges
    b. Competition Among NMS Stock ATSs
    c. Competition Between Broker-Dealers That Operate NMS Stock 
ATSs and Broker-Dealers That Do Not Operate NMS Stock ATSs
    6. Effect of NMS Stock ATSs on the Current Market for NMS Stock 
Execution Services
    a. Trading Costs
    b. Price Discovery
    c. Market Efficiency
    C. Economic Effects and Effects on Efficiency, Competition, and 
Capital Formation
    1. Economic Effects of Enhanced Filing Requirements of Form ATS-
N
    a. Benefits
    b. Costs
    2. Economic Effects of Public Disclosure of Form ATS-N
    a. Benefits
    (i) Benefits of Public Disclosure of Standardized Information of 
Operations of NMS Stock ATSs
    (ii) Benefits of Public Disclosure of the ATS-Related Activities 
of the Broker-Dealer Operator and Its Affiliates
    (iii) Benefits of Public Disclosure of Aggregate Platform-Wide 
Order Flow and Execution Statistics
    (iv) Benefits of Filing Form ATS-N in a Structured Format
    b. Costs
    (i) Costs to NMS Stock ATSs
    (ii) Price Impact Costs
    (iii) Filing in Structured Format
    3. Economic Effects of Written Safeguards and Written Procedures 
To Protect Subscribers' Confidential Trading Information
    a. Benefits
    b. Costs
    4. Impact on Efficiency, Competition, and Capital Formation
    a. Competition
    (i) Entry of New and Continuation of Legacy NMS Stock ATSs
    (a) Enhance Filing Requirements of Form ATS-N
    (b) Implementation and Ongoing Compliance Costs
    (c) Public Disclosure of Form ATS-N
    (ii) Effects on Changes in Number of NMS Stock ATSs on Market 
Participant Trading Costs
    (iii) Innovation
    b. Efficiency
    c. Capital Formation
    D. Reasonable Alternatives
    1. Require NMS Stock ATSs To Publicly Disclose Current Form ATS
    2. Require Form ATS-N but Deem Information Confidential
    3. Require NMS Stock ATSs To Publicly Disclose Form ATS-N but 
not Declare Form ATS-N Ineffective
    4. Initiate Differing Levels of Public Disclosure Depending on 
NMS Stock ATS Characteristics
    5. Require NMS Stock ATSs To Register as National Securities 
Exchanges and Become SROs
    6. Discontinue Quarterly Volume Reports on Form ATS-R
    7. Require NMS Stock ATSs To Operate as Limited Purpose Entities
    8. Prohibit Broker-Dealer Operators and Affiliates From Trading 
on the NMS Stock ATS
    9. Lower the Fair Access Threshold for NMS Stock ATSs
    10. Requirements To Disclose Aggregate Platform-Wide Order Flow 
and Execution Statistics to All Subscribers
    11. Specify Alternative Structured Formats for Form ATS-N
    12. Specify Other Filings Methods for Form ATS-N

[[Page 38770]]

XI. Regulatory Flexibility Act Certification

I. Introduction

    NMS Stock ATSs, including trading centers commonly referred to as 
dark pools,\2\ have become an integral part of the national market 
system. Since the adoption of Regulation ATS in 1998,\3\ the number of 
these ATSs, and the volume of NMS stocks traded on them, has 
significantly increased. NMS Stock ATSs, which meet the definition of 
an exchange but are not required to register as national securities 
exchanges, compete with, and operate with complexity akin to, national 
securities exchanges. Many NMS Stock ATSs are operated by multi-service 
broker-dealers, whose business activities have become increasingly 
intertwined with those of the ATS, adding further complexity to their 
operations of NMS Stock ATSs and creating the potential for conflicts 
between the interests of the broker-dealer operator and the ATS's 
subscribers.
---------------------------------------------------------------------------

    \2\ The term ``dark pool'' is not used or defined in the 
Exchange Act or Commission rules. For purposes of this release, the 
term refers to NMS Stock ATSs that do not publicly display 
quotations in the consolidated quotation data. See Securities 
Exchange Act Release No. 76474 (Nov. 18, 2015), 80 FR 80998, 81008 
n.123 (Dec. 28, 2015) (``Proposal''). Currently, NMS Stock ATSs 
operate predominantly as dark pools. See infra Section II.A.1.
    A ``trading center'' means a national securities exchange or 
national securities association that operates an SRO trading 
facility, an ATS, an exchange market maker, an OTC market maker, or 
any other broker or dealer that executes orders internally by 
trading as principal or crossing orders as agent. 17 CFR 
242.600(b)(78). Some trading centers, such as OTC market makers, 
also offer dark liquidity, primarily in a principal capacity, and do 
not operate as ATSs. For purposes of this adopting release, these 
trading centers are not defined as dark pools because they are not 
ATSs.
    \3\ Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844, 70863 (December 22, 1998) (Regulation of 
Exchanges and Alternative Trading Systems) (``Regulation ATS 
Adopting Release'').
---------------------------------------------------------------------------

    Despite their role in the equity markets, little information is 
widely available to market participants about NMS Stock ATSs, which 
restricts their ability to adequately assess these ATSs as potential 
routing destinations. On November 18, 2015, we proposed to amend 
Regulation ATS with the stated goals of enhancing operational 
transparency for NMS Stock ATSs to enable market participants to make 
more informed order routing decisions, and to facilitate better 
Commission oversight of these trading venues.\4\ To achieve these 
goals, we proposed to require NMS Stock ATSs to publicly report on new 
Form ATS-N information about how the ATS operates and activities of the 
broker-dealer operator and its affiliates that relate to the ATS; and 
provide a process for the Commission to determine whether an NMS Stock 
ATS qualifies for the exemption from the definition of ``exchange,'' in 
which the Commission would, by order, declare a Form ATS-N effective 
or, after notice and opportunity for hearing, ineffective.
---------------------------------------------------------------------------

    \4\ See Proposal, supra note 2. Section 11A(a)(2) of the 
Exchange Act (15 U.S.C. 78k-1(a)(2)) enacted as part of the 
Securities Acts Amendments of 1975 (``1975 Amendments'') (Pub. L. 
94-29, 89 Stat. 97 (1975)) directs the Commission, having due regard 
for the public interest, the protection of investors, and the 
maintenance of fair and orderly markets, to use its authority under 
the Exchange Act to facilitate the establishment of a national 
market system for securities in accordance with the Congressional 
findings and objectives set forth in Section 11A(a)(1) of the 
Exchange Act. See 15 U.S.C. 78k-1(a)(1). See also Regulation ATS 
Adopting Release, supra note 3, at 70858; Proposal, supra note 2, at 
80999-81000.
---------------------------------------------------------------------------

    We received 32 comment letters on the Proposal from a variety of 
interested persons, including ATSs, a national securities exchange, 
broker-dealers, institutional investors, industry trade groups, the 
Commission's Investor Advocate, and the Attorney General of the State 
of New York.\5\ Commenters generally support the goals of the Proposal, 
although some commenters express concern about various specific 
elements, and recommend certain modifications or clarifications. We are 
adopting Form ATS-N and amendments to Regulation ATS and Exchange Act 
Rule 3a1-1(a) with modifications from the Proposal, as discussed 
below.\6\
---------------------------------------------------------------------------

    \5\ Comments received on the Proposal are available on the 
Commission's website, available at: https://www.sec.gov/comments/s7-23-15/s72315.shtml. See Appendix A for a citation key to comment 
letters cited in this release.
    \6\ If any of the provisions of these rules, or the application 
thereof to any person or circumstance, is held to be invalid, such 
invalidity shall not affect other provisions or application of such 
provisions to other persons or circumstances that can be given 
effect without the invalid provision or application.
---------------------------------------------------------------------------

II. Background

A. Role of ATSs in the Current Equity Market Structure

1. Significant Source of Liquidity for NMS Stocks
    At the time Regulation ATS was proposed, there were 8 registered 
national securities exchanges,\7\ and the Commission estimated that 
there were approximately 43 systems that would be eligible to operate 
as ATSs.\8\ As of March 31, 2018, there were 21 registered national 
securities exchanges and 87 ATSs with a Form ATS on file with the 
Commission. Of these, there were 12 national securities exchanges that 
trade NMS stocks and 41 ATSs that had noticed on Form ATS that they 
expect to trade NMS stocks.\9\ Approximately 502.8 billion shares 
($25.4 trillion) were traded in NMS stocks during the first quarter of 
2018.\10\ During this period, the 33 ATSs that reported transactions in 
NMS stocks \11\ accounted for 57.3 billion shares (approximately $2.9 
trillion in dollar volume), representing 11.4% of the combined total 
share trading volume (11.5% of the total dollar volume) in NMS stocks 
on all national securities exchanges, ATSs, and non-ATS OTC trading 
centers.\12\ By comparison, the number of active dark pools trading NMS 
stocks in 2002 was approximately 10,\13\ and in 2009, dark

[[Page 38771]]

pools accounted for 7.9% of NMS share volume.\14\ Additionally, no 
individual ATS executed more than 20.1% of the total share volume on 
NMS Stock ATSs or more than 2.3% of total NMS stock share volume during 
the first quarter of 2018.\15\ Given this dispersal of trading volume 
in NMS stocks among an increasing number of trading centers, NMS Stock 
ATSs, with their approximately 11.4% market share, represent a 
significant source of liquidity in NMS stocks.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 39884 (April 21, 
1998), 63 FR 23504, 23523 (April 29, 1998) (``Regulation ATS 
Proposing Release'') at 23543 n.341.
    \8\ See id. at 23540 n.313 and accompanying text.
    \9\ Data compiled from Forms ATS submitted to the Commission as 
of March 31, 2018.
     NYSE National, Inc. (f.k.a. National Stock Exchange, Inc.) was 
not trading as of March 31, 2018 but filed a proposed rule change 
with the Commission for its proposed relaunch. See Securities 
Exchange Act Release No. 82819 (March 7, 2018) 83 FR 11098 (March 
13, 2018) (NYSENAT-2018-02) (notice of proposed ruled change). The 
Commission has approved the proposed rule change. See Securities 
Exchange Act Release No. 83289 (May 17, 2018) 83 FR 23968 (May 23, 
2018) (NYSENAT-2018-02) (order approving proposed ruled change).
     In contrast to dark pools, an ATS could be an Electronic 
Communication Network (``ECN''), which are ATSs that provide their 
best-priced orders for inclusion in the consolidated quotation data, 
whether voluntarily or as required by Rule 301(b)(3) of Regulation 
ATS. See Rule 600(b)(23) of Regulation NMS, 17 CFR 242.600(b)(23) 
(definition of ``electronic communications network''); see also 2010 
Equity Market Structure Release, supra note 13, at 3599. In general, 
ECNs offer trading services (such as displayed or non-displayed 
order types, maker-taker pricing, and data feeds) that are analogous 
to national securities exchanges. See id. Currently, however, based 
on Form ATS filings, there are no NMS Stock ATSs operating as ECNs.
    \10\ See infra Table 1--``NMS Stock ATSs Ranked by Dollar 
Trading Volume--January 1, 2018 to March 30, 2018'' (citing Trade 
and Quote (TAQ) Data).
    \11\ Data compiled from Forms ATS and Forms ATS-R filed with the 
Commission as of the end of, and for the first quarter of 2018.
    \12\ See infra Table 1--``NMS Stock ATSs Ranked by Dollar 
Trading Volume--January 1, 2018 to March 30, 2018.'' See id. (citing 
Trade and Quote (TAQ) Data).
     During the second quarter of 2015, there were 38 ATSs that 
reported transactions in NMS stocks, accounting for 59 billion 
shares traded in NMS stocks ($2.5 trillion), which represented 
approximately 15.0% of total share trading volume (15.4% of total 
dollar trading volume) on all national securities exchanges, ATSs, 
and non-ATS OTC trading venues combined. See Proposal, supra note 2, 
at 81008 n.121 and accompanying text.
     Competitors for listed-equity (NMS) trading services also 
include several hundred OTC market makers and broker-dealers.
    \13\ See Regulation of Non-Public Trading Interest, Securities 
Exchange Act Release No. 60997 (November 13, 2009) 74 FR 61208, 
61209 n.9 (November 23, 2009) (``Regulation of Non-Public Trading 
Interest'').
     In 2009, there were 32 active dark pools trading in NMS stocks. 
See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 
FR 3594 (January 21, 2010) (``2010 Equity Market Structure 
Release'')), at 3598 n.22 and accompanying text.
    \14\ See id. at 3598.
    \15\ The NMS Stock ATS with the greatest volume executed 
approximately 20.1% of NMS Stock ATS share volume and 2.3% of the 
total consolidated NMS stock share trading volume.
    The market share percentages were calculated by Commission staff 
using aggregate trade data reported by ATSs to the FINRA equity 
trade reporting facilities and made available on FINRA's website and 
TAQ Data. See infra Table 1--``NMS Stock ATSs Ranked by Dollar 
Trading Volume--January 1, 2018 to March 30, 2018.''
    Pursuant to FINRA rules, each ATS is required to use a unique 
MPID in its reporting to FINRA, such that its volume reporting is 
distinguishable from other transaction volume reported by the 
broker-dealer operator of the ATS, including volume reported for 
other ATSs operated by the same broker-dealer. See FINRA Rules 6160, 
6170, 6480, and 6720. FINRA aggregates on a weekly basis ATS data 
reported by ATSs to the FINRA equity trade reporting facilities. The 
data can be viewed on a security-by-security basis or by ATS. See 
FINRA Rules 6110 and 6610. See also Securities Exchange Act Release 
No. 76931 (January 19, 2016), 81 FR 4076 (January 25, 2016) (SR-
FINRA-2016-002) (notice of filing and immediate effectiveness of a 
proposed rule change relating to ATS volume and trading information) 
(``FINRA ATS Reporting Notice'').
---------------------------------------------------------------------------

2. Operational Complexity; Conflict of Interests

    NMS Stock ATSs have grown increasingly complex in terms of the 
services and functionalities that they offer subscribers, and they have 
used advances in technology to improve the speed, capacity, and 
efficiency of the trading functionalities that they offer to execute 
orders in NMS stocks.\16\ Additionally, NMS Stock ATSs today offer a 
wide range of order types, matching systems to bring together orders 
and counterparties in NMS stocks, order interaction protocols, or 
opportunities to customize trading parameters, such as parameters that 
allow subscribers to preference interaction of their order flow with 
that of certain other specific subscribers or types of subscribers.\17\ 
A variety of market participants use these ATSs to display or execute 
orders and trading interest in NMS stocks, including broker-dealers 
that route customer orders to ATSs for execution and potential price 
improvement, and asset managers that seek to execute large size orders 
without suffering adverse price impact.\18\
---------------------------------------------------------------------------

    \16\ ATSs that traded NMS stocks prior to the adoption of 
Regulation ATS did not offer the same services and functionalities 
that they do today. See Proposal, supra note 2, at 81009.
    \17\ See id. at 81009-81010.
    \18\ Market participants may include many different types of 
persons seeking to transact in NMS stocks, including broker-dealers 
and institutional or retail investors. See id. at 81001 n.28 and 
accompanying text.
---------------------------------------------------------------------------

    The relationships between broker-dealer operators \19\ and the ATSs 
they operate have also become more complex and intertwined since the 
adoption of Regulation ATS.\20\ The broker-dealer operator of an NMS 
Stock ATS controls all aspects of the operation of the ATS, including, 
among other things: the means of access to the ATS; who may trade on 
the ATS; how orders are matched and executed; and any differences in 
access to services among subscribers.\21\ The broker-dealer operator, 
or its affiliate, may also own, and control access to, the technology 
and systems that support the trading facilities of the NMS Stock ATS, 
or provide and control the personnel servicing the ATS's trading 
facilities.\22\ Additionally, the broker-dealer operator, or in some 
cases, its affiliates, determines the means by which orders are entered 
on the ATS, in many cases, through the use of a smart order router that 
is owned and operated by the broker-dealer operator or one of its 
affiliates.\23\ The broker-dealer operator, or in some cases, its 
affiliates, also controls the market data that the ATS uses to match, 
and execute orders and the transmission of, and access to, confidential 
order and execution information sent to and from the ATS.\24\ The 
operations of the NMS Stock ATS and the other operations of the broker-
dealer operator are usually closely intertwined, and the broker-dealer 
operator may leverage its information technology, systems, personnel, 
and market data, and those of its affiliates, to operate the ATS.
---------------------------------------------------------------------------

    \19\ See Proposal, supra note 2, at 81010, 81041-81043.
    \20\ See id.
    \21\ See id. at 81010.
    \22\ See id. Some technology or functions of an ATS may be 
licensed from a third party. The broker-dealer operator of the ATS 
is nonetheless legally responsible for ensuring that all aspects of 
the ATS comply with applicable laws. See id. at 81041 n.362.
    \23\ See id. at 81041.
    \24\ See id. For example, the broker-dealer operator determines 
the source of market data that the NMS Stock ATS uses to calculate 
the NBBO and how the NBBO will be calculated.
---------------------------------------------------------------------------

    Furthermore, ATSs that trade NMS stocks are increasingly operated 
by multi-service broker-dealers that engage in significant brokerage 
and dealing activities in addition to operation of their ATS.\25\ These 
other business activities may include, among others, providing 
algorithmic trading software, agency sales desk support, and automated 
smart order routing services, often with, or through, their affiliates. 
As indicated by commenters, the fees charged to subscribers for their 
use of an NMS Stock ATS operated by a multi-service broker-dealer are 
generally bundled with other services offered by the broker-dealer 
operator to subscribers.\26\ Multi-service broker-dealers that also 
operate NMS Stock ATSs may use the ATS as a complement to the broker-
dealer's other service lines. For instance, the broker-dealer operator 
of an NMS Stock ATS, or its affiliate, may also operate an OTC market 
making desk or principal trading desk,\27\ or may have other business 
units that actively trade NMS stocks on a principal or agency basis in 
the ATS or at other trading centers.\28\ Some of these broker-dealer 
operators that operate multiple NMS Stock ATSs may use their ATSs as an 
opportunity to execute orders ``in house'' before seeking contra-side 
interest at other execution venues. A multi-service broker-dealer may 
also execute orders in NMS stocks internally (and not within its ATS) 
by trading as principal against such orders or crossing orders as agent 
in a riskless principal capacity, before routing the orders to its NMS 
Stock ATS or another external trading center. Consequently, the non-ATS 
trading centers operated by the broker-dealer operator of an NMS Stock 
ATS, or its affiliates, may compete with the ATS for the execution of 
transactions in NMS stocks.
---------------------------------------------------------------------------

    \25\ Throughout the Proposal and this release, broker-dealer 
operators of NMS Stock ATSs that provide brokerage or dealing 
services in addition to operating an ATS are referred to as ``multi-
service broker-dealers.'' See id. at 81001 n.30.
    \26\ See infra Section V.D.19.
    \27\ These non-ATS, OTC activities in NMS stocks may include 
operating as an OTC market maker or block positioner or operating an 
internal broker-dealer system. See 2010 Equity Market Structure 
Release, supra note 13, at 3599-3600. Additionally, an affiliate of 
the broker-dealer operator of an NMS Stock ATS may also operate non-
ATS trading centers.
    \28\ See id. See also infra Section V.C (discussing comments on 
the proposed disclosure requirements of Form ATS-N).
---------------------------------------------------------------------------

B. Exemption for Alternative Trading Systems

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

[[Page 38772]]

whether a trading platform meets the definition of exchange, and if so, 
triggers the requirement to register as a national securities exchange 
pursuant to Section 5 of the Exchange Act \30\ and comply with the 
requirements applicable to exchanges. Under Rule 3b-16(a), ``an 
organization, association, or group of persons shall be considered to 
constitute, maintain, or provide `a market place or facilities for 
bringing together purchasers and sellers of securities or for otherwise 
performing with respect to securities the functions commonly performed 
by a stock exchange,' if such organization, association, or group of 
persons: (1) Brings together the orders for securities of multiple 
buyers and sellers; and (2) uses established, non-discretionary methods 
(whether by providing a trading facility or by setting rules) under 
which such orders interact with each other, and the buyers and sellers 
entering such orders agree to the terms of a trade.'' \31\ Exchange Act 
Rule 3b-16(b) explicitly excluded certain systems that the Commission 
believed were not exchanges.\32\ Accordingly, a system is not included 
in the Commission's interpretation of ``exchange'' if: (1) The system 
fails to meet the two-part test in paragraph (a) of Rule 3b-16; (2) the 
system falls within one of the exclusions in paragraph (b) of Rule 3b-
16; or (3) the Commission otherwise conditionally or unconditionally 
exempts \33\ the system from the definition.
---------------------------------------------------------------------------

    \29\ See 17 CFR 240.3b-16. See generally Regulation ATS Adopting 
Release, supra note 3. See also Proposal, supra note 2, at 81004 
(discussing the current exemption from the definition of exchange 
available to ATSs).
    \30\ See 15 U.S.C. 78f.
    \31\ See 17 CFR 240.3b-16(a).
    \32\ See Regulation ATS Adopting Release, supra note 3, at 
70852. Specifically, Rule 3b-16(b) excludes from the definition of 
exchange systems that perform only traditional broker-dealer 
activities, including: (1) systems that route orders to a national 
securities exchange, a market operated by a national securities 
association, or a broker-dealer for execution, or (2) systems that 
allow persons to enter orders for execution against the bids and 
offers of a single dealer if certain additional conditions are met.
    \33\ See 17 CFR 240.3b-16(e).
---------------------------------------------------------------------------

    Section 5 of the Exchange Act \34\ requires an organization, 
association, or group of persons that meets the definition of 
``exchange'' under Section 3(a)(1) of the Exchange Act,\35\ unless 
otherwise exempt, to register with the Commission as a national 
securities exchange pursuant to Section 6 of the Exchange Act.\36\ 
Registered national securities exchanges are also SROs,\37\ and must 
comply with regulatory requirements applicable to both national 
securities exchanges and SROs.\38\ Before a national securities 
exchange may commence operations, the Commission must approve the 
national securities exchange's application for registration filed on 
Form 1. Section 6(b) of the Exchange Act requires, among other things, 
that the national securities exchange be so organized and have the 
capacity to carry out the purposes of the Exchange Act and to comply, 
and enforce compliance by its members and persons associated with its 
members, with the federal securities laws and the rules of the 
exchange.\39\ Both a national securities exchange's registration 
application and the Commission's order approving the application are 
public. After registering, a national securities exchange must file 
with the Commission any proposed changes to its rules.\40\ The initial 
application on Form 1, amendments thereto, and filings for proposed 
rule changes, in combination, publicly disclose important information 
about national securities exchanges, such as the trading services they 
offer and fees they charge for those services.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78e.
    \35\ Pursuant to Section 3(a)(1) of the Exchange Act, the 
statutory definition of ``exchange'' means ``any organization, 
association, or group of persons, whether incorporated or 
unincorporated, which constitutes, maintains, or provides a market 
place or facilities for bringing together purchasers and sellers of 
securities or for otherwise performing with respect to securities 
the functions commonly performed by a stock exchange. . . .'' 15 
U.S.C. 78c(a)(1).
    \36\ 15 U.S.C. 78f. A ``national securities exchange'' is an 
exchange registered as such under Section 6 of the Exchange Act.
     A trading platform that meets the definition of ``exchange'' 
under Section 3(a)(1) of the Exchange and fails to register with the 
Commission as a national securities exchange pursuant to Section 6 
of the Exchange Act, unless exempt, risks operating as an 
unregistered exchange in violation of Section 5 of the Exchange Act. 
See, e.g., Report of Investigation Pursuant to Section 21(a) of the 
Securities Exchange Act of 1934: The DAO, Securities Exchange Act 
Release No. 81207 (July 25, 2017) https://www.sec.gov/litigation/investreport/34-81207.pdf (``DAO Report'') (finding that certain 
tokens offered and sold by a ``virtual'' organization were 
securities, and confirming that issuers of distributed ledger or 
blockchain technology-based securities must register offers and 
sales of such securities unless a valid exemption applies, and that 
securities exchanges providing for trading in these securities must 
register unless they are exempt). Specifically, we confirmed that a 
system that meets the criteria of Rule 3b-16(a), and is not excluded 
under Rule 3b-16(b), must register as a national securities exchange 
pursuant to Sections 5 and 6 of the Exchange Act or operate pursuant 
to an appropriate exemption. See id. at Section III.D. See also In 
the Matter of BTC Trading, Corp. and Ethan Burnside, Respondents, 
Securities Exchange Act Release No. 73783 (December 8, 2014), 
https://www.sec.gov/litigation/admin/2014/33-9685.pdf (order 
instituting administrative and cease-and-desist proceedings, making 
findings, and imposing remedial sanctions and a cease-and-desist 
order and alleging, among other things, that an operator of two 
online venues through which account holders could trade securities 
using virtual currencies violated Section 5 of the Exchange Act by 
failing to register the trading venues as exchanges).
    \37\ Section 3(a)(26) of the Exchange Act defines a self-
regulatory organization as any national securities exchange, 
registered securities association, registered clearing agency, or 
(with limitations) the Municipal Securities Rulemaking Board. See 15 
U.S.C. 78c(a)(26). See also Proposal, supra note 2, at 81000-81001 
nn. 20-26 and accompanying text (discussing certain differences 
between certain obligations and benefits applicable to national 
securities exchanges and those applicable to ATSs).
    \38\ See, e.g., 15 U.S.C. 78f and 78s.
    \39\ See Section 6(b)(1) of the Exchange Act, 15 U.S.C. 
78f(b)(1). The Commission must also find that the national 
securities exchange has rules that meet certain criteria. See 
generally Exchange Act Section 6(b)(2) through (10), 15 U.S.C. 
78f(b)(2) through (10).
    \40\ See generally Section 19(b) of the Exchange Act, 15 U.S.C. 
78s(b), and Exchange Act Rule 19b-4, 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Exchange Act Rule 3a1-1(a)(2) \41\ exempts from the Exchange Act 
Section 3(a)(1) definition of ``exchange'' an organization, 
association, or group of persons that complies with Regulation ATS,\42\ 
which requires, among other things, meeting the definition of an ATS 
and registering as a broker-dealer.\43\ As a result of the exemption, 
an organization, association, or group of persons that meets the 
definition of an exchange and complies with Regulation ATS is not 
required by Section 5 of the Exchange Act to register as a national 
securities exchange pursuant to Section 6 of the Exchange Act, is not 
an SRO, and, therefore, is not required to comply with regulatory 
requirements applicable to national securities exchanges and SROs.\44\ 
An ATS that fails to comply with the requirements of Regulation ATS 
would no longer qualify for the exemption provided under Rule 3a1-
1(a)(2), and thus, risks operating as an unregistered exchange in 
violation of Section 5 of the Exchange Act.\45\
---------------------------------------------------------------------------

    \41\ See 17 CFR 240.3a1-1(a)(2).
    \42\ See id. Rule 3a1-1 also provides two other exemptions from 
the definition of ``exchange'' for any ATS operated by a national 
securities association and any ATS not required to comply with 
Regulation ATS pursuant to Rule 301(a) of Regulation ATS. See 17 CFR 
240.3a1-1(a)(1) and (3).
     Rule 3a1-1(b) provides an exception to the Rule 3a1-1(a) 
exemptions pursuant to which the Commission may require a trading 
system that is a substantial market to register as a national 
securities exchange, if the Commission finds doing so is necessary 
or appropriate in the public interest or consistent with the 
protection of investors. See 17 CFR 240.3a1-1(b). See also 
Regulation ATS Adopting Release, supra note 3, at 70857-70858.
    \43\ See 17 CFR 242.300(a); 17 CFR 242.301(a); and 
242.301(b)(1). In addition to the other requirements of Regulation 
ATS, to qualify for the Rule 3a1-1(a) exemption, an organization, 
association, or group of persons must otherwise meet the definition 
of ``exchange.''
    \44\ See generally Sections 5, 6, and 19 of the Exchange Act, 15 
U.S.C. 78e, 78f, and 78s.
    \45\ See 15 U.S.C. 78e.
---------------------------------------------------------------------------

C. Conditions to the ATS Exemption; Confidential Notice Regime

    Rule 300(a) of Regulation ATS defines an ATS as: ``any 
organization, association, person, group of persons, or

[[Page 38773]]

system: (1) [t]hat constitutes, maintains, or provides a market place 
or facilities for bringing together purchasers and sellers of 
securities or for otherwise performing with respect to securities the 
functions commonly performed by a stock exchange within the meaning of 
[Rule 3b-16]; and (2) [t]hat does not: (i) [s]et rules governing the 
conduct of subscribers other than the conduct of such subscribers' 
trading on such organization, association, person, group of persons, or 
system; or (ii) [d]iscipline subscribers other than by exclusion from 
trading.'' \46\ Governing the conduct of or disciplining subscribers 
are functions performed by an SRO that we believe should be regulated 
as such.\47\ Accordingly, pursuant to the definition in Rule 300(a), a 
trading system that performs SRO functions, or performs functions 
common to national securities exchanges, such as establishing listing 
standards, is precluded from the definition of ATS and would be 
required to register as a national securities exchange or be operated 
by a national securities association (or seek another exemption).\48\
---------------------------------------------------------------------------

    \46\ See 17 CFR 242.300(a).
    \47\ See Regulation ATS Adopting Release, supra note 3, at 
70859. As we noted when we adopted Regulation ATS, any system that 
uses its market power to regulate its participants should be 
regulated as an SRO. We stated that it would consider a trading 
system to be ``governing the conduct of subscribers'' outside the 
trading system if it imposed on subscribers, as conditions of 
participation in trading, any requirements for which the trading 
system had to examine subscribers for compliance. In addition, we 
stated our belief that if a trading system imposed as conditions of 
participation, directly or indirectly, restrictions on subscribers' 
activities outside of the trading system, such a trading system 
should be a registered exchange or operated by a national securities 
association, but that the limitation would not preclude an ATS from 
imposing credit conditions on subscribers or requiring subscribers 
to submit financial information to the ATS. See id.
    \48\ See id.
---------------------------------------------------------------------------

    Rule 301(b)(1) of Regulation ATS requires that every ATS that is 
subject to Regulation ATS, pursuant to paragraph (a) of Rule 301,\49\ 
be registered as a broker-dealer under Section 15 of the Exchange 
Act.\50\ As a registered broker-dealer, an ATS must also, in addition 
to complying with Regulation ATS, comply with broker-dealer filing and 
conduct obligations, including becoming a member of an SRO, such as the 
Financial Industry Regulatory Authority (``FINRA''), and comply with 
SRO rules.\51\ An ATS must also comply with Rule 301(b)(2) of 
Regulation ATS, which currently requires all ATSs to file an initial 
operation report with the Commission on Form ATS \52\ at least 20 days 
before commencing operations.\53\ Form ATS requirements include that an 
ATS provide information about: Classes of subscribers and differences 
in access to the services offered by the ATS to different groups or 
classes of subscribers; securities the ATS expects to trade; any entity 
other than the ATS involved in its operations; the manner in which the 
system operates; how subscribers access the trading system; procedures 
governing order entry; and procedures governing execution, reporting, 
clearance, and settlement of transactions effected through the ATS.\54\ 
Regulation ATS states that information filed by an ATS on Form ATS is 
``deemed confidential when filed'' \55\ and ATSs are not otherwise 
required to publicly disclose such information.\56\
---------------------------------------------------------------------------

    \49\ Pursuant to Rule 301(a), certain ATSs that are subject to 
other appropriate regulations are not required to comply with 
Regulation ATS. These ATSs include those that are: Registered as a 
national securities exchange under Section 6 of the Exchange Act; 
exempt from national securities exchange registration based on the 
limited volume of transactions effected; operated by a national 
securities association; Registered as a broker-dealer under Sections 
15(b) or 15C of the Exchange Act, or are banks, that limits their 
activities to certain instruments; or exempted, conditionally or 
unconditionally, by Commission order, after application by such ATS. 
See 17 CFR 242.301(a).
    \50\ See 17 CFR 242.301(b)(1).
    \51\ Section 15(b)(8) of the Exchange Act requires a broker or 
dealer to become a member of a registered national securities 
association, unless it effects transactions in securities solely on 
an exchange of which it is a member. 15 U.S.C. 78o(b)(8). See also 
Regulation ATS Adopting Release, supra note 3, at 70903 (discussing 
some of the regulatory obligations of registered broker-dealers, 
such as membership in an SRO and compliance with that SRO's rules). 
For example, a broker-dealer that is a FINRA member must file an 
application for approval of a material change to its business 
operations (as defined in FINRA Rule 1011(k)). See FINRA Rule 
1017(a). Among other obligations, a broker-dealer operator of an NMS 
Stock ATS that is a FINRA member is subject to trade reporting 
requirements pursuant to FINRA rules. See, e.g., supra note 15 
(discussing FINRA trade reporting requirements applicable to NMS 
Stock ATSs).
    \52\ Form ATS and the Form ATS Instructions are available at 
https://www.sec.gov/about/forms/formats.pdf.
    \53\ See 17 CFR 242.301(b)(2)(i). The Commission stated in the 
Regulation ATS Adopting Release that Form ATS would provide the 
Commission the opportunity to identify problems that might impact 
investors before the system begins to operate. See Regulation ATS 
Adopting Release, supra note 3, at 70864; Proposal, supra note 2, at 
81005 n.70 and accompanying text. Unlike a Form 1 filed by a 
national securities exchange, Form ATS is not approved by the 
Commission. Instead, Form ATS provides the Commission with notice 
about an ATS's operations prior to commencing operations. See 
Regulation ATS Adopting Release, supra note 3, at 70864.
    \54\ See Proposal, supra note 2, at 81005.
    \55\ 17 CFR 242.301(b)(2)(vii). See Form ATS.
    \56\ As we noted in the Proposal, some ATSs may currently make 
voluntary public disclosures. See Proposal, supra note 2, at 81011, 
n.156. See also infra note 559 and accompanying text (discussing 
comments regarding voluntary postings of Form ATS by NMS Stock 
ATSs).
---------------------------------------------------------------------------

    ATSs must notify the Commission of any changes in their operations 
by filing an amendment to its Form ATS initial operation report. There 
are three types of amendments to an initial operation report.\57\ 
First, if any material change is made to its operations, the ATS must 
file an amendment on Form ATS at least 20 calendar days before 
implementing such change.\58\ Second, if any information contained in 
the initial operation report becomes inaccurate for any reason and has 
not been previously reported to the Commission as an amendment on Form 
ATS, the ATS must file an amendment on Form ATS correcting the 
information within 30 calendar days after the end of the calendar 
quarter in which the system has operated.\59\ Third, an ATS must 
promptly file an amendment on Form ATS correcting information that it 
previously reported on Form ATS after discovery that any information 
was inaccurate when filed.\60\ Also, upon ceasing to operate as an ATS, 
an ATS is required to promptly file a cessation of operations report on 
Form ATS.\61\ As is the case with respect to initial operation reports, 
Form ATS amendments and cessation of operations reports serve as notice 
to the Commission of changes to the ATS's operations,\62\ and Rule 
301(b)(2)(vii) and the Instructions to the form state that Form ATS is 
``deemed confidential.'' \63\
---------------------------------------------------------------------------

    \57\ Form ATS is used for three types of submissions: Initial 
operation reports; amendments to initial operation reports; and 
cessation of operations reports. An ATS designates the type of 
submission on the form. See Form ATS.
    \58\ See 17 CFR 242.301(b)(2)(ii). A ``material change,'' 
includes, but is not limited to, any change to the operating 
platform, the types of securities traded, or the types of 
subscribers. In addition, the Commission has stated that ATSs 
implicitly make materiality decisions in determining when to notify 
their subscribers of changes. See Regulation ATS Adopting Release, 
supra note 3, at 70864. See also infra Section IV.B.1.a.ii 
(discussing the materiality standard that would apply to the filing 
of amendments on Form ATS-N).
    \59\ See 17 CFR 242.301(b)(2)(iii).
    \60\ See 17 CFR 242.301(b)(2)(iv).
    \61\ See 17 CFR 242.301(b)(2)(v).
    \62\ See Regulation ATS Adopting Release, supra note 3, at 
70864.
    \63\ See 17 CFR 242.301(b)(2)(vii); Form ATS at 3, General 
Instructions A.7. Under the final rules, NMS Stock ATSs that trade 
only NMS stocks will not be required to file Form ATS in accordance 
with Rules 301(b)(2)(i) through (vii), but instead will be required 
to comply with the requirements of new Rule 304 and file Form ATS-N. 
See infra Section III.B.4. See also infra Sections IV.A, B, and C.
---------------------------------------------------------------------------

    Rule 301(b)(9) of Regulation ATS also requires an ATS to 
periodically report certain information about transactions on the ATS 
and information about certain activities on Form ATS-R within 30 
calendar days after the end of each calendar quarter in which the 
market

[[Page 38774]]

has operated.\64\ Form ATS-R requires quarterly volume information for 
specified categories of securities, as well as a list of all securities 
traded on the ATS during the quarter and a list of all subscribers that 
were participants during the quarter.\65\ As with respect to Form ATS, 
Rule 301(b)(2)(vii) and the instructions to Form ATS-R state that Form 
ATS-R is ``deemed confidential.'' \66\ Under the amendments we are 
adopting, the requirements of Rule 301(b)(9) will continue to apply to 
all ATSs, including NMS Stock ATSs, as will the other requirements of 
Regulation ATS other than the Form ATS reporting requirements of Rule 
301(b)(2).\67\
---------------------------------------------------------------------------

    \64\ See 17 CFR 242.301(b)(9)(i). Form ATS-R and the Form ATS-R 
Instructions are available at https://www.sec.gov/about/forms/formats-r.pdf. In the Regulation ATS Adopting Release, the 
Commission stated that the information provided on Form ATS-R would 
permit the Commission to monitor the trading on ATSs. See Regulation 
ATS Adopting Release, supra note 3, at 70878.
    \65\ See Form ATS-R at 4, Items 1 and 2 (describing the 
requirements for Exhibit A and Exhibit B of Form ATS-R). Form ATS-R 
also requires an ATS that is subject to the fair access obligations 
under Rule 301(b)(5) of Regulation ATS to provide as Exhibit C, a 
list of all persons granted, denied, or limited access to the ATS 
during the period covered by the Form ATS-R and designate for each 
person (a) whether it was granted, denied, or limited access; (b) 
the date the ATS took such action; (c) the effective date of such 
action; and (d) the nature of any denial or limitation of access. 
ATSs must also complete and file Form ATS-R within 10 calendar days 
after ceasing to operate. See 17 CFR 242.301(b)(9)(ii); Form ATS-R 
at 2, General Instructions A.2 to Form ATS-R.
    \66\ See 17 CFR 242.301(b)(2)(vii); Form ATS-R at 2, General 
Instruction A.7.
    \67\ See generally infra Section III. See also Section III.B.5.
---------------------------------------------------------------------------

    Under Rule 301(b)(3), an ATS that (1) displays subscriber orders in 
an NMS stock to any person (other than an employee of the ATS) and (2) 
during at least four of the preceding six calendar months, had an 
average daily trading volume of 5% or more of the aggregate average 
daily share volume for that NMS stock, as reported by an effective 
transaction reporting plan, must comply with certain order display and 
execution access obligations.\68\ An ATS that meets these criteria must 
comply with Rule 301(b)(3)(ii), which requires the ATS to provide to a 
national securities exchange or national securities association (each 
an SRO), for inclusion in the quotation data made available by the SRO 
to vendors, the prices and sizes of its orders at the highest buy price 
and lowest sell price for that NMS stock that are displayed to more 
than one subscriber.\69\ An ATS that meets the volume threshold also is 
required to comply with Rule 301(b)(3)(iii), which sets forth certain 
access standards regarding the orders that the ATS is required to 
provide to an SRO pursuant to Rule 301(b)(3)(ii).\70\ Under Rule 
301(b)(4), an ATS must not charge any fee to broker-dealers that access 
the ATS through a national securities exchange or national securities 
association that is inconsistent with the equivalent access to the ATS 
that is required under Rule 301(b)(3)(iii).\71\
---------------------------------------------------------------------------

    \68\ See 17 CFR 242.301(b)(3)(i).
    \69\ See 17 CFR 242.301(b)(3)(ii).
    \70\ See 17 CFR 242.301(b)(3)(iii).
    \71\ See 17 CFR 242.301(b)(4). In addition, if the national 
securities exchange or national securities association to which an 
ATS provides the prices and sizes of orders under Rules 
301(b)(3)(ii) and 301(b)(3)(iii) establishes rules designed to 
assure consistency with standards for access to quotations displayed 
on such national securities exchange, or the market operated by such 
national securities association, the ATS shall not charge any fee to 
members that is contrary to, that is not disclosed in the manner 
required by, or that is inconsistent with any standard of equivalent 
access established by such rules. See id.
---------------------------------------------------------------------------

    Under Rule 301(b)(5)--and even if the ATS does not display 
subscribers' orders to any person (other than an ATS employee)--an ATS 
with 5% or more of the average daily volume in an NMS stock during at 
least four of the preceding six calendar months, as reported by an 
effective transaction reporting plan, must: \72\ Establish written 
standards for granting access to trading on its system; not 
unreasonably prohibit or limit any person in respect to access to 
services offered by such ATS by applying the above standards in an 
unfair or discriminatory manner; make and keep records of all grants of 
access including, for all subscribers, the reasons for granting such 
access, and all denials or limitations of access and reasons, for each 
applicant, for denying or limiting access; and report the information 
required in Exhibit C of Form ATS-R regarding grants, denials, and 
limitations of access.\73\ These requirements are referred to as the 
``fair access'' requirements and apply on a security-by-security 
basis.\74\ A denial of access to a market participant after an ATS 
reaches the 5% fair access threshold in an NMS stock would be 
reasonable if it is based on objective standards.\75\
---------------------------------------------------------------------------

    \72\ 17 CFR 242.301(b)(5)(i).
    \73\ See 17 CFR 242.301(b)(5)(ii). Regulation ATS does not 
mandate compliance with these requirements when an ATS reaches the 
5% trading threshold in an NMS stock if the following conditions are 
met: The ATS matches customer orders for a security with other 
customer orders; such customers' orders are not displayed to any 
person, other than employees of the ATS; and such orders are 
executed at a price for such security disseminated by an effective 
transaction reporting plan, or derived from such prices. See 17 CFR 
242.301(b)(5)(iii).
    \74\ The fair access requirements also apply for non-NMS stocks 
when an ATS reaches a 5% trading threshold in certain securities 
other than NMS stocks, including certain equity securities, 
municipal securities, and corporate debt securities. See 17 CFR 
242.301(b)(5)(i).
    \75\ See Regulation ATS Adopting Release, supra note 3, at 
70874.
---------------------------------------------------------------------------

    Prior to the Commission's adoption of Regulation SCI,\76\ NMS Stock 
ATSs were required to comply with Rule 301(b)(6), which requires 
certain ATSs trading 20% or more of the volume in any equity security 
or debt securities to comply with standards regarding the capacity, 
integrity, and security of their automated systems.\77\ Regulation SCI 
superseded and replaced Rule 301(b)(6)'s requirements with regard to 
ATSs that trade NMS stocks and equity securities that are not NMS 
stocks \78\ and requires SCI entities,\79\ including NMS Stock ATSs 
that meet the definition of an ``SCI ATS,'' \80\ to establish written 
policies and procedures reasonably designed to ensure that their 
systems have levels of capacity, integrity, resiliency, availability, 
and security adequate to maintain their operational capability and 
promote the maintenance of fair and orderly markets, and that they 
operate in a manner that complies with the Exchange Act.\81\
---------------------------------------------------------------------------

    \76\ See Securities Exchange Act Release No. 73639 (November 19, 
2014), 79 FR 72251 (December 5, 2014) (adopting final rules for 
systems compliance and integrity) (``SCI Adopting Release'').
    \77\ See 17 CFR 242.301(b)(6).
    \78\ Regulation SCI does not apply to ATSs that trade municipal 
securities or corporate debt securities. See SCI Adopting Release, 
supra note 76, at 72262.
    \79\ Regulation SCI defines ``SCI entity'' to mean ``an SCI 
self-regulatory organization, SCI alternative trading system, plan 
processor, or exempt clearing agency subject to [the Commission's 
Automation Review Policies].'' See 17 CFR 242.1000.
    \80\ Regulation SCI defines ``SCI alternative trading system'' 
or ``SCI ATS'' to mean an ATS, which during at least four of the 
preceding six calendar months: (1) Had with respect to NMS stocks 
(a) five percent (5%) or more in any single NMS stock, and one-
quarter percent (0.25%) or more in all NMS stocks, of the average 
daily dollar volume reported by applicable transaction reporting 
plans, or (b) one percent (1%) or more in all NMS stocks of the 
average daily dollar volume reported by applicable transaction 
reporting plans; or (2) had with respect to equity securities that 
are not NMS stocks and for which transactions are reported to a 
self-regulatory organization, five percent (5%) or more of the 
average daily dollar volume as calculated by the self-regulatory 
organization to which such transactions are reported. However, an 
SCI ATS is not required to comply with the requirements of 
Regulation SCI until six months after satisfying the aforementioned 
criteria. See 17 CFR 242.1000.
    \81\ See SCI Adopting Release, supra note 76, 79 FR at 72252.
---------------------------------------------------------------------------

    Rule 301(b)(7) \82\ requires all ATSs, regardless of the volume 
traded on their systems, to permit the examination and inspection of 
their premises, systems, and records, and cooperate with the 
examination, inspection, or investigation of subscribers, whether such 
examination is being conducted by

[[Page 38775]]

the Commission or by an SRO of which such subscriber is a member. Rule 
301(b)(8) \83\ requires all ATSs to make and keep current the records 
specified in Rule 302 of Regulation ATS \84\ and preserve the records 
specified in Rule 303 of Regulation ATS.\85\
---------------------------------------------------------------------------

    \82\ See 17 CFR 242.301(b)(7).
    \83\ See 17 CFR 242.301(b)(8).
    \84\ See 17 CFR 242.302.
    \85\ See 17 CFR 242.303. In the Regulation ATS Adopting Release, 
the Commission stated that these requirements to make, keep, and 
preserve records are necessary to create a meaningful audit trail 
and to permit surveillance and examination to help ensure fair and 
orderly markets. See Regulation ATS Adopting Release, supra note 3, 
at 70877-78.
---------------------------------------------------------------------------

    Under Rule 301(b)(10), all ATSs must establish adequate safeguards 
and procedures to protect subscribers' confidential trading 
information, which includes limiting access to the confidential trading 
information of subscribers to those employees of the ATS who are 
operating the system or responsible for its compliance with Regulation 
ATS or any other applicable rules; and implementing standards 
controlling employees of the ATS trading for their own accounts.\86\
---------------------------------------------------------------------------

    \86\ See 17 CFR 242.301(b)(10)(i).
---------------------------------------------------------------------------

    Furthermore, all ATSs must adopt and implement adequate oversight 
procedures to ensure that the above safeguards and procedures are 
followed.\87\ Finally, Rule 301(b)(11) \88\ expressly prohibits any ATS 
from using the word ``exchange'' or derivations of the word 
``exchange,'' such as the term ``stock market,'' in its name.\89\
---------------------------------------------------------------------------

    \87\ See 17 CFR 242.301(b)(10)(ii).
    \88\ See 17 CFR 240.301(b)(11).
    \89\ When we proposed Regulation ATS, we said that ``it is 
important that the investing public not be confused about the market 
role [ATSs] have chosen to assume.'' See Regulation ATS Proposing 
Release, supra note 7 at 23523. We expressed concern that ``use of 
the term `exchange' by a system not regulated as an exchange would 
be deceptive and could mislead investors that such alternative 
trading system is registered as a national securities exchange.'' 
See id.
---------------------------------------------------------------------------

D. Concerns Regarding the Lack of Operational Transparency

    Despite their role in the equity markets and complexity of their 
operations, NMS Stock ATSs are not required under Regulation ATS to 
publicly disclose information about their operations. We are concerned 
that little information is widely available to market participants 
about NMS Stock ATSs, and that the lack of, or differential access to, 
information about operations of NMS Stock ATSs inhibits the ability of 
market participants to assess NMS Stock ATSs as potential trading 
venues. These concerns are shared by several commenters.\90\ Commenters 
also concur with our belief that NMS Stock ATSs today play a 
significant role in equity market structure, and that their role has 
changed since Regulation ATS was adopted in 1998.\91\ In addition, 
commenters reinforce our belief that NMS Stock ATSs have become more 
operationally complex, that the potential for conflicts of interest has 
risen as a result of that complexity, and that the conditions to the 
exemption for NMS Stock ATSs should be modified.\92\ Commenters also 
express concern about the lack of operational transparency for NMS 
Stock ATSs.\93\ Given the complexities of NMS Stock ATS operations, the 
lack of information about the ATS's order types, priority rules, 
segmentation procedures, use of market data, and fees, for example, may 
impede the ability of market participants to adequately understand how 
their orders in NMS stocks would interact, match, and execute.
---------------------------------------------------------------------------

    \90\ See, e.g., CFA Institute Letter at 2; ICI Letter at 3; 
Better Markets Letter at 2; Investor Advocate Letter at 14; Luminex 
Letter at 1.
    \91\ See, e.g., SIFMA Letter at 2; Investor Advocate Letter at 
4; LeveL ATS Letter at 2. Other commenters also recognized that the 
role of NMS Stock ATSs has changed since the adoption of Regulation 
ATS. See, e.g., Schneiderman Letter at 1; Virtu Letter at 2; UBS 
Letter at 1; Fidelity Letter at 1; ICI Letter at 2-3; STANY Letter 
at 2-3.
    \92\ See, e.g., Consumer Federation of America Letter at 4; ICI 
Letter at 2; HMA Letter at 18; Schneiderman Letter at 1-2; Better 
Markets Letter at 2; CFA Institute Letter at 2; SIFMA Letter at 8. 
See also infra Section V.D (describing comments on proposed 
disclosures required by Form ATS-N).
    \93\ See, e.g., CBOE Letter at 1; CFA Institute Letter at 3; 
Consumer Federation of America Letter at 2; ICI Letter at 3. See 
also Investor Advocate Letter at 14; Luminex Letter at 1; Consumer 
Federation of America Letter at 4; UBS Letter at 5-7; AI Letter at 
2. One commenter critiques both the current regulatory regime for 
ATSs, as well as the Proposal, but describes issues with the lack of 
transparency and states that the Proposal represents an important 
enhancement in the oversight of ATSs. See Better Markets Letter at 
1-2.
---------------------------------------------------------------------------

    We are also concerned that the lack of available information about 
the ATS-related activities of the broker-dealer operator and its 
affiliates may hinder the ability of market participants to evaluate 
potential conflicts of interest, and thus limit their ability to 
protect their interests. Because of overlap between a broker-dealer's 
ATS operations and its other operations, there is a risk of information 
leakage of subscribers' confidential trading information to other 
business units of the broker-dealer operator or its affiliates.\94\ 
Several commenters describe NMS Stock ATS operational structures that 
exemplify the kinds of relationships about which the Commission 
expressed concern, or otherwise reinforce our belief that the complex 
relationship between an NMS Stock ATS and its broker-dealer operator, 
or its affiliates, creates potential conflicts of interest.\95\ 
Further, in recognizing the current potential for conflicts of interest 
that exist as a result of the complexity of the operations of NMS Stock 
ATSs, the relationship many have with their broker-dealer operator or 
its affiliates, and the lack of transparency about those operations and 
potential conflicts, many commenters also highlight recent enforcement 
actions brought by the Commission.\96\
---------------------------------------------------------------------------

    \94\ In the Regulation ATS Adopting Release, the Commission 
recognized the potential for abuse involving a broker-dealer that 
operates an ATS and offers other traditional brokerage services, and 
expressed concern about the potential for the misuse of confidential 
trading information. See Regulation ATS Adopting Release, supra note 
3, at 70879. See also Proposal, supra note 2, at 81041-81042 n.367 
and accompanying text.
    \95\ See, e.g., Consumer Federation of America Letter at 4; 
LeveL ATS Letter at 3; Fidelity Letter at 2 n.4. See also KCG Letter 
at 2; Luminex Letter at 3-4; Liquidnet Letter at 11.
     Not all NMS Stock ATSs, however, are operated by multi-service 
broker-dealers. See, e.g., BIDS Letter at 1. This commenter 
describes itself as the owner and broker-dealer operator of an NMS 
Stock ATS that does not engage in any proprietary trading and does 
not have any trading affiliates.
     The rules being adopted today would not require a broker-dealer 
that operates an NMS Stock ATSs to limit it business only to 
operating the ATS. We believe that the Form ATS-N disclosures will 
inform market participants about the ATS-related activities of the 
broker-dealer operator and its affiliates that give rise to 
potential conflicts between the interests of the broker-dealer 
operator and subscribers that use the services of the NMS Stock ATS. 
See infra Sections X.D.7 (discussing the alternative of requiring 
NMS Stock ATSs to operate as limited purpose entities) and V.C.8 
(discussing comments stating that the Commission should prohibit 
conflicts of interest arising from the other business activities of 
the broker-dealer operator of an NMS Stock ATS, and those of its 
affiliates, and the Commission's response to those comments).
     See also HMA Letter at 3 and attachment The Dark Side of the 
Pools: What Investors Should Learn from Regulator's Action, 
September 15, 2015, at 10; Investor Advocate Letter at 8; Better 
Markets Letter at 2; infra Section V.C (discussing comments related 
to disclosures about the activities of an NMS Stock ATS's broker-
dealer affiliate and those of its affiliates).
    \96\ See, e.g., Schneiderman Letter at 2; Better Markets Letter 
at 2-3; Consumer Federation of America Letter at 5; and HMA Letter 
at 12, 16-17. See also CFA Institute Letter at 2; Fidelity Letter at 
4; Investor Advocate Letter at 5; Citadel Letter at 1-7.
    One commenter, however, observes that in the recent settlements 
cited in the Proposal, there were conflicts of interest related to 
commercial relationships that had nothing to do with affiliates, and 
believes that all differential treatment of subscribers should be 
disclosed and recommends limiting disclosures regarding affiliate 
relationships. See Markit Letter at 8. Under the requirements we are 
adopting today, NMS Stock ATSs must disclose on Form ATS-N 
differences in treatment of subscribers and the broker-dealer 
operator and affiliate, and we have, in response to commenters, 
revised questions of Form ATS-N to narrow the scope of information 
related to affiliates to be disclosed. See infra Sections V.C and D.
    See also Proposal, supra note 2, at 81042-81043 n.374 (citing 
prior settled enforcement actions against ATSs that trade NMS 
stocks). Since the Proposal, we have entered additional settlements 
regarding NMS Stock ATSs. See In the Matter of Barclays Capital 
Inc., Securities Exchange Act Release No. 77001 (Jan. 31, 2016), 
https://www.sec.gov/litigation/admin/2016/33-10010.pdf (order 
instituting administrative and cease-and-desist proceedings, making 
findings, and imposing remedial sanctions and a cease-and-desist 
order); In the Matter of Credit Suisse Securities (USA) LLC, 
Securities Act Release No. 77002 (Jan. 31, 2016), https://www.sec.gov/litigation/admin/2016/33-10013.pdf (order instituting 
administrative and cease-and-desist proceedings, making findings, 
and imposing remedial sanctions and a cease-and-desist order) 
(``Crossfinder Settlement''); In the Matter of Credit Suisse 
Securities (USA) LLC, Securities Act Release No. 77003 (Jan. 31, 
2016), https://www.sec.gov/litigation/admin/2016/33-10014.pdf (order 
instituting administrative and cease-and-desist proceedings, making 
findings, and imposing remedial sanctions and a cease-and-desist 
order); In the Matter of Deutsche Bank Securities Inc., Securities 
Exchange Act Release No. 79576 (Dec. 16, 2016), https://www.sec.gov/litigation/admin/2016/33-10272.pdf (order instituting administrative 
and cease-and-desist proceedings, making findings, and imposing 
remedial sanctions and a cease-and-desist order).

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

[[Page 38776]]

    NMS Stock ATSs, which meet the definition of ``exchange'' but are 
not required to register with the Commission as national securities 
exchanges, compete with national securities exchanges and operate with 
similar complexity. Unlike national securities exchanges, NMS Stock 
ATSs are not required to, among other things, publicly disclose their 
operations and fees.\97\ In addition, because we review the rules of 
national securities exchanges, a process which requires, among other 
things, that to approve certain rule changes, the Commission find \98\ 
that the national securities exchange's proposed rule changes are 
consistent with the Exchange Act,\99\ each existing national securities 
exchange has implemented rules that restrict affiliation between the 
national securities exchange and its members to mitigate the potential 
for conflicts of interest. We believe that the regulatory differences 
between NMS Stock ATSs and national securities exchanges with regard to 
disclosure obligations may create a competitive imbalance between two 
functionally similar trading centers that trade the same security.
---------------------------------------------------------------------------

    \97\ See infra notes 34-40 and accompanying text (discussing the 
regulatory framework applicable to national securities exchanges, 
including that national securities exchanges are self-regulatory 
organizations (``SROs'')). See also Regulation ATS Adopting Release, 
supra note 3; infra Section II.B (discussing the current 
requirements of Regulation ATS applicable to all ATSs).
    \98\ See Proposal, supra note 2, at 81042 n.372 and accompanying 
text.
    \99\ See 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    Transparency has long been a hallmark of the U.S. securities 
markets, and is one of the primary tools used by investors to protect 
their interests.\100\ We believe that one of the most important 
functions the Commission can perform for investors is to ensure that 
they have access to the information they need to protect and further 
their own interests.\101\ The amendments that we are adopting to 
Regulation ATS and Exchange Act Rule 3a1-1 are designed to address the 
concerns identified above and provide benefits to a wide range of 
market participants. Public disclosures on Form ATS-N will provide 
market participants with information about the operations of an NMS 
Stock ATS, which they can use to understand how orders interact, match, 
and execute in an NMS Stock ATS and compare to other NMS Stock ATSs and 
national securities exchanges. Form ATS-N will also provide the public 
with information about the ATS-related activities of the broker-dealer 
operator and its affiliates, which can be used by market participants 
to assess potential conflicts of interest and information leakage.\102\ 
Collectively, the Form ATS-N public disclosures will allow market 
participants to better evaluate an NMS Stock ATS as a potential trading 
destination for their orders and help them better protect their 
interests. The Form ATS-N public disclosures are also designed, in 
part, to bring the operational transparency requirements for NMS Stock 
ATSs more in line with the requirements for national securities 
exchanges. Finally, we believe that our process for reviewing Form ATS-
N filings, which provides for Commission review of disclosures for 
compliance with the requirements of Rule 304 and Form ATS-N, and a 
potential declaration of ineffectiveness of a Form ATS-N, after notice 
and opportunity for hearing, will facilitate better Commission 
oversight of NMS Stock ATSs and thus, better protection of investors.
---------------------------------------------------------------------------

    \100\ See id.
    \101\ See Proposal, supra note 2, at 81010.
    \102\ See id. at 81042. We believe that to understand the 
operations of an NMS Stock ATS, it is necessary to understand the 
relationship and interactions between the NMS Stock ATS and its 
registered broker-dealer operator as well as the relationship and 
interactions between the NMS Stock ATS and the affiliates of its 
broker-dealer operator.
---------------------------------------------------------------------------

III. Heightened Regulatory Requirements for NMS Stock ATSs

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

    ATSs that trade NMS stocks operate pursuant to the exemption 
provided by Exchange Act Rule 3a1-1(a)(2), which exempts from the 
definition of an ``exchange'' any ATS that complies with Rules 300 
through 303 of Regulation ATS.\103\ Given our concerns regarding the 
lack of public transparency around the operations of NMS Stock ATSs and 
the ATS-related activities of the broker-dealer operator and its 
affiliates, we proposed to expand the conditions of the Rule 3a1-
1(a)(2) exemption to enhance operational transparency and oversight for 
these ATSs. We are adopting this requirement as proposed.\104\ We 
proposed to require NMS Stock ATSs to comply with proposed Rule 304, in 
addition to existing Rules 300 through 303 of Regulation ATS (except 
Rule 301(b)(2)), to be eligible for the exemption.\105\ Proposed Rule 
304(a)(1)(i) set forth two new fundamental conditions to the Rule 3a1-
1(a)(2) exemption: (1) An NMS Stock ATS must file Form ATS-N with the 
Commission (instead of the current Form ATS), and (2) the Commission 
must declare the Form ATS-N effective before the NMS Stock ATS can 
operate pursuant to the exemption. Adopted Rule 304(a)(1)(i) deletes 
the proposed condition that the Commission declare the Form ATS-N 
effective, and provides that the Form ATS-N must be effective

[[Page 38777]]

pursuant to Rule 304(a)(1)(iii) or Rule 304(a)(1)(iv)(A). Adopted Rule 
304(a)(1)(iii) has been modified to provide that Form ATS-N will become 
effective if the Commission does not otherwise declare Form ATS-N 
ineffective--the Commission will not be declaring Form ATS-N filings 
effective.\106\
---------------------------------------------------------------------------

    \103\ 17 CFR 240.3a1-1(a)(2).
    \104\ In Exchange Act Rules 3a1-1(a)(2) and (3), Regulation ATS 
is currently defined as ``17 CFR 242.300 through 242.303.'' We are 
amending the references to Regulation ATS to define Regulation ATS 
as ``17 CFR 242.300 through 242.304.'' We also proposed conforming 
Rule 3a1-1(a)(3) by changing the reference to Rule 303 to Rule 304 
to make clear that an NMS Stock ATS that meets the requirements of 
Rule 301(a) is not required to comply with Regulation ATS, which 
would be amended to include proposed Rule 304. No changes were 
proposed to Rule 3a1-1(a)(1), which exempts any ATS that is operated 
by a national securities association.
    \105\ Proposed Rule 304(a) provided that, unless not required to 
comply with Regulation ATS pursuant to Rule 301(a) of Regulation 
ATS, an NMS Stock ATS must comply with Rules 300 through 304 of 
Regulation ATS (except Rule 301(b)(2)) to be exempt from the 
definition of an ``exchange'' pursuant to Exchange Act Rule 3a1-
1(a)(2). We are adopting proposed Rule 304(a) with certain 
modifications. As adopted, Rule 304(a) will state, ``[u]nless not 
required to comply with Regulation ATS pursuant to Sec.  242.301(a), 
an NMS Stock ATS must comply with Sec. Sec.  242.300 through 242.304 
(except Sec. Sec.  242.301(b)(2)(i) through (vii)) to be exempt 
pursuant to Sec.  240.3a-1(a)(2)'' (emphasis added). The adopted 
rule text specifies the subparagraphs of Rule 301(b)(2) with which 
an NMS Stock ATS would not be required to comply. We believe that 
specifying the applicable subsections of Rule 301(b)(2) provides 
greater clarity, because Rule 301(b)(2)(viii) will apply to NMS 
Stock ATSs that also trade non-NMS stocks. The reference to Rule 
301(b)(2) in the proposed rule text could be confusing to market 
participants because it does not make clear that Rule 
301(b)(2)(viii) applies to certain NMS Stock ATSs. We believe that 
the added specificity in the adopted rule clarifies that only Rules 
301(b)(2)(i) through (vii) will not be applicable to NMS Stock ATSs. 
See infra Section III.B.4. In addition, to reduce any potential 
ambiguity and improve readability, the adopted rule text deletes the 
language that states that the NMS Stock ATS would need to comply 
with the requirements to be exempt ``from the definition of an 
`exchange''' pursuant to Exchange Act Rule 3a1-1(a)(2).
    \106\ See infra Section IV.A.3.
---------------------------------------------------------------------------

    We proposed to amend Rules 3a1-1(a)(2) and (3) to require 
compliance with proposed Rule 304 as a condition to operating pursuant 
to the Rule 3a1-1(a)(2) exemption.\107\ We received several comments on 
the proposal to expand the conditions of the Rule 3a1-1(a)(2) exemption 
for NMS Stock ATSs and require these ATSs to comply with Rule 304. We 
also received comments on the application of the Proposal to ATSs that 
trade securities other than NMS stocks, and, specifically, requiring 
these types of ATSs to file a Form ATS-N and operate pursuant to the 
effectiveness process. Both sets of comments are discussed below.
---------------------------------------------------------------------------

    \107\ In Exchange Act Rules 3a1-1(a)(2) and (3), Regulation ATS 
is currently defined as ``17 CFR 242.300 through 242.303.'' We 
proposed amending these references to Regulation ATS to define 
Regulation ATS as ``17 CFR 242.300 through 242.304.'' We also 
proposed conforming Rule 3a1-1(a)(3) by changing the reference to 
Rule 303 to final Rule 304 to make clear that an NMS Stock ATS that 
meets the requirements of Rule 301(a) is not required to comply with 
Regulation ATS, which would be amended to include proposed Rule 304. 
No changes were proposed to Rule 3a1-1(a)(1), which exempts any ATS 
that is operated by a national securities association.
---------------------------------------------------------------------------

1. Comments on the Rule 304 Requirements; Effectiveness
    Nearly all commenters agree with our stated goal of enhancing 
operational transparency for NMS Stock ATSs.\108\ Several commenters 
agree that the Commission should adopt the heightened disclosure 
requirements of proposed Rule 304.\109\ In particular, several 
commenters support enhancing the disclosure and oversight regime for 
NMS Stock ATSs as progress toward increasing operational transparency 
in NMS Stock ATSs.\110\ Specifically, some commenters express support 
for NMS Stock ATSs to file Form ATS-N as a tool to improve 
transparency.\111\ Several commenters assert that more transparency 
regarding ATS operations could help market participants evaluate and 
compare trading venues so they can determine where to route 
orders.\112\ One commenter states that ``it is good for investors to 
have access to information on how their orders are handled and with 
whom they are dealing.'' \113\ Several commenters believe that making 
Form ATS-N filings public would encourage competition among trading 
venues,\114\ and one commenter asserts that the proposed transparency 
requirements could reduce competitive imbalances between NMS Stock ATSs 
and national securities exchanges.\115\
---------------------------------------------------------------------------

    \108\ See SIFMA Letter at 2; Barnard Letter at Public comment on 
IOSCO's Consultation Report on Issues Raised by Dark Liquidity; 
Anonymous Letter at 1; Luminex Letter at 1; MFA/AIMA Letter at 1-2; 
Fidelity Letter at 1; UBS Letter at 1; Markit Letter at 3-4; 
Schneiderman Letter at 1; ICI Letter at 3; CFA Institute Letter at 
3, 6; CBOE Letter at 1; KCG Letter at 1; PDQ Letter at 1; STA Letter 
at 2; Liquidnet Letter at 1; STANY Letter at 1; FINRA Letter at 1; 
HMA Letter at 1, 5; Citadel Letter at 1; Better Markets Letter at 3-
4; BIDS Letter at 1-2; SSGA Letter at 2; T. Rowe Price Letter at 1; 
AI Letter at 2-3; Consumer Federation of America Letter at 4; Morgan 
Stanley Letter at 1; Investor Advocate Letter at 2, 6; LeveL ATS 
Letter at 1; Virtu Letter at 2; MFA Letter 2 at 30. But see Morgan 
Stanley Letter at 1, 3 (stating that it is important to balance 
public disclosure with disclosure more suitable for the Commission 
(see discussion below and infra note 150 and accompanying text); 
that certain disclosure requirements, such as any disclosure around 
broker trading infrastructure and order handling practices beyond 
ATS operations, should apply to all brokers (see discussion infra 
note 217-218and accompanying text and infra Section III.A.2); and 
that the Proposal treats all ATSs like exchanges and fails to 
account for distinct ATS models (see discussion below and infra note 
176 and accompanying text)). One commenter commented only on whether 
the Proposal should apply to ATSs that trade only fixed-income 
securities. See MarketAxcess Letter; infra Section III.A.2.
    \109\ See generally Virtu Letter; T. Rowe Price Letter; 
Schneiderman Letter; ICI Letter; MFA/AIMA Letter; Consumer 
Federation of America Letter; CBOE Letter; Citadel Letter; Anonymous 
Letter; Better Markets Letter; Investor Advocate Letter. See also 
CFA Institute Letter at 6; SIFMA Letter at 3.
    \110\ See SIFMA Letter at 3; Virtu Letter at 2; T. Rowe Price at 
1; Schneiderman Letter at 1; MFA/AIMA Letter at 2; MFA Letter 2 at 
30; CBOE Letter at 1; Citadel Letter at 1; Consumer Federation of 
America Letter at 6; CFA Institute Letter at 3; Anonymous Letter at 
1; KCG Letter at 3; Morgan Stanley Letter at 1; Investor Advocate 
Letter at 6; Better Markets Letter at 1.
    \111\ See ICI Letter at 4-6; Consumer Federation of America 
Letter at 6; CFA Institute Letter at 3; Citadel Letter at 3; KCG 
Letter at 3; STA Letter at 2; MFA/AIMA Letter at 4; CBOE Letter at 
1; Investor Advocate Letter at 2, 8.
    \112\ See Luminex Letter at 1; Fidelity Letter at 1; SSGA Letter 
at 2; KCG Letter at 1; Citadel Letter at 1; ICI Letter at 3; STA 
Letter at 2; Schneiderman Letter at 2; Consumer Federation of 
America Letter at 6; Investor Advocate Letter at 11.
    \113\ See Luminex Letter at 1.
    \114\ See STA Letter at 2; Consumer Federation of America Letter 
at 6; Investor Advocate Letter at 3, 11-12.
    \115\ See Citadel Letter at 1.
---------------------------------------------------------------------------

    With respect to the Commission's effectiveness determination for 
Form ATS-N, another commenter states that ``given the level of 
competition between exchanges and NMS Stock ATSs, this effectiveness 
determination would better align the Commission's oversight among 
different types of trading venues.'' \116\ One commenter, however, 
believes that ATSs do not add sufficient value to offset the regulatory 
inequity and market fragmentation they have created.\117\ This 
commenter also states that the Proposal represents ``meaningful 
progress in the effort to increase the operational transparency of NMS 
Stock ATSs.'' \118\ The Proposal was not designed to eliminate the 
exemption from the definition of exchange that is currently available 
to all ATSs, including NMS Stock ATSs. We believe that NMS Stock ATSs 
play a significant role in equity market structure and provide market 
participants with a variety of trading models to facilitate the 
interaction and execution of orders in NMS stocks.
---------------------------------------------------------------------------

    \116\ See Investor Advocate Letter at 12.
    \117\ See CBOE Letter at 1.
    \118\ Id.
---------------------------------------------------------------------------

    We believe that the current market for NMS stock execution 
services, consisting of national securities exchanges, NMS Stock ATSs, 
and other off-exchange venues, has resulted in an improvement to market 
efficiency.\119\ The changes to the requirements for NMS Stock ATSs 
that we are adopting today will increase operational transparency for 
these ATSs, bringing it more in line with the operational transparency 
for national securities exchanges, while continuing to recognize the 
difference in the business structure of ATSs as registered broker-
dealers. We also believe that while the rules adopted today will 
increase the regulatory burden for NMS Stock ATSs and could result in 
some NMS Stock ATSs electing to no longer operate as an ATS, those NMS 
Stock ATSs that remain may compete more heavily with each other and 
with national securities exchanges, which could ultimately result in 
improvements to efficiency and capital formation.\120\
---------------------------------------------------------------------------

    \119\ See infra Section X.B.6 (discussing the effects of NMS 
Stock ATSs on the market for NMS stock execution services, including 
fragmentation).
    \120\ See infra Section X.C (discussing the expected economic 
effects of today's rulemaking, as well as its expected effects on 
efficiency, competition, and capital formation).
---------------------------------------------------------------------------

    Another commenter believes that increased disclosure will aid in 
developing industry-based standards.\121\ Three commenters state that 
increased disclosure will boost investor confidence,\122\ and according 
to one of these commenters, increased transparency and investor 
confidence could lead to more investors using NMS Stock ATSs, and 
result in greater price discovery and lower costs of capital 
formation.\123\
---------------------------------------------------------------------------

    \121\ See STA Letter at 2.
    \122\ See CFA Institute Letter at 3; Schneiderman Letter at 2; 
Investor Advocate Letter at 11-12.
    \123\ See Investor Advocate Letter at 11, 12.
---------------------------------------------------------------------------

    We believe that a wide range of market participants will benefit 
from the enhanced operational transparency,

[[Page 38778]]

including, for example, fund managers and the many brokers that 
subscribe to NMS Stock ATSs and route their orders, and those of their 
customers, to NMS Stock ATSs for execution. Five commenters observe, 
for example, that more transparency regarding ATS operations could 
assist market participants in achieving best execution.\124\ One 
commenter states that disclosure of material aspects of ATS operations 
that allow market participants to weigh the costs and benefits of 
venues is ``particularly important for asset managers who are acting in 
a fiduciary capacity.'' \125\ Another commenter believes that making 
Form ATS-N filings publicly available would provide a ``valuable tool 
for funds to use to assess NMS Stock ATSs, make informed routing 
decisions, and evaluate the performance of their brokers.'' \126\
---------------------------------------------------------------------------

    \124\ See Citadel Letter at 1; Consumer Federation of America 
Letter at 6; HMA Letter at 10; Luminex at 1; SIFMA Letter at 35.
    \125\ See SSGA Letter at 2.
    \126\ See ICI Letter at 3.
---------------------------------------------------------------------------

    We believe that the information disclosed on Form ATS-N will help 
brokers meet their best execution obligations to their customers, as 
they should be better able to assess the trading venues to which they 
route orders.\127\ We also believe that asset managers and 
institutional investors, who subscribe to an NMS Stock ATS or whose 
orders may be routed to an NMS Stock ATS by their brokers, should have 
more information about how NMS Stock ATSs operate, including how orders 
and trading interest of the institutional investor may be displayed or 
made known outside the ATS. This information also will enable asset 
managers to better evaluate the routing decisions of their brokers, 
including whether their brokers routed their orders to a venue that 
best fits their trading interests.
---------------------------------------------------------------------------

    \127\ See, e.g., Proposal, supra note 2, at 81002 n.36 and 
accompanying text, 81013 n.187 and accompanying text (discussing 
that the Consumer Federation of America previously commented that 
Form ATS should require ATSs to provide ``critical details about an 
ATS's participants, segmentation, and fee structure'' because the 
``information will allow market participants, regulators, and third 
party analysts to assess whether an ATS's terms of access and 
service are such that it makes sense to trade on that venue'').
---------------------------------------------------------------------------

a. Comments on Form ATS-N Requirement
    Some commenters, however, believe NMS Stock ATSs should not be 
required to comply with new Rule 304 and the Commission should instead 
simply amend Regulation ATS to require making Form ATS public for NMS 
Stock ATSs.\128\ Two of these commenters assert that the Commission 
should mandate disclosure of current Form ATS as a first step to 
increase disclosure before considering implementing more burdensome 
disclosure requirements.\129\
---------------------------------------------------------------------------

    \128\ See Luminex Letter at 2-3; PDQ Letter at 2; Fidelity 
Letter at 5; STANY Letter at 3; Morgan Stanley Letter at 2.
    \129\ See Fidelity Letter at 5; STANY Letter at 3.
---------------------------------------------------------------------------

    We are not adopting commenters' suggestion to make Form ATS public 
rather than requiring NMS Stock ATSs to comply with Rule 304 and file 
Form ATS-N. First, we believe that new Form ATS-N requires important 
additional disclosures that are not made under existing Form ATS.\130\ 
While Form ATS-N will require NMS Stock ATSs to disclose more 
information than Form ATS, in response to certain comments, we have 
reduced the burden of completing Form ATS-N by narrowing the scope of 
several requests for information and, in some cases, eliminating 
certain requests from the form.\131\ We have also simplified Form ATS-N 
to make completing and maintaining the form less burdensome and have 
modified questions so as not to solicit competitively sensitive 
information.\132\ We believe that Form ATS-N disclosures will help 
market participants compare and evaluate NMS Stock ATSs and make better 
informed decisions about where to route their orders to achieve their 
trading or investment objectives, enhance execution quality, and 
improve efficiency and capital allocation.\133\
---------------------------------------------------------------------------

    \130\ See infra Sections X.C.1 and X.C.2. We have considered any 
additional burden that may result from completion of Form ATS-N and 
the benefits of the additional information that will be made 
available to market participants by requiring NMS Stock ATSs to file 
Form ATS-N, and making Form ATS-N public. See id.
    \131\ For example, we have narrowed a request for information 
regarding trading by affiliates of the broker-dealer operator on the 
NMS Stock ATS by requiring only the disclosures of affiliates that 
can enter or direct the entry of orders and trading interest into 
the ATS. See infra Section V.C.1. We are not requiring NMS Stock 
ATSs to provide proposed Exhibit 1 to Form ATS-N. See infra Section 
V.B.2. Exhibit 1 would have required that NMS Stock ATSs provide a 
copy of any materials currently provided to subscribers or other 
persons related to the operations of the ATS or the disclosures on 
Form ATS-N, such as frequently asked questions, manuals, and 
marketing materials.
    \132\ See infra Section V.C.
    \133\ See infra Section X.C.4.
---------------------------------------------------------------------------

    Based on Commission staff's experience reviewing disclosures made 
by ATSs on Form ATS over the past 19 years and as discussed in the 
Proposal, we have observed that ATSs have often provided minimal, 
rudimentary, and summary disclosures about their operations on Form 
ATS. One commenter agrees with our assessment, stating that based on 
its review of publicly available Forms ATS, the forms ``often provide 
minimal and often generalized information'' with respect to 
classification and segmentation of subscribers, means of access to the 
ATS, matching priority, order interaction, order types, and how the 
NBBO is calculated, and they are often missing ``critical details'' 
about their operations.\134\ Further, this commenter states that 
``[r]arely do Form ATSs provide information relating to their fee 
structures and potential or actual conflicts of interest.'' \135\ 
According to another commenter, current Form ATS is ``not adequate'' to 
allow the Commission and market participants to ``understand how NMS 
Stock ATSs operate in today's environment, given the complexity and the 
potential for significant conflicts of interest with the broker-dealer 
operator.'' \136\ In addition, one commenter observes that market 
participants currently receive ``varying levels'' of information about 
the operations of the NMS Stock ATS.\137\ As described in the 
Proposal,\138\ we believe that the complexity of NMS Stock ATS 
operations has increased substantially and in a manner that causes the 
current disclosure requirements of Form ATS to result in an 
insufficient, and inconsistent, level of detail about the operations of 
NMS Stock ATSs.
---------------------------------------------------------------------------

    \134\ See Consumer Federation of America Letter at 3.
    \135\ See id.
    \136\ See Investor Advocate Letter at 8.
    \137\ See Morgan Stanley Letter at 1.
    \138\ See Proposal, supra note 2, at 81011.
---------------------------------------------------------------------------

    Two commenters argue that a new Form ATS-N is unnecessary because 
most of the fundamental information required in Form ATS-N is currently 
covered by Form ATS.\139\ In addition, three commenters suggest that, 
as an alternative to requiring NMS Stock ATSs to file and make public 
Form ATS-N, we should clarify the requests for information on Form ATS 
and mandate that the revised Form ATS be made public.\140\ One of these 
commenters believes such an approach would help achieve the 
Commission's goal of operational transparency, while ``maintaining a 
regulatory structure under which NMS Stock ATSs can continue to 
innovate.'' \141\ Even if we were to ``clarify'' the requests for 
information on Form ATS to standardize disclosures and make current and 
past Forms ATS public, Form ATS does not require the

[[Page 38779]]

disclosure of certain information that will be required by Form ATS-N. 
For example, Form ATS-N requires NMS Stock ATSs to disclose information 
about the ATS-related activities of the broker-dealer operator and its 
affiliates that will allow market participants to assess potential 
conflicts of interest and information about the NMS Stock ATS's 
safeguards and procedures to protect confidential trading information. 
The disclosure requirements of Form ATS are not sufficient to provide 
market participants with adequate information about the operational 
complexity of NMS Stock ATSs and the ATS-related activities of the 
broker-dealer operator and its affiliates that exist today. Form ATS-N 
is designed to provide market participants with more robust, detailed, 
and standardized disclosures, and to enable market participants to 
better understand the operations of NMS Stock ATSs and potential 
conflicts of interest between ATS operations and the other ATS-related 
activities of the broker-dealer operator and its affiliates.
---------------------------------------------------------------------------

    \139\ See Luminex Letter at 2-3; STANY Letter at 3.
    \140\ See STANY Letter at 3; PDQ Letter at 2; Fidelity Letter at 
5.
    \141\ See STANY Letter at 3.
---------------------------------------------------------------------------

    One commenter who suggests making Form ATS public as an alternative 
to requiring Form ATS-N expresses concern that the ``crippling amount 
of detail'' required to be disclosed under Form ATS-N would not be 
useful to market participants.\142\ We do not believe that Form ATS-N, 
as modified from the Proposal, will require a ``crippling'' level of 
detail that will only be useful to the Commission, and several 
commenters agree that the Form ATS-N disclosures would be useful for 
market participants in comparing trading venues and assessing conflicts 
of interest.\143\ While Form ATS-N will require NMS Stock ATSs to 
disclose more information than Form ATS, we have recognized commenters' 
concerns regarding the burden of completing Form ATS-N by narrowing the 
scope of several requests, eliminating certain requests altogether, and 
simplifying its format.\144\
---------------------------------------------------------------------------

    \142\ See id. at 4.
    \143\ See supra notes 109-123 and accompanying text.
    \144\ See infra Section V.
---------------------------------------------------------------------------

    Other commenters discuss how market participants currently glean 
information about ATSs, and suggest that such methods could serve as 
alternatives to the requirements of Rule 304, or inform the Rule 304 
requirements.\145\ One commenter states that it performs periodic due 
diligence on ATSs because it believes that as a fiduciary, it should 
only trade on venues or exchanges that further its goals of satisfying 
``best execution,'' that protect client information, and generally 
support principles of fair access.\146\ This commenter also states that 
currently, market participants perform such due diligence by sending 
ATSs questionnaires.\147\ Similarly, another commenter observes that 
ATSs are incentivized to respond to these questionnaires to attract 
participants, and therefore, the Commission should not place additional 
disclosure burdens on ATSs.\148\ We do not believe that the practice of 
some market participants individually soliciting information about the 
operations of NMS Stock ATSs and conflicts of interest through 
questionnaires is an adequate alternative to Form ATS-N. We believe 
that disclosures on Form ATS-N should be easily accessible to all 
market participants. This is particularly important for NMS Stock ATSs 
given how orders in NMS stocks may be routed among various trading 
centers before receiving an execution. Based on the Commission's 
experience, responses to questionnaires are generally unavailable to 
non-subscribers, including potential subscribers and customers of 
current subscribers. Without this information, potential subscribers 
would be unable to fully assess an NMS Stock ATS as a trading center 
and customers of subscribers would be inhibited from assessing their 
broker's routing decisions. In addition, we believe, as indicated by 
comments,\149\ that the publicly available, standardized disclosure 
regime that will result from Rule 304 and Form ATS-N is critical for 
all market participants to receive equal information about NMS Stock 
ATSs.
---------------------------------------------------------------------------

    \145\ See SSGA Letter at 2; PDQ Letter at 2; Morgan Stanley 
Letter at 2.
    \146\ See SSGA Letter at 2. See also Fidelity Letter at 8 
(discussing that, from a due diligence perspective, subscribers may 
require NMS Stock ATS information).
    \147\ See SSGA Letter at 2. See also PDQ Letter at 2.
    \148\ See PDQ Letter at 2.
    \149\ See Virtu Letter at 2; Schneiderman Letter at 1; ICI 
Letter at 3; Consumer Federation of America Letter at 6; and Citadel 
Letter at 1.
---------------------------------------------------------------------------

    One commenter suggests that, as an alternative to the proposed Form 
ATS-N, the Commission should mandate that ATS operators publicly 
disclose current and historical Form ATS filings and related 
amendments, and responses to standardized, frequently asked questions 
(``FAQs'') regarding ATS operations.\150\ The commenter believes that 
this approach would be ``more balanced and appropriate'' and ``less 
burdensome and faster to implement.'' \151\ For the reasons discussed 
above in this section, we believe that the requests on Form ATS are not 
designed to produce adequate information for market participants about 
the operational complexity of NMS Stock ATSs and the ATS-related 
activities of their broker-dealer operators and their affiliates. We 
also believe that making public an ATS's responses to standardized, 
FAQs regarding its operations would not achieve the same level of 
disclosure that Form ATS-N will require, and would not facilitate our 
oversight of NMS Stock ATSs. Based on Commission experience, the 
information required to be disclosed on Form ATS-N exceeds the 
information provided by NMS Stock ATSs in their responses to FAQs and 
will provide a greater benefit to market participants. In addition, NMS 
Stock ATSs must file Form ATS-N disclosures with the Commission, which 
will be subject to Commission review before they become public. As 
discussed in the Proposal, the public disclosures on Form ATS-N are 
designed to standardize the information available to all market 
participants about NMS Stock ATSs and facilitate their ability to 
compare and evaluate these trading venues.\152\ Finally, we believe 
that the burden resulting from filing a Form ATS-N would not be 
significant compared to requiring an NMS Stock ATS to prepare 
disclosures on Form ATS and responses to FAQs.
---------------------------------------------------------------------------

    \150\ See Morgan Stanley Letter at 2 (asserting that 
``standardization is the key to concise, comparable and meaningful 
information regarding ATS operations''). This commenter states that 
while it supports the Proposal's effort to mandate transparency, it 
is concerned that proposed Form ATS-N ``will result in more 
subjective, narrative responses that will not lend themselves to 
side-by-side comparison.'' See id. at 1.
    \151\ See id. at 2.
    \152\ See Proposal, supra note 2, at 81123. See also infra 
Section V.A.1. We believe that requiring NMS Stock ATSs to provide 
only ``yes'' or ``no'' responses would limit ATSs, which provide 
diverse services and often operate uniquely, from accurately 
describing their operations and inhibit market participants from 
fully understanding the operations of the ATS or the ATS-related 
activities of the broker-dealer operator and its affiliates. See id. 
(discussing the Commission's belief that narrative responses are 
important for market participants to understand the operations of 
NMS Stock ATSs given differences across ATSs, and provide NMS Stock 
ATSs with the flexibility in their responses).
---------------------------------------------------------------------------

    We received four comments about the application of Rule 304 to some 
or all NMS Stock ATSs. We received three comments expressing the 
importance of the Commission's need to heighten the regulatory 
requirements for all NMS Stock ATSs.\153\ In particular, one commenter 
states that the Commission's additional disclosure requirements are 
important for creating a consistent and

[[Page 38780]]

fair set of obligations for all NMS Stock ATSs while providing market 
participants and subscribers with complete information.\154\ This 
commenter observes that although an ATS may have a small share of 
volume relative to the overall equities trading marketplace, it does 
not necessarily follow that such ATS has a similarly small share of 
each subscriber's flow.\155\ Another commenter cautions the Commission 
about allowing exemptions based on metrics such as dollar volume, 
trading volume, or number of subscribers because allowing such 
exemptions could increase ``incentives and opportunities'' for 
regulatory arbitrage, and may result in unintended consequences.\156\ 
On the other hand, one commenter argues that the Commission should take 
a tiered regulatory approach to NMS Stock ATSs by applying certain of 
the enhanced requirements only to larger NMS Stock ATSs.\157\ This 
commenter suggests that to foster competitive innovations among NMS 
Stock ATSs, the Commission should only apply the requirement of prior 
Commission ``approval'' of changes before they are implemented to 
``larger ATSs with a substantial market footprint.'' \158\
---------------------------------------------------------------------------

    \153\ See CFA Institute Letter at 3; UBS Letter at 2. See also 
KCG Letter at 1.
    \154\ See UBS Letter at 2.
    \155\ See id.
    \156\ See CFA Institute Letter at 3.
    \157\ See STANY Letter at 2. See also Luminex Letter at 1.
    \158\ See STANY Letter at 2.
---------------------------------------------------------------------------

    We continue to believe that requiring all NMS Stock ATSs to 
publicly file a Form ATS-N, irrespective of the volume of NMS stocks 
transacted on the ATS is appropriate, and does not agree that its 
objectives would be achieved by applying Rule 304 on a tiered basis to 
NMS Stock ATSs. Given that broker-dealers can route their customers' 
orders to any NMS Stock ATS for execution, we do not believe that 
transaction volume in NMS stocks serves as a proxy for whether 
customers of broker-dealers or subscribers to an ATS should have 
information about how their orders would be prioritized, matched, or 
executed on an NMS Stock ATS or understand the ATS-related activities 
of the broker-dealer operator and its affiliates that may give rise to 
conflicts of interest.\159\ As a result, customers of broker-dealers 
that route their orders to NMS Stock ATSs with low volume will have the 
same level of information to assess their broker-dealers' routing 
decisions as customers of broker-dealers that may route orders to any 
other NMS Stock ATSs. Amending Exchange Act Rule 3a1-1(a) to apply the 
requirements of Rule 304 to all NMS Stock ATSs would promote efficient 
and effective market operations by providing information all market 
participants can use to evaluate all NMS Stock ATSs that could be 
potential destinations for their orders. We believe that these 
requirements, including the requirement that NMS Stock ATSs file 
amendments to Form ATS-N in advance of adopting material changes,\160\ 
would not place an undue burden on smaller NMS Stock ATSs or their 
ability to innovate.\161\ Smaller NMS Stock ATSs that are not operated 
by multi-service broker-dealer operators and do not engage in other 
brokerage or dealing activities in addition to their ATS operations 
would have a lower burden than other ATSs because certain sections of 
Form ATS-N (such as several items of Part II) may not be applicable to 
these NMS Stock ATSs.\162\ We believe that the reduction in costs from 
exempting small NMS Stock ATSs would be minimal as compared to the 
benefits that would result from requiring the same level of 
transparency from small NMS Stock ATSs as from other NMS Stock 
ATSs.\163\ Further, under Regulation ATS, every ATS must currently wait 
20 calendar days from the date of filing an amendment to Form ATS-N 
before implementing a material change to its operations.\164\ In 
addition, we believe that the new process for NMS Stock ATSs applicable 
to filing material amendments is appropriate,\165\ and, like the other 
requirements of Rule 304, should be applied consistently across NMS 
Stock ATSs, regardless of their size or trading volume. The Commission 
review process for Form ATS-N amendments is designed to improve 
operational transparency for all market participants and not only for 
market participants that use NMS Stock ATSs with significant trading 
volume as compared to other NMS Stock ATSs.
---------------------------------------------------------------------------

    \159\ National securities exchanges are subject to the same 
public rule filing and registration requirements irrespective of the 
volume transacted on the exchange. While an NMS Stock ATS may not 
transact significant overall volume in NMS stocks, that ATS may 
transact a significant volume of orders in certain NMS stocks or 
orders for certain subscribers. Additionally, we also believe that 
applying the enhanced regulatory requirements only to larger NMS 
Stock ATSs could create an opportunity for arbitrage without 
appropriate benefit, in that an NMS Stock ATS may be incentivized to 
structure their operations to avoid being subject to enhanced 
requirements. We believe that the burden of complying with the 
enhanced regulatory requirements imposed on lower volume NMS Stock 
ATSs is justified by the benefits. See infra Section X.D.4.
    \160\ One commenter expresses its concern that ``small and 
innovative ATSs will be frustrated by the requirement that changes 
to their technology must be approved by the Commission prior to 
implementation.'' See STANY Letter at 2. The Commission will not 
``approve'' material amendments, but instead, may declare amendments 
ineffective if the disclosures filed by an NMS Stock ATS on Form 
ATS-N are materially deficient with respect to their completeness or 
comprehensibility. See infra Section IV.B.2. In addition, we are 
requiring that NMS Stock ATSs publicly disclose a brief summary of a 
material amendment upon filing, and after the Commission has had an 
opportunity to review the amendment, the material amendment would be 
made public. This change from the Proposal is in response to 
commenters who believe that an ATS may be placed at a competitive 
disadvantage if it is required to publicly file a material change 30 
calendar days before implementing the change. See infra Section 
IV.E.2.c.
    \161\ See infra Section X.D.4.
    \162\ See infra Section V.C and Section X.C.4.a.
    \163\ See infra Section X.D.4.
    \164\ See supra note 58 and accompanying text.
    \165\ See infra Section IV.B.1.a.
---------------------------------------------------------------------------

b. Comments on Effects on ATSs Relative to National Securities 
Exchanges
    We received comments regarding the competitive effect of Rule 304 
on ATSs relative to national securities exchanges.\166\ Some commenters 
support public disclosure of Form ATS-N on the grounds that the current 
differences in transparency requirements for ATSs and national 
securities exchanges are competitively unfair.\167\ On the other hand, 
other commenters express concern about the competitive burden that the 
requirements of Rule 304 could place on ATSs.\168\ Specifically, one 
commenter states that not extending the enhanced transparency 
requirements to national securities exchanges may ``result in a 
competitive advantage to exchanges.'' \169\ We believe that the new 
disclosure requirements for NMS Stock ATSs are not more rigorous than 
the disclosure standards for national securities exchanges and will not 
provide national securities exchanges with a competitive advantage over 
NMS Stock ATSs. National securities exchanges are required to publicly 
file proposed rule changes with the Commission to disclose, among other 
things, their manner of operations and fees.\170\ These proposed rules 
changes are subject to notice and comment from the public, as well as 
Commission consideration, pursuant to Section 19(b) and 17 CFR 240.19b-
4 (Rule 19b-4).\171\ This is not the case for NMS Stock ATSs. 
Furthermore, Form ATS-N is designed to solicit information about ATS-
related activities of the broker-dealer operator and its affiliates to 
help

[[Page 38781]]

market participants better understand potential conflicts of interest 
and information leakage. In the context of national securities 
exchanges, we have expressed concern that the affiliation of a national 
securities exchange with one of its members raises potential conflicts 
of interest, and the potential for unfair competitive advantage; and 
because the Commission reviews the rules of national securities 
exchanges, a process which requires, among other things, that to 
approve certain rule changes the Commission find that the proposed rule 
change is consistent with the Exchange Act, each existing national 
securities exchange has implemented rules that restrict affiliation 
between the exchange and its members to mitigate the potential for 
these types of conflicts of interest.\172\ NMS Stock ATSs are not 
subject to such restrictions with respect to the activities of their 
broker-dealer operator and its affiliates that may raise conflicts of 
interests.
---------------------------------------------------------------------------

    \166\ See, e.g., Anonymous Letter at 1, Citadel Letter at 1; 
Markit Letter at 4; STANY Letter at 3.
    \167\ See Anonymous Letter at 1; Citadel Letter at 1.
    \168\ See Markit Letter at 4; STANY Letter at 3.
    \169\ See Markit Letter at 4.
    \170\ See Proposal, supra note 2, at 81011.
    \171\ See id.
    \172\ See Proposal, supra note 2, at 81042 n. 370-372 and 
accompanying text. In cases where we have approved exceptions to 
this prohibition, there have been limitations and conditions on the 
activities of the national securities exchange and its affiliated 
member designed to address concerns about potential conflicts of 
interest and unfair competitive advantage. See id. at 81042 n.372.
---------------------------------------------------------------------------

    Another commenter states its view that requiring public disclosure 
of Form ATS-N will ``alter the competitive landscape . . . between NMS 
Stock ATSs and national securities exchanges.'' \173\ We continue to 
believe that since the adoption of Regulation ATS, the market in 
execution services for NMS stocks has evolved such that trading 
functions of NMS Stock ATSs have become more functionally similar to 
those of national securities exchanges.\174\ The enhanced transparency 
requirements for NMS Stock ATSs are designed to allow market 
participants to compare execution services of NMS Stock ATSs against 
national securities exchanges, to appropriately calibrate the level of 
transparency between NMS Stock ATSs and national securities exchanges, 
and to foster even greater competition for order flow of NMS stocks 
between those trading centers.\175\
---------------------------------------------------------------------------

    \173\ See STANY Letter at 3.
    \174\ See supra Section II.D.
    \175\ See infra Section X.C.2.a (discussing the economic 
benefits of the new disclosure requirements). See also Section 
X.C.4.a.i.
---------------------------------------------------------------------------

    One commenter asserts that the Proposal treats all ATSs as stand-
alone, exchange-like price/time priority models and fails to account 
for distinct ATS models (e.g. price/capacity/size priority and interval 
VWAP crossing) and does not consider that an ATS may be part of a 
broader, integrated electronic offering available to clients choosing 
to access the markets through a full-service broker-dealer.\176\ This 
commenter also states that while Regulation ATS recognizes the 
distinction between exchanges and ATS offerings, the regulatory 
structure specifically tailored for exchanges can be seen throughout 
much of the Proposal and proposed Form ATS-N, such as in the Proposal's 
focus on: Subscribers, in the way an exchange has members; a subscriber 
manual, in the way an exchange has a rule book; and fees, similar to an 
exchange fee schedule.\177\
---------------------------------------------------------------------------

    \176\ See Morgan Stanley Letter at 3.
    \177\ See id. at 2-3.
---------------------------------------------------------------------------

    One commenter questions why the Commission has determined that NMS 
Stock ATSs should be subject to ``essentially similar disclosure 
requirements'' as national securities exchanges without affording NMS 
Stock ATSs benefits such as limited immunity and market data revenue 
that national securities exchanges receive.\178\ NMS Stock ATSs, unlike 
registered national securities exchanges, are registered as broker-
dealers and exempt from the requirements of, among other provisions, 
Sections 6 and 19(b) of the Exchange Act. However, an NMS Stock ATS 
that desires the benefits afforded to national securities exchanges can 
choose to register as a national securities exchange under Section 6 of 
the Exchange Act \179\ and be subject to the requirements of, among 
other provisions, Sections 6 and 19(b) of the Exchange Act. In 
addition, we do not agree with the commenter's view that the disclosure 
requirements with which NMS Stock ATSs must comply are ``essentially 
similar'' to the disclosure requirements imposed on national securities 
exchanges. For example, a national securities exchange is required to 
file with the Commission all rule changes establishing or changing a 
due, fee, or other charge assessed to members, which the Commission 
reviews for consistency with the Exchange Act.\180\ In contrast, an NMS 
Stock ATS will be required to provide disclosure on the types of fees 
and charges of the NMS Stock ATS.\181\ Further, disclosure is only one 
of the requirements to which national securities exchanges are subject. 
Notably, the rules and changes to the rules of national securities 
exchanges are required to be filed with the Commission and are subject 
to public notice and comment.\182\ NMS Stock ATSs are not subject to 
these requirements, as well as many others, applicable to national 
securities exchanges.\183\
---------------------------------------------------------------------------

    \178\ See Fidelity Letter at 4.
    \179\ See 15 U.S.C. 78f. An ATS is not required to comply with 
the requirements of Rule 301(b) if it is registered as an exchange 
under Section 6 of the Exchange Act. See 17 CFR 242.301(a)(1).
    \180\ See 17 CFR 240.19b-4(f)(2). Another commenter states that 
while Regulation ATS recognizes the distinction between national 
securities exchanges and ATS offerings, the regulatory structure 
tailored for national securities exchanges can be seen throughout 
much of the Proposal and proposed Form ATS-N, and included as 
examples the Proposal's focus on disclosures regarding subscribers, 
subscriber manuals, and fees, as well as the public posting upon 
filing of amendments to Form ATS-N. See Morgan Stanley Letter at 3-
4. This commenter believes this approach is contrary to the 
objectives of Regulation ATS and urges the Commission to reconsider 
aspects of the Proposal that have the effect of not recognizing the 
materially different roles that ATSs and exchanges are intended to 
play in the U.S. marketplace. See id at 4. We agree that registered 
broker-dealers that operate ATSs should continue to be able to avail 
themselves of the exemption from the definition of ``exchange'' 
provided by Exchange Act Rule 3a1-1 and Regulation ATS, but believe 
that due to changes in the role and operation of NMS Stock ATSs 
since the adoption of Regulation ATS, it is in the public interest 
to update the requirements for that exemption applicable to that 
subset of ATSs. Also many of the disclosure items identified by this 
commenter are the kinds of disclosures other commenters have 
described as significant to their understanding of the operation of 
NMS Stock ATSs.
    \181\ See infra Section V.D.19.
    \182\ See generally 15 U.S.C. 78s(b); 17 CFR 240.19b-4.
    \183\ See 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    While NMS Stock ATSs and national securities exchanges are subject 
to different regulatory regimes, NMS Stock ATSs are trading centers 
that perform similar trading functions as national securities exchanges 
and have evolved to become more like national securities exchanges in 
their operations. We believe that Form ATS-N, as adopted, accommodates 
the differences between the regulatory requirements for national 
securities exchanges and those of NMS Stock ATSs while increasing 
public operational transparency for NMS Stock ATSs. The Commission does 
not agree that NMS Stock ATSs are being treated like national 
securities exchanges and believes that Form ATS-N is designed in a 
manner that allows ATSs to explain their unique business models. For 
example, NMS Stock ATSs will be able to explain their trading models, 
and associated facilities and procedures, in Part III, Item 11 of 
adopted Form ATS-N (``Trading, Rules and Facilities''). In addition, 
Part III, Item 19 (``Fees'') requires an NMS Stock ATS to identify and 
describe the types of fees or charges of the ATS and any differences 
among subscribers, whereas national securities exchanges are required 
to publicly post their complete fee schedules and any changes are 
subject to the SRO rule filing process under Section 19 of the

[[Page 38782]]

Exchange Act. The Commission also understands that some broker-dealer 
operators offer their NMS Stock ATSs along with other execution and 
routing services. We believe that requests on Form ATS-N are 
appropriately designed, and provide narrative flexibility, to elicit 
information about the varying NMS Stock ATS models, including those of 
multi-service broker-dealers.\184\
---------------------------------------------------------------------------

    \184\ See, e.g., infra Section V.D.11 (describing Part III, Item 
11 of Form ATS-N, which asks NMS Stock ATSs to provide a summary of 
their marketplaces and the means and facilities for bringing 
together the orders of multiple buyers and sellers on the NMS Stock 
ATS).
---------------------------------------------------------------------------

c. Comments on Effectiveness Requirement
    We proposed that to qualify for the exemption from the definition 
of ``exchange,'' an NMS Stock ATS's Form ATS-N must be declared 
effective by the Commission; as adopted, a Form ATS-N must be effective 
for the ATS to qualify for the exemption.\185\ Several commenters 
express their support for requiring that Form ATS-N be subject to 
Commission review,\186\ and some commenters support the proposed 
requirement that Form ATS-N be declared effective by the 
Commission,\187\ while other commenters raise concerns about requiring 
that Form ATS-N be declared effective by the Commission.\188\ One 
commenter states that the proposed effective/ineffective process is 
``unnecessary'' and ``will have a chilling effect'' on, or stifle 
innovation of, ATS operations.\189\ Another commenter similarly 
questions the need for the Commission to make a determination of 
effectiveness for Form ATS-N, and expresses concern that such a process 
would increase the regulatory risk for new NMS Stock ATSs and stifle 
innovation in the ATS marketplace by delaying the effectiveness of NMS 
Stock ATSs whose features, while meeting regulatory requirements, do 
not meet industry norms.\190\
---------------------------------------------------------------------------

    \185\ See infra Section IV.A.1. As adopted, the Commission will 
not declare initial Form ATS-N filings effective under Rule 304.
    \186\ See Citadel Letter at 3; HMA Letter at 7-8; and Investor 
Advocate Letter at 11-12.
    \187\ See MFA/AIMA Letter at 4; CFA Institute Letter at 4; and 
PDQ Letter at 2. Two commenters do not object to the effectiveness 
process. See Liquidnet Letter at 3 and STANY Letter at 2.
    \188\ See Luminex Letter at 1; Fidelity Letter at 8-9.
    \189\ See Luminex Letter at 1.
    \190\ See Fidelity Letter at 8-9.
---------------------------------------------------------------------------

    We do not believe that requiring Form ATS-N to become effective 
after Commission review is ``unnecessary;'' \191\ rather, the review 
process will facilitate the Commission's oversight of NMS Stock ATSs 
and help ensure that information required by the form is disclosed in a 
complete and comprehensible manner. We have modified the proposed 
effectiveness process for initial Form ATS-N so that the Commission 
will not declare initial Form ATS-N effective; instead, initial Form 
ATS-N, as amended, will become effective, unless declared ineffective, 
upon the earlier of: (1) The completion of review by the Commission and 
publication pursuant to Rule 304(b)(2), or (2) the expiration of the 
Commission review period, or, if applicable, the extended review 
period.\192\ Form ATS-N will nevertheless be subject to Commission 
review, and, as proposed, the Commission may declare a Form ATS-N 
ineffective if it finds, after notice and opportunity for hearing, that 
such action is necessary or appropriate in the public interest, and is 
consistent with the protection of investors.\193\ We believe that 
requiring Form ATS-N to be effective, which would occur only after 
being subject to Commission review, could incentivize NMS Stock ATSs to 
make more detailed and informative disclosures than under current Form 
ATS. While requiring Form ATS-N to be effective may have some impact on 
innovation,\194\ our review of Form ATS-N is designed to mitigate any 
effect on innovation, and accordingly would focus on, for example, the 
completeness and comprehensibility of the Form ATS-N disclosures and 
not include a review of the merits of the disclosures or whether such 
trading functionalities meet industry norms.\195\ We do not believe 
that requiring Form ATS-N to be effective will unduly increase the 
``regulatory risk'' of launching a new NMS Stock ATS as one commenter 
suggests.\196\ We understand that the Commission review process will 
generate some uncertainty for NMS Stock ATSs as a Form ATS-N could be 
declared ineffective, which is not currently the case with respect to 
Form ATS.\197\ The Commission review process, however, will not be 
merit based, and determinations of ineffectiveness will require the 
Commission to make certain findings after notice to the NMS Stock ATS 
and opportunity for hearing.\198\ In addition, the rule provides that 
if the Commission does not declare the Form ineffective before the end 
of a fixed time period, the Form ATS-N will become effective. We 
believe that these factors will provide NMS Stock ATSs with greater 
regulatory certainty regarding the effectiveness process.
---------------------------------------------------------------------------

    \191\ See supra note 189 and accompanying text.
    \192\ See infra Sections IV.A.3.c and IV.A.4.a.
    \193\ See id.
    \194\ See infra Section X.C.
    \195\ See supra note 190 and accompanying text. See also infra 
Section IV.A.3.d.
    \196\ See supra note 190 and accompanying text.
    \197\ See infra Section X.C.4.
    \198\ See infra Section IV.A.3.
---------------------------------------------------------------------------

2. Comments on Extending Rule 304 to Non-NMS Stock ATSs
    Rule 304 of Regulation ATS, as proposed and adopted, would apply 
only to NMS Stock ATSs, as defined in Rule 300(k) of Regulation ATS. We 
are concerned that, given the significance of NMS Stock ATSs in equity 
market structure and their operational complexities, the lack of 
transparency around NMS Stock ATSs operations could inhibit market 
participants' ability to evaluate NMS Stock ATSs as potential routing 
destinations for their orders in NMS stocks. As discussed in the 
Proposal, we did not propose to apply Rule 304 to non-NMS Stock ATSs, 
which would include ATSs that trade corporate or municipal fixed income 
securities (``Fixed Income ATSs''), U.S. Government securities 
(``Government Securities ATSs''),\199\ or OTC Equity securities (``OTC 
Equity Securities ATSs'').\200\ We sought comment on whether Rule 304, 
in whole or in part, should apply to Fixed Income ATSs, Government 
Securities ATSs, and OTC Equity Securities ATSs.\201\ We also did not 
propose to apply Rule 304 to any other type of trading center besides 
NMS Stock ATSs,\202\ such as non-ATS OTC trading centers \203\ or 
national securities exchanges.
---------------------------------------------------------------------------

    \199\ The term ``U.S. Government securities'' is defined under 
Section 3(a)(42) of the Exchange Act. See 15 U.S.C. 78c(a)(42) 
(defining ``government securities'' as, among other things, 
``securities which are direct obligations of, or obligations 
guaranteed as to principal or interest by, the United States'').
    \200\ For purposes of this discussion, we are using the term 
``OTC Equity Security'' as it is defined in FINRA's 6400 rule series 
for quoting and trading in OTC Equity Securities. FINRA defines OTC 
Equity Security as ``any equity security that is not an `NMS stock' 
as that term is defined in Rule 600(b)(47) of SEC Regulation NMS; 
provided, however, that the term `OTC Equity Security' shall not 
include any Restricted Equity Security,'' which FINRA defines as 
``any equity security that meets the definition of `restricted 
security' as contained in Securities Act Rule 144(a)(3).'' See FINRA 
Rules 6420(f), (k).
    \201\ See Proposal, supra note 1, at 81018.
    \202\ See Proposal, supra note 2. See also infra note 668 and 
accompanying text (discussing the term ``trading center'').
    \203\ For purposes of this discussion, references to non-ATS OTC 
trading centers, as used herein, encompass all executions that occur 
off a national securities exchange and outside an ATS, including 
when a 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 
13, at 3599-3600.

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

[[Page 38783]]

    We received several comments generally supporting operational 
transparency and about whether or not to apply Rule 304 to non-NMS 
Stock ATSs.\204\ Of the commenters generally supporting enhanced 
operational transparency, several encourage the Commission to make the 
current Form ATS public for all ATSs.\205\ Some commenters urge the 
Commission to amend Regulation ATS to apply Rule 304 to all ATSs.\206\ 
Two commenters explicitly support applying the Proposal solely to NMS 
Stock ATSs.\207\
---------------------------------------------------------------------------

    \204\ See Better Markets Letter at 3, 8; CFA Institute Letter; 
Citadel Letter; Consumer Federation of America Letter at 6-7; 
Fidelity Letter at 6-7; HMA Letter at 5-6, 10, 12; ICI Letter at 11; 
Investor Advocate Letter at 2, 12-15; KCG Letter at 12-13; Liquidnet 
Letter at 3; Luminex Letter at 2, 4; MarketAxess Letter; Markit 
Letter at 2, 4, 9; MFA/AIMA Letter 2-4; MFA Letter 2 at 30; Morgan 
Stanley Letter at 5-6; PDQ Letter at 2; SIFMA Letter at 3, 5; STANY 
Letter at 5; T. Rowe Price Letter at 2; Virtu Letter at 2.
    \205\ See Fidelity Letter at 7; ICI Letter at 11; Luminex Letter 
at 2; Morgan Stanley Letter 2, 5; Investor Advocate Letter at 2-3; 
PDQ Letter at 2; STANY Letter at 3; SIFMA Letter at 3-4.
    \206\ See Better Markets Letter at 3, 8; CFA Institute Letter at 
3-4; Consumer Federation of America Letter at 6-7; HMA Letter 5-6, 
10, 12.
    \207\ See ICI Letter at 11; Liquidnet Letter at 3.
---------------------------------------------------------------------------

    Several commenters specifically argue for extending Rule 304, 
including Form ATS-N, to Fixed Income ATSs.\208\ Several commenters, 
however, recommend against extending the Proposal requirements for NMS 
Stock ATSs to Fixed Income ATSs.\209\ Several commenters suggest that 
the Commission require Fixed Income ATSs to make their Forms ATS 
public.\210\
---------------------------------------------------------------------------

    \208\ See Consumer Federation of America Letter at 6; Better 
Markets Letter at 8; CFA Institute Letter at 3-4; HMA Letter at 10; 
MFA/AIMA Letter at 2-3.
    \209\ See Fidelity Letter at 6-7; KCG Letter at 12-13; Liquidnet 
Letter at 3; MarketAxess Letter at 3-4 ; Markit Letter at 9; SIFMA 
Letter at 3.
    \210\ See Fidelity Letter at 6; SIFMA Letter at 34-35; Markit 
Letter at 9; Investor Advocate Letter at 12-16; ICI Letter at 11. 
See also Luminex Letter at 4.
---------------------------------------------------------------------------

    We also received several comments that specifically address 
enhancing operational transparency for, or extending Rule 304 to, 
Government Securities ATSs.\211\ Several commenters support applying 
Rule 304 requirements to Government Securities ATSs,\212\ while several 
state that Regulation ATS should be amended to include electronic 
platforms for U.S. Government securities.\213\ Other commenters believe 
that the Commission should gather additional information on fixed 
income markets, which include U.S. Government securities markets, and 
as an interim step, make the Form ATS filings for these ATSs 
public.\214\ We also received comments that specifically oppose 
applying the Proposal requirements to Government Securities ATSs,\215\ 
or more generally oppose expanding Rule 304 to non-NMS Stock ATSs.\216\
---------------------------------------------------------------------------

    \211\ See Better Markets Letter at 8; CFA Institute Letter at 3-
4; Citadel Letter at 4-5; Investor Advocate Letter at 16-17; KCG 
Letter; Liquidnet Letter at 3; MFA/AIMA Letter at 2-7; SIFMA Letter 
at 3, 5, 35-36; Virtu Letter at 2.
    \212\ Some commenters specifically support operational 
transparency and enhanced monitoring of trading activity for 
Government Securities ATSs. See Virtu Letter at 2; Better Markets 
Letter at 8; CFA Institute Letter at 3-4; Citadel Letter at 4-5; 
MFA/AIMA Letter at 2-7. See also Liquidnet Letter at 3 (stating that 
it does ``not object'' to the requirements of Regulation ATS 
applying to systems that cross trades in U.S. Government 
securities).
    \213\ See Citadel Letter at 4-5; Liquidnet Letter at 3; Investor 
Advocate Letter at 16-19; Virtu Letter at 2. One commenter combined 
its support for transparency of ATSs that trade U.S. Government 
securities and Fixed Income ATSs. See MFA/AIMA Letter at 3-4
    \214\ See SIFMA Letter at 34-35; Markit Letter at 9; Investor 
Advocate Letter, at 14. See also Fidelity Letter at 6.
    \215\ See KCG Letter at 13; SIFMA Letter at 3, 5, 36.
    \216\ See supra note 209 accompanying text.
---------------------------------------------------------------------------

    We also received comments regarding enhancing operational 
transparency for other non-ATS OTC trading centers--namely broker-
dealers that internalize order flow.\217\ In general, these commenters 
point out the discrepancy in disclosure obligations that would result 
from the Proposal, or the possibility that broker-dealers would route 
order flow to non-ATS trading centers as a result.\218\
---------------------------------------------------------------------------

    \217\ See ICI Letter at 12; Morgan Stanley Letter at 2-3.
    \218\ See id. See also Fidelity Letter at 11-12. Another 
commenter recommends that the Commission be required to conduct a 
review within a designated time-period to assess the effectiveness 
of the new rules and determine if any refinements should be 
proposed. See T. Rowe Price Letter at 3. In addition, one commenter 
suggests that regulators periodically monitor the development of the 
market and technological developments, and take appropriate action 
as needed. See Barnard Letter at 3. In addition to the Commission's 
ongoing oversight responsibilities under the Exchange Act, Rule 304 
provides a process for the Commission to review disclosures filed on 
Form ATS-N, either through an initial Form ATS-N, Form ATS-N 
amendment, or cessation of operations.
---------------------------------------------------------------------------

    Given the range of commenter views on these questions and our 
belief that it is appropriate to take an incremental approach by first 
applying the amended regime to NMS Stock ATSs before considering a 
further step, we are not amending Rule 3a1-1(a) and Regulation ATS for 
non-NMS Stock ATSs. We intend to monitor the implementation and 
effectiveness of Rule 304 to NMS Stock ATSs, and should we decide to 
take further action with respect to non-NMS Stock ATSs, we would do so 
in a separate rulemaking and take into account our experience with Rule 
304 and NMS Stock ATSs.
    The Commission notes that the Fixed Income Market Structure 
Advisory Committee (``FIMSAC'') was formed in 2017 pursuant to the 
Commission's authority under the Federal Advisory Committee Act to 
provide the Commission with diverse perspectives on the structure and 
operations of the U.S. fixed income markets, as well as advice and 
recommendations on matters related to fixed income market 
structure.\219\ The FIMSAC recently issued recommendations for the 
Commission to review the framework for the oversight of electronic 
trading platforms for municipal securities and corporate bonds. 
Specifically, the FIMSAC recommended that the Commission form, together 
with FINRA and the MSRB, a joint working group to review the regulatory 
framework for oversight of electronic trading platforms used in the 
municipal securities and corporate bond markets.\220\ In light of 
recent recommendations of the FIMSAC, and comments received, we will 
review the regulatory framework for fixed income electronic trading 
platforms, including to consider whether we should propose amendments 
to Regulation ATS (and any other applicable rules) to account for 
operational and regulatory differences among electronic trading

[[Page 38784]]

platforms for municipal securities and corporate bonds.
---------------------------------------------------------------------------

    \219\ See 5 U.S.C.--App; Securities Exchange Act Release No. 
81958 (October 26, 2017), 82 FR 50460 (October 31, 2017) (Notice of 
Federal Advisory Committee Establishment).
    \220\ See Recommendation for the SEC to Review the Framework for 
the Oversight of Electronic Trading Platforms for Corporate and 
Municipal Bonds (July 16, 2018) available on the Commission's 
website at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-electronic-trading-platforms-recommendation.pdf.
---------------------------------------------------------------------------

B. Amendments to Existing Regulation ATS Rules for NMS Stock ATSs

    To operate pursuant to the Exchange Act Rule 3a1-1a(2) exemption, 
NMS Stock ATSs will be required to comply with new Rule 304, in 
addition to the applicable existing Rules 300 through 303 of Regulation 
ATS. In light of the new requirements of Rule 304, we are adopting, 
with modifications discussed below, amendments to several existing 
rules of Regulation ATS.
1. Rule 300(k): Definition of NMS Stock ATS
    Proposed Rule 300(k) of Regulation ATS defined ``NMS Stock ATS'' in 
new paragraph (k) as ``an alternative trading system, as defined in 
Sec.  242.300(a), that facilitates transactions in NMS stocks, as 
defined in Sec.  242.300(g).'' We received no comments on the proposed 
definition of NMS Stock ATS and are adopting Rule 300(k) with 
modifications. We are replacing ``facilitates transactions in'' with 
``trades.'' The term ``trades'' is well understood in the context 
Regulation ATS \221\ and the term ``facilitates'' is not used in the 
definition of an ATS. This change is non-substantive and will clarify 
the rule text.\222\ Accordingly, Rule 300(k), as adopted, defines an 
``NMS Stock ATS'' as ``an alternative trading system, as defined in 
paragraph (a) of [Rule 300], that trades NMS stocks, as defined in 
paragraph (g) of [Rule 300].''
---------------------------------------------------------------------------

    \221\ We believe that the concept of NMS Stock ATSs ``trading'' 
or ``transacting'' in NMS stocks, should be familiar to existing NMS 
Stock ATSs as Form ATS requires disclosure regarding, among other 
things ``the types of securities the [ATS] trades'' and ``the name 
of any entity, other than the [ATS] that will be involved in the 
operation of the [ATS], including the execution, trading, clearing, 
and settling of transactions on behalf of the [ATS].'' See Form ATS. 
Additionally, Form ATS requires disclosure regarding ``[t]he 
procedures governing execution, reporting, clearance and settlement 
of transactions effected through the [ATS]''; and Form ATS-R 
requires NMS Stock ATSs to ``[p]rovide the total unit and dollar 
volume of transactions'' in specified securities categories. See 
Form ATS and Form ATS-R.
    \222\ As proposed, an NMS Stock ATS would include any ATS that 
effects transactions in securities that are listed on a national 
securities exchange (other than options, debt or convertible debt). 
See Proposal, supra note 2, at 81015-81016.
---------------------------------------------------------------------------

2. Rule 301(a): Exemption From Compliance With Regulation ATS
    We made explicit in proposed Rule 304(a) that NMS Stock ATSs must 
comply with Rules 300 through 304, unless not required to comply with 
Regulation ATS pursuant to Rule 301(a). Pursuant to Rule 301(a), 
certain ATSs that are subject to other appropriate regulations are not 
required to comply with Regulation ATS.\223\ To the extent that an NMS 
Stock ATS meets the criteria of the Rule 301(a) exemption, such ATS 
would not be required to comply with Rules 300 through 304 of 
Regulation ATS. We received no comments on the application of Rule 
301(a) to NMS Stock ATSs and are adopting as proposed this language in 
Rule 304(a) to make clear that Rules 300 through 303 of Regulation ATS, 
including Rule 301(a) continue to apply to NMS Stock ATSs, unless 
otherwise provided by Rule 301(a).
---------------------------------------------------------------------------

    \223\ ATSs that are not subject to Rule 301(a) include those 
that are: Registered as an exchange under Section 6 of the Exchange 
Act; exempt from national securities exchange registration based on 
limited volume; operated by a national securities association; 
registered as a broker-dealer, under Sections 15(b) or 15C of the 
Exchange Act, or that are banks, and that limit their securities 
activities to certain instruments; or exempted, conditionally or 
unconditionally, by Commission order, after application by such ATS 
from one or more of the requirements of Rule 301(b). See 17 CFR 
242.301(a). See also Regulation ATS Adopting Release, supra note 3, 
at 70859-63.
---------------------------------------------------------------------------

3. Rule 301(a)(5): Exemptions From Certain Requirements of Regulation 
ATS Pursuant to Application to the Commission
    Rule 301(a)(5) of Regulation provides that an ATS shall comply with 
the requirements of Rule 301(b) unless such ATS is exempted, 
conditionally or unconditionally, by Commission order after application 
by such ATS, from one or more of the requirements of Rule 301(b), and 
that the Commission will grant such exemption only after determining 
that such an order is consistent with the public interest, the 
protection of investors, and the removal of impediments to, and 
perfection of, a national market system.\224\
---------------------------------------------------------------------------

    \224\ See 17 CFR 242.301(a)(5).
---------------------------------------------------------------------------

    When adopting Rule 301(a)(5), we stated that while the requirements 
of Regulation ATS are appropriate for all ATSs, a system may develop in 
the future for which these requirements may not be appropriate. The 
Commission expected to issue such an order only under unusual 
circumstances, and only after making the applicable determination.\225\ 
The requirements of Rule 304 were not part of Regulation ATS at the 
time the Commission adopted Rule 301(a)(5). We believe that, given the 
amendments to Regulation ATS that will require NMS Stock ATSs to comply 
with the filing requirements of Rule 304, including filing Form ATS-N, 
instead of the Form ATS filing requirements of Rules 301(b)(2)(i)-
(vii), it may be appropriate under certain limited, unusual facts and 
circumstances for the Commission to exempt an NMS Stock ATS, 
conditionally or unconditionally, by Commission order, from one or more 
requirements of Rule 304. As such, we are amending Rule 301(a)(5) to 
include exemptions from the requirements of Rule 304.\226\
---------------------------------------------------------------------------

    \225\ Regulation ATS Adopting Release, supra note 3, at 70863.
    \226\ The Commission continues to also have general exemptive 
authority pursuant to Section 36(a) of the Exchange Act to grant 
both conditional and unconditional exemptions from any provisions or 
provisions of the Exchange Act, or any rule or regulation thereunder 
(including Rule 304 and any other provision of Rule 3a1-1 and 
Regulation ATS), to the extent necessary or appropriate in the 
public interest and consistent with the protection of investors. See 
15 U.S.C. 78mm(a).
---------------------------------------------------------------------------

    In response to the Proposal, we received one comment regarding 
possible use of the Commission Section 36 exemptive authority in 
connection with the requirements of Rule 304.\227\ This commenter 
states that instead of modifying the requirements under the Proposal in 
such a way that could result in less relevant information being 
provided to the Commission and to the public, certain concerns of other 
commenters could be addressed through use of the Commission's Section 
36 exemptive authority. Specifically, this commenter observes that an 
NMS Stock ATS could seek relief tailored to its unique facts and 
circumstances pursuant to Section 36(a)(1) of the Exchange Act, and 
that Section 36(a)(1) permits the Commission to grant both conditional 
and unconditional exemptions from any provisions of a rule, to the 
extent necessary or appropriate in the public interest and consistent 
with the protection of investors.\228\ This commenter also states that 
using Section 36 exemptive authority would be consistent with the 
manner in which the Commission generally treats requests it receives 
from regulated entities, and encourages the Commission to consider 
providing guidance as to what factors it might consider when evaluating 
a request for specific exemptive relief.\229\ We believe that 
amendments made to Rule 301(a)(5) make clear that the Commission could

[[Page 38785]]

exempt an NMS Stock ATS, conditionally or unconditionally, by order, 
after application by the ATS from one or more of the requirements of 
Rule 304 of Regulation ATS provided that the Commission determines that 
such an exemption is consistent with the public interest, the 
protection of investors, and removal of impediments to, and perfection 
of the mechanisms of, a national market system.
---------------------------------------------------------------------------

    \227\ See Investor Advocate Letter at 8.
    \228\ See id. See also infra notes 723-725 and accompanying text 
(discussing this comment in the specific context of disclosures 
regarding affiliates of the broker-dealer operator).
    \229\ See Investor Advocate Letter at 9. For example, in the 
context of any exemptions from the requirements applicable to 
disclosures regarding affiliates of the broker-dealer operator of an 
NMS Stock ATS, the commenter encouraged the Commission to consider 
providing guidance as to what facts and circumstances it might 
consider when evaluating a broker-dealer operator's request for 
exemptive relief. See id. See also infra notes 723-725 and 
accompanying text.
---------------------------------------------------------------------------

    We also received other comments regarding specific exceptions from 
the proposed requirements of Rule 304. Specifically, three commenters 
suggest providing an exception to the 30-calendar day advance notice 
requirement for material changes in case of exigent circumstances.\230\ 
One commenter states that unless the Commission narrows the materiality 
standard for material amendments, the 30-calendar day advance notice 
requirement could affect an ATS operator's ability to take ``decisive 
action.'' \231\ This commenter further believes that NMS Stock ATS 
operators often must take decisive action without time for a lengthy 
review and approval process, given that the speed of response to 
technical or operational issues (including cybersecurity) often is 
measured in seconds. This commenter believes there should be a carve-
out for exigent circumstances when an NMS Stock ATS must act 
swiftly.\232\ Another commenter states that there could be situations 
in which it would be difficult for an NMS Stock ATS to meet the 30-
calendar day advance notice requirement based on ongoing business 
changes, and that the Commission should clarify that certain Form ATS-N 
disclosures may be subject to immediate change without notice.\233\ 
Another commenter states that the Commission should allow for more 
rapid action (than the 30-day advance notice requirement) in the event 
of an ``external emergency,'' such as an extreme market event, but that 
such circumstances should be rare and only granted upon express 
approval of the Commission, upon a finding that such action is 
necessary to protect investors and promote fair and efficient 
markets.\234\
---------------------------------------------------------------------------

    \230\ See HMA Letter at 10; SIFMA Letter at 31; KCG Letter at 
10.
    \231\ See SIFMA Letter at 31.
    \232\ See id.
    \233\ See KCG Letter at 10. The commenter states that, for 
example, if a broker-dealer operator provides a disclosure that it 
routes orders to the ATS from its algorithmic business, and the data 
center from which the algorithmic business operates subsequently 
experiences systems issues that force it to stop routing orders to 
the ATS, the disclosure would no longer be accurate and the broker-
dealer operator would not be in position to provide 30-calendar day 
advance notice of the change.
    \234\ See HMA Letter at 10.
---------------------------------------------------------------------------

    We believe that there may be unusual circumstances under which an 
NMS Stock ATS may need to seek an exemption from the requirements of 
Rule 304 or the disclosure requirements of Form ATS-N. For example, 
under exceptionally rare occasions, an NMS Stock ATS may need to make a 
material change to its operations on an expedited basis to prevent 
substantial harm to market participants, such as in response to a 
significant operational or market-wide event. The amendments to Rule 
301(a)(5) are designed to address these concerns.\235\ Applications for 
relief from a requirement of Rule 304 generally should explain why the 
applicant believes the relief sought is consistent with the public 
interest, the protection of investors, and the removal and impediments 
to, and perfection of the mechanism of, a national market system.\236\
---------------------------------------------------------------------------

    \235\ As amended, Rule 301(a)(5) will apply to ATSs that have 
received exemptive relief from one or more requirements of Rule 304. 
See Rule 301(a)(5).
    \236\ Applications for exemptive relief from the 30-calendar day 
advance notice requirement of Rule 304(a)(2)(i)(A) generally should, 
for example, contain a description of the circumstances that 
necessitate the implementation of the material change on an 
expedited basis, and why, in the view of the NMS Stock ATS, 
expedited implementation is necessary or appropriate in the public 
interest, and consistent with the protection of investors, such as 
why the expedited implementation is necessary to prevent substantial 
harm to investors. The Commission will not consider hypothetical or 
anonymous requests for exemptive relief.
---------------------------------------------------------------------------

    As noted by commenters, circumstances may necessitate the 
implementation of a material change to the operations of an NMS Stock 
ATS on an expedited basis. We believe that, based on particular facts 
and circumstances, it may be appropriate to grant such an exemption 
from the 30-day advance notice requirement of Rule 304(a)(2)(i)(A), for 
example, in the event of extraordinary, unforeseen circumstances, and 
if delaying implementation pursuant to the 30-calendar day advance 
notice requirement would cause substantial harm to subscribers or other 
markets trading NMS stocks. By comparison, to the extent that an NMS 
Stock ATS may need to change its operations in response to an 
operational problem, as suggested by one commenter, an NMS Stock ATS 
could proactively develop and disclose in the relevant Form ATS-N Item 
alternative procedures that the ATS would apply if the ATS experiences 
a systems problem that causes it to be unable to perform a particular 
function. For example, an NMS Stock ATS that routes orders and trading 
interest resting in the ATS to destinations outside the ATS could 
state, for example, that the NMS Stock ATS will either execute or 
cancel orders and trading interest submitted to the ATS if the ATS is 
unable to route orders and trading interest away from the ATS due to a 
systems problem.
4. Rule 301(b)(2): Form ATS Reporting Requirements No Longer Apply to 
NMS Stock ATSs
    We proposed in Rule 304 to except NMS Stock ATSs from complying 
with Rule 301(b)(2) of Regulation ATS. Existing Rule 301(b)(2) requires 
an ATS to file with the Commission a Form ATS initial operation report, 
amendments to the Form ATS initial operation report, and cessation of 
operations reports on Form ATS, all of which are ``deemed confidential 
when filed.'' \237\ We proposed this exception to make clear that NMS 
Stock ATSs would not be required to comply with the Form ATS reporting 
requirements provided in Rule 301(b)(2) because the NMS Stock ATS would 
file a Form ATS-N pursuant to Rule 304. We also proposed Rule 
301(b)(2)(viii) to make clear that NMS Stock ATSs must file with the 
Commission the reports and amendments required by Rule 304 and that NMS 
Stock ATSs were not subject to Rule 301(b)(2) of Regulation ATS. We 
also proposed that ATSs that effect transactions in both NMS stocks and 
non-NMS stocks would be subject to the requirements of proposed Rule 
304, with respect to NMS stocks, and Rule 301(b)(2), with respect to 
non-NMS stocks.
---------------------------------------------------------------------------

    \237\ See Rule 301(b)(2)(vii).
---------------------------------------------------------------------------

    We received one comment regarding proposed Rule 
301(b)(2)(viii).\238\ The commenter states that requiring an ATS that 
transacts in both NMS stocks and non-NMS Stocks to file reports on Form 
ATS-N with respect to NMS stocks but also file reports on Form ATS with 
respect to non-NMS stocks could be unduly burdensome.\239\ The 
commenter states that an ATS should have the option to file reports on 
Form ATS-N

[[Page 38786]]

for all U.S. equities that it trades, whether listed or unlisted 
because an ATS operator would otherwise have the burden of maintaining 
two separate ATS filings for what the commenter believes is essentially 
the same functionality.\240\
    We do not believe that requiring an ATS that trades both NMS stocks 
and non-NMS stocks to file reports on Form ATS-N with respect to NMS 
stocks, but also file reports on Form ATS with respect to non-NMS 
stocks, will be unduly burdensome. We recognize the additional burdens 
for NMS Stock ATSs resulting from the requirement to file disclosures 
on new Form ATS-N; however, we estimate that the burden for these ATSs 
to maintain their Forms ATS will decrease, because they will no longer 
be required to disclose information about their NMS stock operations on 
Form ATS.\241\ We also believe that allowing a broker-dealer operator 
to choose to disclose information on Form ATS-N about trading in non-
NMS stocks, as suggested by the commenter,\242\ would likely result in 
incomplete disclosures about the ATS's non-NMS stock operations that 
may be confusing or not useful to market participants. Form ATS-N was 
specifically designed to solicit information about trading in NMS 
stocks on an ATS to allow market participants to understand the ATS's 
NMS stock operations and readily compare the ATS against other ATSs and 
national securities exchanges that trade NMS stocks.\243\ While many of 
the requests on Form ATS-N could apply to Fixed Income ATSs or 
Government Securities ATSs, the requests are not fully tailored to 
solicit information about trading in those types of securities and the 
systems that trade them. For example, transactions in NMS stocks are, 
in some cases, subject to different federal securities laws and 
Commission rules than transactions in other securities, such as fixed 
income securities.\244\ Because Form ATS-N is specifically designed for 
NMS Stock ATSs, subscribers relying on Form ATS-N disclosures to assess 
a non-NMS Stock ATS, such as one that trades fixed income securities, 
as a potential trading venue may not receive a complete or 
comprehensible understanding of the ATS's fixed income operations, or 
fixed income activities of the broker-dealer operator and its 
affiliates as such activities relate to the ATS, because Form ATS-N 
does not solicit such information. We believe that allowing NMS Stock 
ATSs to choose whether to integrate information about trading in non-
NMS stocks on a Form ATS-N could make the disclosures confusing for 
users and make it difficult for them to compare the operations of an 
NMS Stock ATS against other NMS Stock ATSs.
---------------------------------------------------------------------------

    \238\ See Liquidnet Letter at 3. We received two comments 
regarding the application of Rule 301(b)(2)(i) through (vii) to 
Legacy NMS Stock ATSs that have filed a Form ATS-N that has not yet 
become effective. See Liquidnet Letter at 3; BIDS Letter at 2-3. We 
are adopting a transitional rule that will not require a Legacy NMS 
Stock ATS to amend its Form ATS under Rule 301(b)(2) if it has filed 
a Form ATS-N with the Commission that has not yet become effective. 
We are instead requiring such Legacy NMS Stock ATS to file 
amendments on Form ATS-N pursuant to the requirements of Rule 
304(a)(2)(i)(A) through (C). Rule 304(a)(1)(v)(C) is discussed below 
in greater detail. See infra Section IV.A.4.c.
    \239\ See Liquidnet Letter at 3.
    \240\ See id.
    \241\ An ATS that trades both NMS stocks and non-NMS stocks will 
be required to amend its Form ATS, after the ATS files Form ATS-N, 
by removing information that pertains solely to the ATS's NMS stock 
operations. Amending Form ATS in this manner should help ensure that 
the Form ATS accurately describes the ATS's non-NMS stock 
operations.
    \242\ See Liquidnet Letter at 3.
    \243\ See supra Section III.A.
    \244\ For example, Rule 611 of Regulation NMS, which requires a 
trading center to establish, maintain, and enforce written policies 
and procedures that are reasonably designed to prevent trade-
throughs on that trading center, subject to certain exceptions, 
applies only to protected quotations in NMS stocks, and not to non-
NMS stocks. See 17 CFR 242.611.
---------------------------------------------------------------------------

    Because we are adopting rules that require NMS Stock ATSs to file 
Form ATS-N pursuant to Rule 304, we are adopting Rule 304(a) with 
modifications to provide that an NMS Stock ATS would specifically be 
excepted from compliance with Rules 301(b)(2)(i) through (vii) of 
Regulation ATS, which govern the filing of Form ATS.\245\ An NMS Stock 
ATS that is operating pursuant to an initial operation report on Form 
ATS as of January 7, 2019 (``Legacy NMS Stock ATS'') will be required 
to file a Form ATS-N no earlier than January 7, 2019 and no later than 
February 8, 2019.\246\
---------------------------------------------------------------------------

    \245\ See supra Section III.A.
    \246\ See infra Section IV.A.4.
---------------------------------------------------------------------------

    We are also adopting Rule 301(b)(2)(viii) to provide for how Legacy 
NMS Stock ATSs transition from filing a Form ATS to filing a Form ATS-
N. We are defining the term ``Legacy NMS Stock ATS'' to mean an NMS 
Stock ATS that is operating pursuant to an initial operation report on 
Form ATS as of January 7, 2019. We are also replacing proposed language 
that stated that an NMS Stock ATS would not be subject to the 
requirements of Rule 301(b)(2) with language stating that a Legacy NMS 
Stock ATS shall be subject to the Form ATS filing requirements of Rule 
301(b)(2)(i) through (vii) until the Legacy NMS Stock ATS files an 
initial Form ATS-N with the Commission pursuant to Rule 
304(a)(1)(iv)(A), and that thereafter, the Legacy NMS Stock ATS shall 
file reports \247\ pursuant to Rule 304(a)(1)(iv)(A). We intended in 
the Proposal to except a Legacy NMS Stock ATS from compliance with Rule 
301(b)(2)(i) through (vii) after it filed Form ATS-N, but also intended 
that a Legacy NMS Stock ATSs be subject to Rule 301(b)(2)(viii), which 
requires NMS Stock ATSs to file reports required by Rule 304.\248\ We 
believe that this modification will make clear that, until a Legacy NMS 
Stock ATS files its Form ATS-N with the Commission, the Legacy NMS 
Stock ATS must amend Form ATS in compliance with Rule 301(b)(2) of 
Regulation ATS.
---------------------------------------------------------------------------

    \247\ To reduce redundancy, we are revising the proposed rule 
text to state that the Legacy NMS Stock ATS must file ``reports'' 
(rather than ``the reports and amendments'') required by Rule 304. 
Rule 304(b)(1) provides that every Form ATS-N, which will include 
every amendment filed on Form ATS-N, shall constitute a ``report'' 
within the meaning of sections 11A, 17(a), 18(a), and 32(a) (15 
U.S.C. 78k-1, 78q(a), 78r(a), and 78ff(a)), and any other applicable 
provisions of the Exchange Act.
    \248\ See Proposal, supra note 2, at 81022-24, 81027-31. Without 
this modification, Rule 301(b)(2)(viii) could be interpreted, 
contrary to the Commission's intention, to except an NMS Stock ATS 
from compliance with all of Rule 301(b)(2), including Rule 
301(b)(2)(viii) itself.
---------------------------------------------------------------------------

    We are also including language in Rule 301(b)(2)(viii) stating that 
as of January 7, 2019, an entity seeking to operate as an NMS Stock ATS 
shall not be subject to the ATS filing requirements of Rule 
301(b)(2)(i) through (vii) and shall file reports pursuant to Rule 
304.\249\ Rule 301(b)(2)(viii) describes the reporting obligations of 
Legacy NMS Stock ATSs, and we believe that this additional language 
will make clear that NMS Stock ATSs must file an initial Form ATS-N, 
and that they do not need to comply with Rule 301(b)(2)(i) through 
(vii) and therefore should not file Form ATS.\250\
---------------------------------------------------------------------------

    \249\ EDGAR will be ready to accept Form ATS-N filings on 
January 7, 2019, and we have conformed Rule 301(b)(2)(iii) to be 
consistent with the EDGAR ability to accept Form ATS-N filings.
    \250\ See infra Section IV.A.1 (discussing the filing 
requirements for new NMS Stock ATSs).
---------------------------------------------------------------------------

    We recognize that an entity may wish to start operating as an NMS 
Stock ATS between the time the final rule is adopted and January 7, 
2019. During that time, an entity must file an initial operation report 
on Form ATS and comply with Rule 301(b)(2); after January 7, 2019, the 
ATS, which would operate as a Legacy NMS Stock ATS, must file an 
initial Form ATS-N between January 7, 2019 and February 8, 2019 
pursuant to Rule 304(a)(1)(iv)(A).\251\ As of January 7, 2019, an 
entity that seeks to operate as an NMS Stock ATS must comply with Rule 
304 (and not with Rules 301(b)(2)(i) through (vii)) and file an initial 
Form ATS-N with the Commission.
---------------------------------------------------------------------------

    \251\ See infra Section IV.A.4.a.
---------------------------------------------------------------------------

    We are adopting, with a non-substantive modification, the proposed 
Rule 301(b)(2)(viii) requirement that an ATS that effects transactions 
in both NMS stocks and non-NMS stocks be subject to the requirements of 
new Rule 304 with respect to NMS stocks and

[[Page 38787]]

Rule 301(b)(2) with respect to non-NMS stocks. We are modifying the 
requirement to replace ``effects transactions in'' with ``trades.'' As 
adopted, Rule 301(b)(2)(viii) requires that an ATS that trades both NMS 
stocks and non-NMS stocks be subject to the requirements of new Rule 
304 with respect to NMS stocks and Rule 301(b)(2) with respect to non-
NMS stocks.\252\ By adopting Rule 304 and Form ATS-N, we believe it has 
addressed concerns raised by NMS Stock ATSs, as discussed above and in 
the Proposal, but that applying Rule 304 to the non-NMS Stock ATS 
operations of ATSs that trade both NMS stocks and non-NMS stocks would 
impose unequal regulatory burdens across ATSs that transact in non-NMS 
stocks. Finally, we are adopting as proposed non-substantive amendments 
to Rule 301(b)(2)(i) and Rule 301(b)(2)(vii) to delete outdated 
references to dates for phased-in compliance with Regulation ATS for 
ATSs that were operational as of April 21, 1999, and to update the name 
of the Division of Trading and Markets, respectively.\253\
---------------------------------------------------------------------------

    \252\ This modification is being made for clarity and 
consistency with the Rule 300(k) definition of NMS Stock ATS. See 
supra Section III.B.1.
    \253\ See 17 CFR 242.301(b)(2)(i) and (vii), respectively.
---------------------------------------------------------------------------

5. Rule 301(b)(9): Form ATS-R Quarterly Reports
    We also proposed to amend Rule 301(b)(9) of Regulation ATS,\254\ 
which provides that an ATS shall report transaction volume on Form ATS-
R on a quarterly basis and within 10 calendar days after it ceases 
operation,\255\ to require an ATS that trades both NMS stocks and non-
NMS stocks to separately report its transactions in NMS stocks on one 
Form ATS-R, and its transactions in non-NMS stocks on another Form ATS-
R.\256\
---------------------------------------------------------------------------

    \254\ See 17 CFR 242.301(b)(9).
    \255\ See Regulation ATS Adopting Release, supra note 3, at 
70878. The information filed on Form ATS-R permits the Commission to 
monitor trading on an ATS.
    \256\ We did not propose any other changes to Rule 301(b)(9). 
Form ATS-R would continue to be deemed confidential.
---------------------------------------------------------------------------

    We received two comments regarding Form ATS-R. One commenter states 
that in light of information on FINRA's website regarding ATSs,\257\ 
and the detailed disclosures in periodic disclosures required by Form 
ATS-N, the Commission should no longer require an NMS Stock ATS to file 
Form ATS-R.\258\ We are not amending Regulation ATS at this time to 
remove the requirement for NMS Stock ATSs to file Form ATS-R. 
Notwithstanding the disclosure on FINRA's website of certain volume 
information for ATSs that trade NMS stocks, we continue to believe that 
the form helps the Commission oversee and monitor the trading activity 
of NMS Stock ATSs, because Form ATS-R provides the Commission with 
information that is unavailable on the FINRA website.\259\ Another 
commenter states that to alleviate burdens on ATSs and promote more 
meaningful comparisons across firms and venues, the Commission should 
significantly revise reporting obligations on Form ATS-R.\260\ The 
commenter does not specify how Form ATS-R should be revised; however, 
we believe that the role Form ATS-R plays in helping the Commission to 
oversee and monitor the trading activities of NMS Stock ATSs justifies 
the burden on NMS Stock ATSs to file Form ATS-R.\261\
---------------------------------------------------------------------------

    \257\ See supra note 15.
    \258\ See SIFMA Letter at 8 n.16.
    \259\ Form ATS-R requires ATSs to provide, among other things, 
trading volumes, a list of all subscribers that were participants of 
the ATS, and a list of all securities traded. The information on 
Form ATS-R permits the Commission to monitor ATSs for compliance 
with the fair access requirements of Rule 301(b)(5), as ATSs subject 
to those requirements must report quarterly on Form ATS-R the 
persons to whom they grant, deny, or limit access to the ATS, as 
well as the date of the action, the effective date of the action, 
and the nature of the denials of limitations of access. See Form 
ATS-R; see also Regulation ATS Adopting Release, supra note 3, at 
70878.
    \260\ See HMA Letter at 11 n.64.
    \261\ See supra Section X.D.6.
---------------------------------------------------------------------------

6. Rule 303: Recordkeeping Requirements for Form ATS-N
    We proposed amending Rules 303(a)(1) and 303(a)(2) of Regulation 
ATS to reflect the proposed amendments to Rule 301(b)(2) \262\ and the 
addition of Rule 304.\263\ In addition, the proposed rules would make 
minor technical amendments to Rule 303. We received no comments on the 
proposed amendments to Rule 303 and are adopting these requirements as 
proposed.
---------------------------------------------------------------------------

    \262\ See supra Section III.B.4.
    \263\ See infra Section IV.
---------------------------------------------------------------------------

    Unless not required to comply with Regulation ATS pursuant to Rule 
301(a) \264\ of Regulation ATS, an ATS must comply with the 
recordkeeping requirements of Regulation ATS.\265\ Specifically, Rule 
301(b)(8) \266\ requires an ATS to make and keep current the records 
specified in Rule 302 \267\ and to preserve the records specified in 
Rule 303.\268\ Before the adoption of the amendments to Rule 303, Rule 
303(a)(1) required an ATS to preserve certain records for at least 
three years, the first two years in an easily accessible place.\269\ 
Specifically, Rule 303(a)(1) \270\ required an ATS to preserve: (1) All 
records required to be made pursuant to Rule 302; (2) all notices 
provided to subscribers, including notices addressing hours of 
operations, system malfunctions, changes to system procedures, 
maintenance of hardware and software, and instructions pertaining to 
access to and denials of, or limitations on, access to the ATS; (3) 
documents made or received in the course of complying with the system 
capacity, integrity, and security standards in Rule 301(b)(6), if 
applicable; \271\ and (4) if the ATS is subject to the fair access 
requirements under Rule 301(b)(5),\272\ a record of its access 
standards. Rule 303(a)(2) \273\ 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),\274\ which includes current Form ATS, and records made 
pursuant to Rule 301(b)(5).\275\ 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.\276\
---------------------------------------------------------------------------

    \264\ 17 CFR 242.301(a).
    \265\ See Proposal, supra note 2, at 81087.
    \266\ See 17 CFR 242.301(b)(8).
    \267\ See 17 CFR 242.302.
    \268\ See 17 CFR 242.303.
    \269\ See 17 CFR 242.303(a)(1).
    \270\ See id.
    \271\ See supra notes 77-81 and accompanying text.
    \272\ See supra notes 72-75 and accompanying text.
    \273\ See 17 CFR 242.303(a)(2).
    \274\ See 17 CFR 242.301(b)(2).
    \275\ See supra notes 72-75 and accompanying text.
    \276\ See 17 CFR 242.301(b)(2).
---------------------------------------------------------------------------

    We are amending the record preservation requirements of Rule 303 to 
incorporate the preservation of records that would be created pursuant 
to the requirements that NMS Stock ATSs file initial Form ATS-N, Form 
ATS-N amendments, and notices of cessation on Form ATS-N, instead of 
Form ATS. Specifically, we are amending 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 Stock ATS--Rule 304, and records 
made pursuant to Rule 301(b)(5).\277\ As a result, because an NMS Stock 
ATS will be required to file initial Form ATS-N, Form ATS-N amendments, 
and notices of cessation on Form ATS-N pursuant to Rule 304,

[[Page 38788]]

instead of on Form ATS pursuant to Rule 301(b)(2), the NMS Stock ATS 
must preserve those reports for the life of the enterprise and of any 
successor enterprise pursuant to Rule 303(a)(2) as amended.\278\ We are 
not amending the recordkeeping requirements of Rule 302, or any other 
amendments to the record preservation requirements of Rule 303(a)(2).
---------------------------------------------------------------------------

    \277\ See 17 CFR 242.303(a)(2)(ii).
    \278\ NMS Stock ATSs that had previously made filings on Form 
ATS must preserve those filings for the life of the enterprise, as 
well as filings made going forward on Form ATS-N. See id. We believe 
that the 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 staff to help ensure fair and orderly markets without 
imposing any undue burden on ATSs.
---------------------------------------------------------------------------

    We are also adopting 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; this 
reference is incorrect, as Rule 301(b)(9) describes the filing 
requirements, rather than the recordkeeping requirements, for ATSs. We 
are therefore adopting a change to correct the above reference to 
``paragraph (b)(8) of Sec.  242.301.'' In addition, we are adopting an 
amendment to Rule 303(a)(1) to incorporate amendments to Rule 
301(b)(10).\279\
---------------------------------------------------------------------------

    \279\ See infra Section VI.
---------------------------------------------------------------------------

7. Comments Recommending Changes to Other Existing Regulation ATS Rules
    In the Proposal, we requested comment on other potential changes to 
Regulation ATS rules, including the order display and execution access 
requirement in Rule 301(b)(3) and the fair access requirement in Rule 
301(b)(5).\280\ We received two comments recommending changes to Rule 
301(b)(3) of Regulation ATS.\281\ One commenter urges the Commission to 
consider lowering or eliminating the threshold for the order display 
requirement.\282\ Another commenter states that lowering the threshold 
for the order display requirement would result in reduced choice and 
higher trading costs for long-term investors, and urges the Commission 
to provide a block exemption from the order display requirement.\283\
---------------------------------------------------------------------------

    \280\ See Proposal, supra note 2, at 81058, 81083.
    \281\ See Citadel Letter at 3; Liquidnet Letter at 14-15; see 
also supra Section II.C (discussing the order display and execution 
access requirements under Rule 301(b)(3) of Regulation ATS).
    \282\ See Citadel Letter at 3.
    \283\ The commenter believes that the threshold for the order 
display requirement may prevent it from offering functionalities 
that may provide market participants flexibility in how they display 
block orders. See Liquidnet Letter at 14-15.
---------------------------------------------------------------------------

    In addition, the Commission received two comments recommending 
changes to the fair access requirements in Rule 301(b)(5).\284\ One 
commenter urges the Commission to eliminate the 5% trading volume fair 
access threshold, in light of the importance of NMS Stock ATSs to 
equity markets today.\285\ Another commenter states that rather than 
lowering the trading volume threshold that triggers the fair access 
requirement of Rule 301(b)(5), the Commission should exclude block 
executions from counting towards the fair access threshold.\286\ In 
addition, one commenter believes that, in connection with Rule 
301(b)(3) of Regulation ATS (order display and execution access), it is 
not appropriate to include actionable indications of interest in the 
definitions of ``bid'' and ``offer'' under Regulation NMS.\287\ Another 
commenter states that actionable indications of interest should be 
treated as quotes and should be transparent to the public.\288\
---------------------------------------------------------------------------

    \284\ See Citadel Letter at 2-3; Liquidnet Letter at 9-12; see 
also supra Section II.C (discussing the fair access requirements 
under Rule 301(b)(5) of Regulation ATS).
    \285\ See Citadel Letter at 2.
    \286\ See Liquidnet Letter at 10.
    \287\ See UBS Letter at 8. 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. See 
Regulation of Non-Public Trading Interest at 61209 (proposal to 
amend, among other things, Rule 301(b)(3) of Regulation ATS).
    \288\ See Barnard Letter at 2.
---------------------------------------------------------------------------

    We are not adopting changes to the order display and execution 
requirement or the fair access requirement at this time. We believe 
that it is appropriate to take an incremental approach by first 
applying the amended regime to NMS Stock ATSs before considering a 
further step and we intend to monitor the effectiveness of Rule 
301(b)(3) and Rule 301(b)(5) requirements. Should the Commission decide 
to take further action with regard to these requirements, such as 
proposing to amend Regulation ATS, the Commission would do so in a 
separate rulemaking and take into account its experience with Rule 304 
and NMS Stock ATSs.

IV. Form ATS-N Filing Process; Effectiveness Review

A. Initial Form ATS-N

1. Rule 304(a)(1)(i): Filing and Effectiveness Requirement
    Rule 304(a)(1)(i) requires that an NMS Stock ATS operate pursuant 
to an effective initial Form ATS-N to be exempt from the definition of 
``exchange.'' Proposed Rule 304(a)(1)(i) (``Filing'') provided that 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. Proposed Rule 304(a)(1)(i) also included transitional 
provisions for Legacy NMS Stock ATSs to file Form ATS-N and operate 
under Rule 304. These provided that if an NMS Stock ATS is operating 
pursuant to a previously-filed initial operation report on Form ATS as 
of the 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 the effective date of 
the final rule. Further, proposed Rule 304(a)(1)(i) would have provided 
that an NMS Stock ATS operating as of the 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. We are adopting Rule 304(a)(1)(i) (``Filing and 
Effectiveness Requirement'') with modifications and relocating the 
provisions applicable to Legacy NMS Stock ATSs to another provision 
within Rule 304(a)(1). Rule 304(a)(1)(i) sets forth two principal 
conditions of the Exchange Act Rule 3a1-1(a)(2) exemption for NMS Stock 
ATSs: (1) The NMS Stock ATS must file an initial Form ATS-N, and (2) 
the initial Form ATS-N must be effective.\289\
---------------------------------------------------------------------------

    \289\ See supra Section III.A.1. See also Rule 301(a)(1)(i).
---------------------------------------------------------------------------

    We are relocating the provisions of proposed Rule 304(a)(1)(i) 
regarding the filing of Form ATS-N by Legacy NMS Stock ATSs during the 
Commission review period to Rule 304(a)(1)(iv) to better organize the 
rule text, particularly in light of other changes we are making to the 
proposed rule in response to comments. In addition, we are making 
other, non-substantive modifications that we believe will not impact 
NMS Stock ATSs and will result in a more readable rule text for the 
public.\290\
---------------------------------------------------------------------------

    \290\ We are making the following non-substantive modifications 
to Rule 304(a)(1)(i): (1) Deleting the phrase ``from the definition 
of `exchange';'' (2) changing the phrase ``in accordance with the 
instructions therein'' to ``in accordance with the conditions of 
this section;'' and (3) adding the term ``initial'' before ``Form 
ATS-N.''
---------------------------------------------------------------------------

    We are also changing Rule 304(a)(1)(i) to state that the exemption 
for NMS Stock ATSs will not be available unless ``the initial Form ATS-
N is effective

[[Page 38789]]

pursuant to paragraph (a)(1)(iii) or (a)(1)(iv)(A) of [Rule 304]'' 
rather than the proposed rule text, which stated that the exemption is 
available only if ``the Commission declares the Form ATS-N effective.'' 
This change is made in connection with adopted Rule 304(a)(1)(iii) and 
Rule 304(a)(1)(iv)(A), which, in response to comments, provide that an 
initial Form ATS-N for both a non-Legacy NMS Stock ATS and Legacy NMS 
Stock ATS, as amended, becomes effective, unless declared ineffective, 
upon the earlier of: (1) The completion of review by the Commission and 
publication pursuant to Rule 304(b)(2) or (2) the expiration of the 
Commission review period, or, if applicable, the end of the extended 
review period. Accordingly, we are adopting Rule 304(a)(1)(i), which 
provides that no exemption is available to an NMS Stock ATS pursuant to 
Rule 3a1-1(a)(2) unless the NMS Stock ATS files with the Commission an 
initial Form ATS-N, in accordance with the conditions of Rule 304 and 
the initial Form ATS-N is effective pursuant to Rule 304(a)(1)(iii) or 
Rule 304(a)(1)(iv)(A). Consequently, an NMS Stock ATS that is not a 
Legacy NMS Stock ATS operating pursuant to an initial operation report 
on Form ATS as of January 7, 2019, will be required to comply with the 
requirements of Rule 304 as of that date. \291\
---------------------------------------------------------------------------

    \291\ See Rule 301(b)(1). An entity seeking to operate as an NMS 
Stock ATS that has filed an initial operation report on Form ATS 
prior to January 7, 2019, but has not yet become operational 
pursuant to Rule 301(b)(2)(i), must file an initial operation report 
on Form ATS-N, in accordance with the conditions of Rule 304, and 
the initial Form ATS-N must become effective before the new NMS 
Stock ATS may commence operations.
---------------------------------------------------------------------------

2. Rule 304(a)(1)(ii): Commission Review Period
    Rule 304(a)(1)(ii) describes the timing for the Commission's review 
of initial Form ATS-N for Legacy NMS Stock ATSs. Proposed Rule 
304(a)(1)(ii) provided the timing for the Commission's review of 
initial Form ATS-N as adopted for both Legacy NMS Stock ATSs and non-
Legacy NMS Stock ATSs. The timing for the Commission's review of 
initial Form ATS-N for Legacy NMS Stock ATSs is provided by Rule 
304(a)(1)(iv)(B).\292\
---------------------------------------------------------------------------

    \292\ See infra Section IV.A.4.b.
---------------------------------------------------------------------------

    Proposed Rule 304(a)(1)(ii)(A) (``Review period and extension of 
the 120-day review period'') provided that the Commission would declare 
a Form ATS-N filed by a Legacy NMS Stock ATS effective or ineffective 
no later than 120 calendar days from filing with the Commission. 
Proposed Rule 304(a)(1)(ii)(A) also provided that the Commission could 
extend the review period for Forms ATS-N filed by Legacy NMS Stock 
ATSs: (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-calendar 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.
    Proposed Rule 304(a)(1)(ii)(B) would have provided that the 
Commission would declare a Form ATS-N filed by an non-Legacy NMS Stock 
ATS effective or ineffective no later than 120 calendar days from 
filing with the Commission. The proposed rule also would have provided 
that 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-calendar 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. We 
received three comments regarding the length of the Commission review 
period and extended review period for Form ATS-N filings.\293\ One 
commenter states that the 120-calendar day period for the Commission to 
review Form ATS-N filings is a reasonable amount of time for the 
Commission to process each filing, and the 120-day extension of the 
review period for Form ATS-N filings by Legacy NMS Stock ATSs that are 
particularly novel or complex is agreeable.\294\ Another commenter does 
not object to the proposed period for reviewing Form ATS-N.\295\ We 
continue to believe that an initial review period of 120 calendar days 
for Form ATS-N filings would provide the Commission adequate time to 
carry out its oversight functions with respect to its review of Forms 
ATS-N filed by both Legacy NMS Stock ATSs and non-Legacy NMS Stock 
ATSs, including its responsibilities to protect investors and maintain 
fair, orderly, and efficient markets.\296\ We also continue to believe 
that extended review periods of 120 calendar days for Form ATS-N 
filings by Legacy NMS Stock ATSs, and 90 calendar days for filings by 
non-Legacy NMS Stock ATSs, that are unusually lengthy or raise novel or 
complex issues, are appropriate. As discussed in the Proposal, these 
time periods will allow the 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 a filing with an 
NMS Stock ATS if necessary.\297\
---------------------------------------------------------------------------

    \293\ See CFA Institute Letter at 4; Liquidnet Letter at 3; PDQ 
Letter at 2. See also infra note 435.
    \294\ See CFA Institute Letter at 4.
    \295\ See Liquidnet Letter at 3. See also PDQ Letter at 2.
    \296\ See Proposal, supra note 2, at 81023-81024. See infra 
Section IV.A.4.b for a description of Rule 304(a)(1)(iv)(B), which 
provides the Commission review period for Legacy NMS Stock ATSs.
    \297\ See Proposal, supra note 2, at 81024.
---------------------------------------------------------------------------

    One commenter worries the review process may devolve into other 
market centers seeking to have the Commission preserve their market 
positions, and urges the Commission to promptly evaluate and act on 
initial Form ATS-N filings.\298\ We believe that the proposed time 
periods for review of Form ATS-N filings are appropriate. The 
Commission could, depending on the length and complexity of a Form ATS-
N filing, complete the review prior to the expiration of the review 
period; thus, the Form ATS-N would become effective upon publication, 
pursuant to Rule 304(b)(2).\299\ The review periods and extended review 
periods combined cannot exceed 240 calendar days for a Legacy NMS Stock 
ATS or 210 calendar days for a non-Legacy NMS Stock ATS unless the NMS 
Stock ATS agrees, in writing, to a longer review period.\300\
---------------------------------------------------------------------------

    \298\ See HMA Letter at 7-8.
    \299\ See Rule 304(a)(1)(iii); Rule 304(a)(1)(iv)(A). See also 
Section IV.A.4.b.
    \300\ See Rule 304(a)(1)(ii)(A); 304(a)(1)(iv)(B). See also 
infra Section IV.A.4.b.
---------------------------------------------------------------------------

    In addition, one commenter states that the proposed process for 
determining whether an NMS Stock ATS qualifies for the exemption from 
the definition of ``exchange'' could, in light of the Commission's SRO 
rule filing review responsibilities, overwhelm staff by adding 
potentially hundreds of new NMS Stock ATS filings.\301\ This commenter 
expresses concern that Commission staff may spend too much time 
reviewing whether an NMS Stock ATS meets its procedural obligations 
rather than trying to better understand the ``substance, merits, and 
potential misconduct of ATSs' trading operations and activities, and 
how they fit into the broader market structure,'' and worries that 
Commission staff ``might get caught in a procedural morass and miss the

[[Page 38790]]

forest for the trees.'' \302\ This commenter compares the proposed 
review process for Form ATS-N filings to the review and approval 
process for SRO rule changes, and states that unless the Commission is 
more willing than it has previously been to challenge applications, the 
proposed process for reviewing Form ATS-N filings will devolve into an 
``unreasonably burdensome exercise for Commission staff while providing 
little benefit to market integrity or investor protection.'' \303\ We 
do not believe that the review process would be unreasonably burdensome 
to the Commission or its staff. The Commission's review will not be 
merit-based; instead, it will focus on the completeness and 
comprehensibility of disclosures. In addition, under the adopted rules, 
a Form ATS-N, as amended, will become effective, unless declared 
ineffective, upon the earlier of the completion of Commission review or 
the end of the Commission review period. This streamlined process will 
facilitate efficient Commission review, which is designed to protect 
investors by allowing the Commission to review disclosures on Form ATS-
N for potential deficiencies that might otherwise confuse or mislead 
market participants about the operations of the NMS Stock ATS or the 
ATS-related activities of the broker-dealer operator and its 
affiliates.
---------------------------------------------------------------------------

    \301\ See Consumer Federation of America Letter at 10.
    \302\ See id.
    \303\ See id. at 2, 10.
---------------------------------------------------------------------------

    We are adopting proposed Rule 304(a)(1)(ii)(B) with modifications, 
renumbering the proposed rule as Rule 304(a)(1)(ii) (``Commission 
review period''), and relocating Rule 304(a)(1)(ii)(A), which relates 
to Legacy NMS Stock ATSs, to Rule 304(a)(1)(iv)(B). We are modifying 
proposed Rule 304(a)(1)(ii) to state that the Commission ``may,'' ``by 
order,'' \304\ as provided in Rule 304(a)(1)(iii), declare an initial 
Form ATS-N filed by an NMS Stock ATS ineffective no later than 120 
calendar days from the date of filing with the Commission or, if 
applicable, the end of the extended review period.\305\ Proposed Rule 
304(a)(1)(iv) (``Order regarding effectiveness'') would have required 
the Commission to issue an order to declare a Form ATS-N effective or 
ineffective. We are not adopting the proposed requirement \306\ that 
the Commission issue an order to declare a Form ATS-N effective 
because, as described below, the Commission will only issue orders of 
ineffectiveness. In addition, to improve readability, the adopted rule 
references the ineffectiveness process in Rule 304(a)(1)(iii). The 
Commission will make public, on its website, any effective initial Form 
ATS-N, as amended.\307\
---------------------------------------------------------------------------

    \304\ We are: (1) Deleting proposed Rule 304(a)(1)(iv), which 
stated that the Commission would issue an order declaring a Form 
ATS-N effective or ineffective and (2) adding the words ``by order'' 
to adopted Rule 304(a)(1)(ii). These changes simplify the rule text 
without changing the Commission's proposal to inform the public 
about the ineffectiveness of Form ATS-N by issuing an order.
    \305\ We are deleting text that states that this provision 
applies to ``an NMS Stock ATS that was not operating as of 
[effective date of the final rule]'' as it will be clear that the 
provisions of Rule 304(a)(1)(ii) apply to the filing of initial Form 
ATS-N by non-Legacy NMS Stock ATSs and that the provisions of Rule 
304(a)(1)(iv) will apply to filings by Legacy NMS Stock ATSs.
    \306\ See proposed Rule 304(a)(1)(iv).
    \307\ See Rule 304(b)(2)(i).
---------------------------------------------------------------------------

    We are modifying Rule 304(a)(1)(ii) to add a provision that will 
allow NMS Stock ATSs to amend their initial Forms ATS-N during the 
Commission review period. We discussed in the Proposal that during the 
Commission's review, the Commission 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.\308\ In addition, 
an NMS Stock ATS may need to update disclosures on its initial Form 
ATS-N to otherwise reflect changes during the Commission review period. 
To allow an NMS Stock ATS to correct or update its disclosures on an 
initial Form ATS-N during the review period, we are modifying Rule 
304(a)(1)(ii) to provide that during the review period of the initial 
Form ATS-N, the NMS Stock ATS shall amend its initial Form ATS-N 
pursuant to the requirements of Rules 304(a)(2)(i)(B) and (C), which 
are discussed further below.\309\ We believe that updates or 
corrections to an NMS Stock ATS's disclosures about its intended 
operations would be properly filed as updating or correcting amendments 
pursuant to Rules 304(a)(2)(i)(B) and (C).\310\ We believe allowing an 
entity seeking to operate as an NMS Stock ATS to amend its initial Form 
ATS-N during the Commission review period will promote transparency and 
facilitate complete and comprehensible disclosures. Once an initial 
Form ATS-N becomes effective, the Commission will make public the 
initial Form ATS-N, as amended, which will incorporate any amendments 
that were filed during the Commission review period. An NMS Stock ATS 
(other than a Legacy NMS Stock ATS),\311\ however, seeking to amend its 
initial Form ATS-N to make a material change to its Form ATS-N 
disclosures during the Commission review period must withdraw its 
initial Form ATS-N and may refile a new, initial Form ATS-N pursuant to 
Rule 304(a)(1). We believe a material change to the disclosures on an 
initial Form ATS-N would necessitate a full review period.\312\ In 
addition, we have made several technical, non-substantive modifications 
to Rule 304(a)(1)(ii) that are designed to improve the readability of 
the rule, reduce potential ambiguity, or both.\313\
---------------------------------------------------------------------------

    \308\ See Proposal supra note 2, at 81026.
    \309\ See infra Sections IV.B.1.b and IV.B.1.c. Amendments will 
be subject to Commission review under Rule 304(a)(2)(ii), which 
states that the Commission will, by order, declare ineffective any 
Form ATS-N amendment no later than 30 calendar days from filing of 
such amendment with the Commission if the Commission finds that such 
action is necessary or appropriate in the public interest, and is 
consistent with the protection of investors.
    \310\ See id.
    \311\ Unlike non-Legacy NMS Stock ATSs, Legacy NMS Stock ATSs 
will operate during the Commission review period pursuant to a 
filed, but not yet effective, initial Form ATS-N. Accordingly, 
Legacy NMS Stock ATSs may file amendments to their Form ATS-N during 
the Commission review period to make material changes to their 
operations and introduce new functionalities. See infra Section 
IV.A.4.c.
    \312\ The Commission could, however, complete its review of a 
refiled initial Form ATS-N in less than 120 calendar days from the 
date of filing, and the Form ATS-N would become effective upon 
publication. See Rules 304(a)(1)(ii)-(iii) and 304(b).
    \313\ We are making additional changes from proposed Rule 
304(a)(1)(ii) to: (1) Rename the paragraph from ``Review period and 
extension of the 120-day review period'' to ``Commission review 
period;'' (2) add to the end of the first sentence that the 
Commission may declare an initial Form ATS-N ineffective no later 
than 120 calendar days from the date of filing with the Commission 
``or, if applicable, the end of the extended review period;'' (3) 
specify that the Commission will declare an initial Form ATS-N 
ineffective no later than 120 calendar days from ``the date of'' 
filing with the Commission; (4) add the word ``initial'' before Form 
ATS-N; and (5) add the word ``calendar'' before ``day'' in the 
description of the 90-day extension period.
---------------------------------------------------------------------------

3. Rule 304(a)(1)(iii): Effectiveness; Ineffectiveness Determination
    Rule 304(a)(1)(iii) describes the process by which an initial Form 
ATS-N would become effective, or be declared ineffective by the 
Commission. Proposed Rule 304(a)(1)(iii) (``Effectiveness'') provided 
that the Commission will declare effective a Form ATS-N if the NMS 
Stock ATS qualifies for the Rule 3a1-1(a)(2) exemption and 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.\314\ Proposed Rule 304(a)(1)(iv) (``Order 
regarding effectiveness'')

[[Page 38791]]

provided that the Commission will issue an order to declare a Form ATS-
N effective or ineffective. Proposed Rule 304(a)(1)(iv) also provided 
that upon the effectiveness of the Form ATS-N, the NMS Stock ATS may 
operate pursuant to the conditions of Rule 304, and 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) further provided that a Form ATS-N declared ineffective 
would not prevent the NMS Stock ATS from subsequently filing a new Form 
ATS-N. We also discussed in the Proposal our preliminary beliefs 
regarding when it would be necessary or appropriate in the public 
interest to declare ineffective a Form ATS-N.\315\ We received several 
comments related to proposed Rule 304(a)(1)(iii), proposed Rule 
304(a)(1)(iv), and the standard of review for declaring Form ATS-N 
filings effective or ineffective, which are summarized below.
---------------------------------------------------------------------------

    \314\ See proposed Rule 304(a)(1)(iii).
    \315\ See Proposal, supra note 2, at 81024-81026.
---------------------------------------------------------------------------

    Pursuant to Rule 304 and Form ATS-N, as adopted and as discussed 
below, an NMS Stock ATS must provide all the information required by 
the form and respond to each item, as applicable, and disclose 
information that is accurate, current, and complete. A Form ATS-N 
filing that is defective may be rejected. If the filing is accepted for 
review, it will become effective unless the Commission finds, after 
notice and opportunity for hearing, that it is necessary or appropriate 
in the public interest, and consistent with the protection of 
investors, to declare the filing ineffective. Responsibility for 
current, complete, and accurate disclosures rests with the NMS Stock 
ATS.\316\ The Commission will consider whether it is necessary or 
appropriate in the public interest, and consistent with the protection 
of investors, to declare an initial Form ATS-N filing ineffective 
because, for example, the Form ATS-N was filed by an entity that does 
not meet the proposed definition of NMS Stock ATS; one or more 
disclosures reveal non-compliance with federal securities laws, or the 
rules or regulations thereunder, including Regulation ATS; or the 
disclosures are materially deficient with respect to completeness or 
comprehensibility.
---------------------------------------------------------------------------

    \316\ See Rule 304(c); Instructions to Form ATS-N. The 
Commission's staff may become aware of information, as a result of 
discussions with the NMS Stock ATS or otherwise, that calls into 
question, for example, the currency or accuracy of the disclosures 
on a Form ATS-N, which may result in a determination to begin the 
process to declare the Form ATS-N ineffective. See infra Section 
IV.A.3.d.
---------------------------------------------------------------------------

a. Comments on the Standard of Review To Accept Filings of Form ATS-N
    The determination of whether to reject a Form ATS-N filing is 
separate from the Commission's determination to declare a filed Form 
ATS-N ineffective after Commission review. We received one comment 
regarding the process pursuant to which a Form ATS-N would be accepted 
for Commission review.\317\ The commenter states that the Commission 
should not review a Form ATS-N filing for accuracy and completeness in 
connection with accepting a Form ATS-N filing, but rather that such 
review should be conducted when the Commission is considering whether 
to declare the Form ATS-N effective or ineffective.\318\ The commenter 
states that the Commission's standards for accepting a Form ATS-N 
should be clear and objective, and Form ATS-N should be rejected only 
for purely ``technical deficiencies.'' \319\
---------------------------------------------------------------------------

    \317\ See SIFMA Letter at 28.
    \318\ See id.
    \319\ See id.
---------------------------------------------------------------------------

    As proposed, the Instructions to Form ATS-N required that ``[a]n 
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.'' \320\ In the 
Proposal, we stated that ``a Form ATS-N that contains technical 
deficiencies, such as missing pages or one in which the entity does not 
respond to all questions, including sub-questions, would not be 
complete and would be returned to the NMS Stock ATS.'' \321\
---------------------------------------------------------------------------

    \320\ See proposed Instructions to Form ATS-N. As adopted, the 
Instructions to Form ATS-N state that: ``An NMS Stock ATS must 
provide all the information required by Form ATS-N, including 
responses to each Item, as applicable, and the Exhibits, and 
disclose information that is accurate, current and complete. . . . A 
filing that is defective may be rejected and not accepted by the 
EDGAR system. Any filing so rejected shall be deemed not to have 
been filed.'' The Instructions to Form ATS-N replace the proposed 
cite to 17 CFR 240.0-3 under the Exchange Act, which applies to 
paper filings, with a cite to Regulation S-T, which applies to 
electronic filings, because the form will be electronically filed 
via EDGAR. See Instructions to Form ATS-N. Because Form ATS-N will 
be electronically filed, we do not believe it is necessary to return 
a copy of Form ATS-N filings and are therefore replacing the word 
``returned'' with ``rejected'' to specify this.
     We are also modifying the Instructions to Form ATS-N to delete 
the phrase: ``and must present the information in a clear and 
comprehensible manner.'' See Instructions to Form ATS-N. This 
modification to the Instructions to Form ATS-N will streamline the 
instructions by removing confusing language relating to the 
Commission's standard of review, but will not modify an NMS Stock 
ATS's obligations with respect to Form ATS-N. Additionally, the 
Commission has reorganized the Instructions to differentiate between 
an NMS Stock ATS's filing obligations, and the consequences of 
incompleteness or similar deficiency.
     We are modifying our guidance and the rule text for 
determinations of ineffectiveness, and believe these modifications 
to the Instructions to Form ATS-N better align them with that 
guidance and adopted rule text and reduce any potential confusion 
about the difference between an NMS Stock ATS's obligations with 
respect to completing Form ATS-N and the standard of review that the 
Commission will apply when determining whether to declare a Form 
ATS-N ineffective. See infra Section IV.A.3.d. See also infra 
Section V.A.1 (discussing the Form ATS-N disclosure requirements).
    \321\ See Proposal, supra note 2, at 81024 n.284.
---------------------------------------------------------------------------

    We believe that it would be appropriate to reject a Form ATS-N if 
the filing is defective.\322\ For example, a Form ATS-N is defective if 
it is missing sections or missing responses to any questions, including 
sub-questions, or does not comply with the electronic-filing 
requirements. A decision to reject a Form ATS-N filing, and not accept 
it for review, would be for reasons distinct from Commission review 
pursuant to Rule 304(a)(1)(iii), as discussed below. The rejection of a 
Form ATS-N would not prejudice any decision by the Commission regarding 
ineffectiveness should the NMS Stock ATS resubmit a Form ATS-N.\323\ An 
NMS Stock ATS also may choose to withdraw a filed Form ATS-N.\324\ The 
Commission will apply the same standard when determining whether to 
accept an amendment to Form ATS-N for review or reject the filing.
---------------------------------------------------------------------------

    \322\ See 17 CFR part 232.
    \323\ Proposal, supra note 2, at 81024 n.284.
    \324\ See id.
---------------------------------------------------------------------------

b. Comments on the Review for Declarations of Ineffectiveness
    We proposed that the Commission will declare effective a Form ATS-N 
if the NMS Stock ATS qualifies for the Rule 3a1-1(a)(2) exemption, and 
will declare it ineffective if it finds, after notice and opportunity 
for hearing, that such action is necessary or appropriate in the public 
interest, and is consistent with the protection of investors.\325\ We 
discussed in the Proposal that the Commission would use Form ATS-N to 
evaluate whether an entity qualifies for the exemption, and would 
evaluate, among other things, whether the entity satisfies the 
definition of NMS Stock ATS.\326\ We also discussed our preliminary 
beliefs regarding when it would be necessary or appropriate in the 
public interest to declare ineffective

[[Page 38792]]

a Form ATS-N, and provided examples.\327\ We stated that it would be 
necessary and appropriate in the public interest to declare a Form ATS-
N ineffective if the Commission finds, after notice and opportunity for 
hearing, that: An entity does not meet the definition of NMS Stock ATS; 
one or more disclosures on Form ATS-N are materially deficient with 
respect to their accuracy, currency or completeness; or one or more 
disclosures reveal non-compliance with federal securities laws, or the 
rules and regulations thereunder, including Regulation ATS.\328\ We 
also stated that a declaration of effectiveness would not constitute a 
finding that the NMS Stock ATS's operations are consistent with the 
Exchange Act, but rather only address the issue of whether the NMS 
Stock ATS had complied with the requirements of Form ATS-N.\329\
---------------------------------------------------------------------------

    \325\ See proposed Rule 303(a)(1)(iii).
    \326\ See Proposal, supra note 2, at 81024.
    \327\ See id. at 81024-81026.
    \328\ See id.
    \329\ See id. at 81026. With respect to compliance with federal 
securities laws, we stated that the Commission's evaluation would 
involve a ``red-flag'' review of the Form ATS-N disclosures. See id. 
at 81025. With respect to whether an entity meets the definition of 
NMS Stock ATS, we stated our preliminary belief that 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. See id. at 81024 n.288 and accompanying text.
---------------------------------------------------------------------------

    We received several comments regarding the standard that the 
Commission would apply to declare a Form ATS-N effective or 
ineffective. One commenter asserts that it would be helpful to have the 
Commission review initial Forms ATS-N for completeness and accuracy, 
and legal and regulatory compliance, and to help standardize the level 
of disclosure across NMS Stock ATSs.\330\ Another commenter urges the 
Commission to move forward with the effectiveness determination as 
proposed.\331\ This commenter states that market participants will use 
the 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, and that it is important that the detailed information be 
accurate, current, and complete.\332\ This commenter also states that 
the Commission should be able to conduct a ``red flag'' review of the 
disclosures for apparent non-compliance with the federal securities 
laws, and avoid having a noncompliant NMS Stock ATS begin operation 
with inadequate system operations; this commenter states that while not 
affording complete certainty, this review process would be an 
improvement over the review process for Form ATS.\333\ Further, the 
commenter states that the notice and hearing process will furnish the 
industry with useful information regarding specific regulatory concerns 
and questions.\334\ One commenter expresses concern that the Commission 
would lack objective standards to evaluate initial Forms ATS-N and 
amendments.\335\ Another commenter believes that in the Proposal, the 
Commission did not articulate a ``consistent standard of review'' for 
declaring a Form ATS-N or Form ATS-N amendment effective or 
ineffective.\336\ The commenter expresses its view that the standard 
for declaring a Form ATS-N ineffective should be only if the Form ATS-N 
is ``materially deficient with respect to completeness,'' \337\ 
asserting that criteria such as currency, accuracy, and fair 
presentation are subjective standards that could make it difficult for 
NMS Stock ATSs to understand the level of disclosure necessary to 
satisfy the Commission's review requirements, and therefore require 
extended discussion with the Commission.\338\ Further, the commenter 
believes that such subjective standards would be difficult to 
standardize in application from firm to firm, would complicate the 
Commission's review of Form ATS-N, and are unnecessary to increase the 
operational transparency of NMS Stock ATSs and to ensure a consistent 
level of information regarding NMS Stock ATSs is available to market 
participants.\339\ The commenter believes that the rule's directives to 
consider whether to declare a Form ATS-N ineffective would provide the 
Commission with flexibility to determine whether declaring a Form ATS-N 
ineffective is ``necessary or appropriate in the public interest'' and 
``consistent with the protection of investors,'' and therefore that 
including additional subjectivity in the Commission's standard is 
unnecessary.\340\ The commenter believes that NMS Stock ATSs would have 
other incentives to ensure the accuracy of their Forms ATS-N.\341\
---------------------------------------------------------------------------

    \330\ See MFA/AIMA Letter at 4.
    \331\ See Investor Advocate Letter at 11.
    \332\ See id.
    \333\ See id.
    \334\ See id. We agree with the commenter and intend to help 
market participants understand the reason the Form ATS-N was 
declared ineffective by explaining the Commission's reasoning for 
the ineffective declaration in the Commission order. See supra 
Section IV.A.3.d.
    \335\ See LeveL ATS Letter at 8-9.
    \336\ See SIFMA Letter at 32.
    \337\ See id.
    \338\ See id. at 33.
    \339\ See id.
    \340\ See id.
    \341\ See id.
---------------------------------------------------------------------------

    This commenter also states that the Commission should only find a 
disclosure to be ``materially deficient'' with respect to the accuracy, 
currency, and completeness in an ``extreme situation, not a 
circumstance where additional color or language might be viewed as 
preferable to a disclosure as filed,'' and asserts that a response that 
is facially responsive to a question on Form ATS-N should be deemed 
sufficient.\342\ This commenter agrees with the examples of 
``materially deficient'' disclosures that the Commission provided in 
the Proposal, but also requests that the Commission provide examples of 
``disclosures that would not be viewed as materially deficient.'' \343\ 
Additionally, this commenter states that if the Commission declares an 
initial Form ATS-N or amendment ineffective, it should provide the NMS 
Stock ATS with a clear written statement of the reasons for the 
declaration.\344\ The commenter urges the Commission to provide clarity 
and practical guidance around its expectations on declaring Form ATS-N 
filings effective.\345\ Another commenter raises concerns that the 
process for declaring Form ATS-N effective or ineffective may result in 
the Commission staff undertaking merit-based reviews of the disclosures 
on Form ATS-N that could be used to delay the effectiveness of NMS 
Stock ATSs whose features, ``while meeting regulatory requirements, do 
not meet current industry norms.'' \346\
---------------------------------------------------------------------------

    \342\ See id. at 30.
    \343\ See id. at 30 (emphasis in original). See also Proposal, 
supra note 2, at 81025. Another commenter states that it recognizes 
the difficulty associated with identifying every potential scenario 
that might cause a Form ATS-N to be declared ineffective, but 
requests that the Commission provide additional guidance to ensure 
that NMS Stock ATS operators understand the standard to be applied. 
See LeveL ATS Letter at 9.
    \344\ See SIFMA Letter at 30.
    \345\ See id.
    \346\ See Fidelity Letter at 2, 9. This commenter requests that 
the Commission implement a ``completeness review'' under which the 
Commission would review responses to Form ATS-N for completeness and 
consistency without considering the merits of each answer. The 
commenter also requests that the Commission provide additional 
guidance with respect to the process by which it could declare a 
Form ATS-N ineffective, and questions how review by Commission staff 
of initial filings will be undertaken to ensure consistency across 
Form ATS-N filings. See id. at 9.
---------------------------------------------------------------------------

    We believe 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, for example, the Commission finds, after 
notice and opportunity for hearing, the Form ATS-N was filed by an 
entity that does not meet the definition of NMS Stock ATS; one or more 
disclosures reveal non-compliance

[[Page 38793]]

with federal securities laws, or the rules or regulations thereunder, 
including Regulation ATS; or one or more disclosures on Form ATS-N are 
materially deficient with respect to their completeness or 
comprehensibility.\347\ We are providing additional examples of when, 
depending on the facts and circumstances, the Commission may make such 
a finding.\348\ In response to comments regarding the scope of the 
Commission's review of initial Form ATS-N filings and the standard to 
be applied for declarations of ineffectiveness, we are making clear 
that the Commission will not be conducting a merit-based review.\349\
---------------------------------------------------------------------------

    \347\ See infra Section IV.A.3.d.
    \348\ See id.
    \349\ See infra notes 404-407 and accompanying text.
---------------------------------------------------------------------------

c. Effectiveness, Ineffectiveness Process
    The Commission received comments about the proposed process by 
which a Form ATS-N would become effective or ineffective, including the 
potential implications of the proposed process. One commenter expresses 
concern that a declaration of effectiveness may give market 
participants a false sense of security that the Commission's deeming an 
NMS Stock ATS's Form ATS-N ``effective'' will be tantamount to the 
Commission's approval of an ATS's operations on the merits, as market 
participants may not fully understand that a declaration of 
effectiveness only implies that the NMS Stock ATS has met the Form ATS-
N filing requirements, and that the Commission is not approving the 
merits of the NMS Stock ATS's operations or conflicts of interest. 
\350\ The commenter believes that such mistaken belief could cause 
market participants to route orders to venues that are not in their 
best interests.\351\ Another commenter states that there is the danger 
that the Commission review process would encourage market complacency, 
and that the Commission, through guidance in this adopting release and 
continuing investor education, should help to ensure that: (1) 
Investors understand that such a determination would not constitute a 
finding that the NMS Stock ATS's operations are necessarily consistent 
with the Exchange Act; and (2) operators of NMS Stock ATSs understand 
that the determination would not preclude the Commission from later 
determining that an NMS Stock ATS has violated federal securities 
laws.\352\
---------------------------------------------------------------------------

    \350\ See Consumer Federation of America Letter at 2, 10-11.
    \351\ See id. at 11.
    \352\ See Investor Advocate Letter at 12. See also supra note 
340 and accompanying text. Pursuant to Rule 304(a)(1)(iii) the 
Commission will issue an order declaring an initial Form ATS-N 
filing ineffective if it finds, after notice and opportunity for 
hearing, that such action is necessary or appropriate in the public 
interest, and is consistent with the protection of investors if, for 
example, the Form ATS-N was filed by an entity that does not meet 
the definition of NMS Stock ATS; one or more disclosures reveal non-
compliance with federal securities laws, or the rules or regulations 
thereunder, including Regulation ATS; or the disclosures are 
materially deficient with respect to completeness or 
comprehensibility.
---------------------------------------------------------------------------

    We also received two comments about an NMS Stock ATS potentially 
using a declaration of effectiveness to shield itself from potential 
liability.\353\ Both express concern that, although the Proposal 
explains that a declaration of effectiveness is not an ``approval'' of 
Form ATS-N, the process could be used to inappropriately inoculate NMS 
Stock ATS operators from liability.\354\ One of these commenters states 
that its concern is heightened by a recent court decision in which the 
court found that the Commission's review and approval of exchanges' 
activities made the activities legal.\355\ One commenter believes that 
a declaration of ineffectiveness will ``sound the death knell'' for an 
NMS Stock ATS and that the opportunity to file a new Form ATS-N would 
be of no practical value because the marketplace would not use the 
ATS.\356\
---------------------------------------------------------------------------

    \353\ See HMA Letter at 8; Consumer Federation of America Letter 
at 11.
    \354\ See id.
    \355\ See HMA Letter at 8.
    \356\ See Fidelity Letter at 9.
---------------------------------------------------------------------------

    While we do not believe that providing a process by which Form ATS-
N filings will become effective or ineffective \357\ would risk 
misleading market participants about the kind of review that will be 
undertaken by the Commission,\358\ we are modifying the process for 
initial Form ATS-N filings to become effective, to mitigate any such 
risk. Accordingly, the Commission will not declare initial Form ATS-N 
filings effective pursuant to Rule 304(a)(1)(iii). Further, the 
Commission will only declare ineffective an initial 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. An initial Form ATS-N, as amended, will 
become effective, unless declared ineffective, upon the earlier of 
completion of review by the Commission and publication pursuant to Rule 
304(b)(2), or the expiration of the review period, or, if applicable, 
the extended review period. Unlike proposed rule changes filed by 
national securities exchanges, the Commission will not make affirmative 
findings about Form ATS-N filings with regard to consistency with the 
Exchange Act in the general course of the review of Form ATS-N 
filings.\359\ As discussed below, the Commission's review will not 
focus on the merits of the Form ATS-N disclosures, such as determining 
the strengths and weaknesses of the trading platform or a protocol 
offered by the NMS Stock ATS, nor is the Commission making findings 
regarding whether the means by which orders will interact on the 
trading platform are consistent with certain provisions of the Exchange 
Act.\360\ If disclosures on Form ATS-N reveal non-compliance with 
federal securities laws or the rules and regulations thereunder, 
however, the Commission may find that it is appropriate to declare the 
filing ineffective. We believe that the scope of the Commission's 
review is clear and that the benefits of the Commission review process 
for Form ATS-N filings justify any risk that market participants 
misunderstand that the Commission is not performing a merit review of 
Form ATS-N. We further believe that adopting a process for initial Form 
ATS-N filings to become effective without the Commission affirmatively 
declaring them effective by order will help signal to market 
participants that the Commission is not passing on the merits of the 
NMS Stock ATSs' disclosures regarding their operations. Even if we 
assume that a declaration of ineffectiveness will ``sound the death 
knell,'' as suggested by a commenter,\361\ or result in reputational 
harm to an NMS Stock ATS, the process for declaring a Form ATS-N filing 
ineffective will be consistent with the Commission's objective to 
protect investors and the public interest and will provide NMS Stock 
ATSs with opportunities to avoid or mitigate such a declaration. An NMS 
Stock ATS would be given notice and an opportunity for hearing to 
respond to the Commission's concerns. A non-Legacy NMS Stock ATS would 
also have the option of withdrawing and subsequently refiling its Form 
ATS-N. In addition, during the Commission review period, both non-
Legacy NMS Stock ATSs and Legacy NMS Stock ATSs can amend their initial 
Form ATS-N to cure potential deficiencies. Additionally, if the 
Commission does

[[Page 38794]]

declare an initial Form ATS-N ineffective, the NMS Stock ATS will have 
an opportunity to revise its disclosures, or change its operations, and 
subsequently file a new initial Form ATS-N, and such filing could 
become effective.
---------------------------------------------------------------------------

    \357\ See Rule 304(a)(1)(iii).
    \358\ See Consumer Federation of America Letter at 2, 10.
    \359\ See supra note 405.
    \360\ See infra notes 404-407 and accompanying text.
    \361\ See supra note 356.
---------------------------------------------------------------------------

    In addition, one commenter argues that a Form ATS-N should be 
considered ineffective upon filing until the Commission affirmatively 
declares it effective or ineffective.\362\ However, this commenter also 
recommends that if the Commission fails to declare a Form ATS-N 
effective or ineffective within the 120-calendar day review period, or 
does not extend the review period, the ``default decision'' should be 
that the Form ATS-N is declared effective.\363\ We believe that it 
would be appropriate for an initial Form ATS-N to become effective if 
the Commission does not declare, by order, the filing ineffective 
during the initial review period, or in the case of an extended review 
period, during the extended period, to provide certainty about timing 
of the Commission's review to the NMS Stock ATS and to market 
participants. Providing for an initial Form ATS-N filed by a Legacy NMS 
Stock ATS to become effective in this manner will allow the Legacy NMS 
Stock ATS to continue to operate without disruption to its subscribers 
(provided the Commission does not declare the Form ATS-N 
ineffective).\364\ Considering an initial Form ATS-N ineffective upon 
filing, before the Commission has completed the review, as suggested by 
a commenter, would cause a Legacy NMS Stock ATS to stop operating, 
which may harm the market participants that currently use the services 
on the Legacy NMS Stock ATS. Once an initial Form ATS-N is effective, 
Rule 304(a)(4) provides a process for the Commission to suspend, limit, 
or revoke the exemption for the NMS Stock ATS. Given this change in the 
effectiveness determination process, we do not believe that requiring 
that an initial Form ATS-N filing be considered ineffective upon filing 
would provide any additional benefit, because an NMS Stock ATS (except 
for a Legacy NMS Stock ATS) may not operate pursuant to the conditions 
of the Rule 3a1-1(a)(2) exemption unless its Form ATS-N has become 
effective, pursuant to Rule 304(a)(1)(iii).
---------------------------------------------------------------------------

    \362\ See CFA Institute Letter at 5.
    \363\ See id. at 4.
    \364\ See Rule 304(a)(1)(iv)(A). See also infra Section IV.A.4.a 
(discussing the initial Form ATS-N requirements for Legacy NMS Stock 
ATSs).
---------------------------------------------------------------------------

d. Effectiveness; Ineffectiveness Determinations Under Rule 
301(a)(1)(iii)
    We are adopting Rule 304(a)(1)(iii) with modifications, and 
relocating most of proposed Rule 304(a)(1)(iv), with 
modifications,\365\ to adopted Rule 304(a)(1)(iii) (``Effectiveness; 
Ineffectiveness determination''). For the reasons described above, we 
are modifying Rule 304(a)(1)(iii) to provide that an initial Form ATS-N 
filed by an NMS Stock ATS, as amended,\366\ will become effective, 
unless declared ineffective, upon the earlier of: (1) The completion of 
review by the Commission and publication pursuant to Rule 304(b)(2)(i), 
or (2) the expiration of the review period, or, if applicable, the end 
of the extended review period, pursuant to Rule 304(a)(1)(ii). Rule 
304(a)(1)(iii) will further provide that the Commission will, by order, 
declare ineffective an initial 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.\367\
---------------------------------------------------------------------------

    \365\ See infra note 368 and accompanying text.
    \366\ We are adopting a process that allows NMS Stock ATSs to 
file an updating and correcting amendment to an initial Form ATS-N 
during the Commission review period. See supra Section IV.A.2. We 
are adding to Rule 304(a)(1)(iii) that an initial Form ATS-N ``as 
amended'' will become effective, which includes any amendments filed 
to the initial Form ATS-N during the Commission review period. 
Amendments filed by an NMS Stock ATS to an initial Form ATS-N during 
the Commission review period are subject to Rule 304(a)(2)(ii), 
which provides that the Commission will, by order, declare 
ineffective any Form ATS-N amendment no later than 30 calendar days 
from filing with the Commission. The Commission will have 30 
calendar days to declare any amendments ineffective, including 
amendments to Form ATS-N that are filed during the Commission review 
period. For example, if an NMS Stock ATS files an updating or 
correcting amendment to an initial Form ATS-N on calendar day 110 of 
the Commission review period, and the initial Form ATS-N becomes 
effective on calendar day 120, the updating or correcting amendment 
could be declared ineffective by the Commission up to an additional 
20 calendar days after the initial Form ATS-N becomes effective--
until the Commission's 30-calendar day review period has expired.
    \367\ We are also making technical changes to the proposed text 
of Rule 304(a)(1)(iii) by adding to Rule 304(a)(1)(iii) the word 
``initial'' before Form ATS-N and renaming the paragraph as 
``Effectiveness; Ineffectiveness determination.''
     In the Proposal, we stated 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. See Proposal, supra note 
2, at 81025. As discussed further below, we are modifying the 
proposed guidance regarding when it may be necessary or appropriate 
to declare a Form ATS-N ineffective.
     We are also modifying the Instructions to Form ATS-N to better 
align them with that guidance, and to reduce any potential confusion 
about the difference between an NMS Stock ATS's obligations with 
respect to completing Form ATS-N and the standard of review that the 
Commission will apply when determining whether to declare a Form 
ATS-N ineffective. See supra note 320.
     The same standard for declarations of ineffectiveness will 
apply to filings of both initial Form ATS-N and Form ATS-N 
amendments. See infra Section IV.B.2.
---------------------------------------------------------------------------

    We are also relocating two provisions of proposed Rule 
304(a)(1)(iv), with non-substantive modifications,\368\ to adopted Rule 
304(a)(1)(iii). As a result, Rule 304(a)(1)(iii) states that if the 
Commission declares an initial Form ATS-N ineffective, the NMS Stock 
ATS shall be prohibited from operating as an NMS Stock ATS pursuant to 
Sec.  240.3a1-1(a)(2); and that an initial Form ATS-N declared 
ineffective does not prevent the NMS Stock ATS from subsequently filing 
a new Form ATS-N. We believe Rule 304(a)(1)(iii), as modified, clearly 
explains when an initial Form ATS-N will become effective or declared 
ineffective, and the consequences of an order of ineffectiveness. 
Accordingly, an NMS Stock ATS whose initial Form ATS-N has become 
effective may commence operations and will be required to comply with 
Rule 304 as well as applicable provisions of Rules 300 through 303 of 
Regulation ATS. An NMS Stock ATS whose initial Form ATS-N was declared 
ineffective would be prohibited from operating pursuant

[[Page 38795]]

to the Rule 3a1-1(a)(2) exemption. Similarly, a Legacy NMS Stock ATS 
whose initial Form ATS-N was declared ineffective would no longer be 
eligible for the Rule 3a1-1(a)(2) exemption and would be required to 
cease operations.\369\ If the Commission declares an initial Form ATS-N 
ineffective, the NMS Stock ATS that filed the form could subsequently 
file a new Form ATS-N for Commission consideration.
---------------------------------------------------------------------------

    \368\ We are deleting the following language, which was part of 
proposed Rule 304(a)(1)(iv): ``The Commission will issue an order to 
declare a Form ATS-N effective or ineffective.'' This is addressed 
in the adopted rule text stating that ``[a]n initial Form ATS-N, as 
amended, filed by an NMS Stock ATS will become effective, unless 
declared ineffective, upon the earlier of: (1) [T]he completion of 
review by the Commission and publication pursuant to paragraph 
(b)(2)(i) of [Rule 304] or (2) [t]he expiration of the review 
period, or, if applicable, the end of the extended review period, 
pursuant to paragraph (a)(1)(ii) of [Rule 304]'' and that ``[t]he 
Commission will, by order, declare an initial Form ATS-N ineffective 
if it finds, after notice and opportunity for hearing, that such 
action is necessary and appropriate in the public interest, and is 
consistent with the protection of investors.'' See Rule 
304(a)(1)(iii)(B). In addition, we are not adopting the language 
that states ``[u]pon the effectiveness of the Form ATS-N, the NMS 
Stock ATS may operate pursuant to the conditions of this section'' 
or language that states ``[i]f the Commission declares an initial 
Form ATS-N effective, the NMS Stock ATS may operate pursuant to the 
conditions of this section'' for purposes of clarity and 
readability. Rule 304(a)(1)(i) provides that an initial Form ATS-N 
must be effective for the NMS Stock ATS to avail itself of the Rule 
3a1-1(a)(2) exemption (see supra Section IV.A.1), and Rule 
304(a)(1)(iii) specifies when an initial Form ATS-N filing will 
become effective. Rule 304(a)(1)(iii) also states that: (1) if the 
Commission declares an initial Form ATS-N ineffective, the NMS Stock 
ATS shall be prohibited from operating as an NMS Stock ATS 
``pursuant to Sec.  240.3a1-1(a)(2);'' and (2) an initial Form ATS-N 
declared ineffective ``does'' not (rather than ``would'' not) 
prevent the NMS Stock ATS from subsequently filing a new Form ATS-N.
    \369\ The initial filing of Form ATS-N by Legacy NMS Stock ATSs 
is discussed further below. See infra Section IV.A.4.a.
---------------------------------------------------------------------------

    In the Proposal, we provided certain examples of scenarios in which 
we believed 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, after notice and opportunity for 
hearing.\370\ We continue to believe that the examples provided in the 
Proposal are appropriate for the Commission to declare a Form ATS-N 
ineffective and will provide NMS Stock ATSs and market participants 
with clarity with respect to when the Commission could find, after 
notice and opportunity for hearing, it necessary or appropriate in the 
public interest, and consistent with the protection of investors, to 
declare ineffective a Form ATS-N. We are also providing additional 
clarity with respect to this guidance.
---------------------------------------------------------------------------

    \370\ See Proposal, supra note 2, at 81024-26.
---------------------------------------------------------------------------

    Several commenters request additional guidance and clarity 
regarding the Commission's review of initial Form ATS-N filings and 
Form ATS-N amendments and the circumstances under which the Commission 
may declare a Form ATS-N ineffective.\371\ We believe 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 the 
Commission finds, for example, after notice and opportunity for 
hearing, the Form ATS-N was filed by an entity that does not meet the 
definition of NMS Stock ATS; one or more disclosures reveal non-
compliance with federal securities laws, or the rules or regulations 
thereunder, including Regulation ATS; or one or more disclosures on 
Form ATS-N are materially deficient with respect to their completeness 
or comprehensibility. Given that the objective of Rule 304 is to 
provide market participants with information about NMS Stock ATSs 
through Form ATS-N disclosures, our review is designed to focus on the 
Form ATS-N disclosures and is not a merit-based review of the 
operations of the NMS Stock ATS or the ATS-related activities of the 
broker-dealer operator.\372\
---------------------------------------------------------------------------

    \371\ See supra notes 343, 345, and 346 and accompanying text. 
See also supra notes 335-340 and accompanying text discussing 
commenter concerns regarding whether the Commission articulated an 
objective or consistent standard of review.
    \372\ See infra notes 404-407 and accompanying text.
---------------------------------------------------------------------------

    We believe \373\ that it would be necessary to declare ineffective 
a Form ATS-N if the Form ATS-N was filed by an entity that does not 
satisfy the definition of ATS, and more specifically, the definition of 
NMS Stock ATS.\374\ The 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.\375\ We believe that 
the review of Form ATS-N disclosures will help 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.
---------------------------------------------------------------------------

    \373\ See Proposal, supra note 2, at 81024-81025.
    \374\ See Rule 300(k).
    \375\ For example, an ATS that is not an NMS Stock ATS would be 
subject to different conditions under Regulation ATS 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 a national 
securities exchange. See Proposal, supra note 2, at 81024 n.288 and 
accompanying text.
---------------------------------------------------------------------------

    We believe that it would be necessary to declare Form ATS-N 
ineffective if one or more disclosures reveal non-compliance with 
federal securities laws, including Regulation ATS. As discussed in the 
Proposal,\376\ the Commission will conduct a ``red-flag'' review for 
instances of non-compliance with federal securities laws that seem 
apparent from the disclosures on 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.\377\ Section 15(b)(8) of the Exchange 
Act \378\ 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 
\379\ 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 and comply with the rules of the SRO, including 
obtaining approval by the SRO to operate an ATS in accordance with 
applicable SRO rules. 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.\380\ 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) of the 
Exchange Act 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,\381\ and the Commission's order granting broker-dealer 
registration would not be effective.\382\ As another example, if the 
Form ATS-N reveals non-compliance with Regulation NMS, including, among 
other provisions, Rule 612, 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,\383\ the Form ATS-
N would not be consistent with Rule 304 because the NMS Stock ATS would 
operate in a manner that may violate the federal securities laws.
---------------------------------------------------------------------------

    \376\ See Proposal at 81025-26.
    \377\ 17 CFR 242.301(b)(1).
    \378\ 15 U.S.C. 78o(b)(8).
    \379\ 15 U.S.C. 78o-3.
    \380\ See 17 CFR 301(b)(1). Rule 301(b)(1) of Regulation ATS 
requires an ATS to register as a broker-dealer under Section 15 of 
the Exchange Act.
    \381\ See 15 U.S.C. 78o(b)(1).
    \382\ See 17 CFR 242.301(b)(1).
    \383\ 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).
---------------------------------------------------------------------------

    We believe that it would be necessary to declare Form ATS-N 
ineffective if one or more disclosures are materially deficient with 
respect to their completeness and comprehensibility. The following are 
non-exhaustive examples of Form ATS-N disclosures that may be deficient 
with respect to

[[Page 38796]]

their completeness: \384\ 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; \385\ an NMS 
Stock ATS describes some of its priority rules, but fails to describe 
conditions or exceptions to its priority rules, or fails to describe 
any priority overlays; \386\ an NMS Stock ATS, in response to Part II, 
Item 1 of adopted Form ATS-N, discloses that a principal trading desk 
of the broker-dealer operator trades on the NMS Stock ATS, but does not 
explain advantages the broker-dealer operator receives compared to 
other subscribers; an NMS Stock ATS, in response to Part III, Item 19 
of adopted Form ATS-N, fails to provide complete information about fees 
and rebates charged for use of the NMS Stock ATS; an NMS Stock ATS 
discloses that it 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 ATS in fact has several classes 
of subscribers; or an NMS Stock ATS discloses that it has two classes 
of subscribers that are charged the same trading fees, but the 
Commission or its staff learns through discussions with the ATS or 
otherwise that in fact one class receives more favorable fees than the 
other.\387\
---------------------------------------------------------------------------

    \384\ These are some, but not all, of the types of circumstances 
that could result in the Commission declaring a Form ATS-N 
ineffective due to being materially deficient with respect to 
completeness. We also provided some of these examples in the 
Proposal as examples of disclosures 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. See Proposal, 
supra note 2, at 81025. Because we are modifying the standard of 
review to focus on completeness and comprehensibility, some of the 
examples discussed in the Proposal are also discussed below to show 
application of the standard the Commission is adopting to the same 
scenarios.
    \385\ This example was discussed in the Proposal as an example 
of a disclosure that may be materially deficient because it may not 
be sufficiently detailed. See Proposal, supra note 2, at 81025.
    \386\ See id. Another example would be if the NMS Stock ATS 
fails to describe which order would receive priority where two or 
more orders are otherwise on par, such as a situation in which a 
customer and non-customer order are at the same price in a price 
priority system.
    \387\ These examples were discussed in the Proposal as examples 
of disclosures that may be materially deficient because they would 
not be accurate. See Proposal, supra note 2, at 81025.
---------------------------------------------------------------------------

    The following are non-exhaustive examples of Form ATS-N disclosures 
that may be deficient with respect to their comprehensibility: \388\ 
Form ATS-N includes inconsistent information among the disclosures, 
such as a statement by the NMS Stock ATS in one part of the form that 
the ATS uses private feeds to calculate the NBBO but in another part of 
the form indicates that it uses the SIP; \389\ the NMS Stock ATS states 
in one part of Form ATS-N that it does not segment its orders but 
provides a description in another part of the Form ATS-N that indicates 
that the ATS offers a functionality that allows institutional investors 
to limit their trading activity to interactions with other 
institutional investors; the Form ATS-N disclosures indicate that the 
NMS Stock ATS uses time/price priority to execute orders but provides 
an example that demonstrates an order received before an identically 
priced order does not receive priority over the later order; or the NMS 
Stock ATS states in one part of the Form ATS-N that it provides certain 
order types, transacts in certain types of securities, or provides 
access to certain classes of subscribers, and there is contrary 
disclosure in other parts of the Form ATS-N.
---------------------------------------------------------------------------

    \388\ These are some, but not necessarily all, of the types of 
circumstances that could result in the Commission declaring a Form 
ATS-N ineffective due to being materially deficient with respect to 
comprehensibility.
    \389\ In the Proposal, this was provided as an example of a 
disclosure that may be materially deficient because it may not be 
accurate; however, inconsistent disclosures in a Form ATS-N also may 
render disclosures unclear as to which rule or procedure, for 
example, controls and how the NMS Stock ATS intends to operate. See 
Proposal, supra note 2, at 81025. Depending on the facts and 
circumstances, inconsistent or contradictory disclosures in a Form 
ATS-N may be materially deficient with respect to comprehensibility.
---------------------------------------------------------------------------

    We do not agree with the commenter that believes that the term 
materially deficient should be understood to represent only ``extreme 
situation[s].'' \390\ The Commission review will focus on whether the 
lack of completeness or comprehensibility in a Form ATS-N disclosure 
would prevent market participants from understanding an ATS's 
operations or the ATS-related activities of its broker-dealer operator 
or its affiliates. We believe that subscribers and market participants 
will rely on Form ATS-N disclosures to understand and evaluate the 
operations of the NMS Stock ATS and conflicts of interest that may 
arise from the ATS-related activities of the broker-dealer operator and 
its affiliates and use this information to help determine where to 
route their orders, or the orders of their customers. We believe that a 
disclosure on Form ATS-N that is materially deficient with respect to 
its completeness or comprehensibility could mislead market participants 
or impede their ability to understand an NMS Stock ATS's operations, or 
the ATS-related activities of its broker-dealer operator, which would 
frustrate the purpose of the transparency goals of this rulemaking. We 
do not believe that it would be practical, as one commenter 
suggests,\391\ to provide examples of disclosures that the Commission 
would not view as materially deficient because the context of each 
disclosure is crucial to determining whether a disclosure is complete 
and comprehensible. Whether a disclosure deficiency is material depends 
on the facts and circumstances, as does whether the deficiency would 
support a finding that the deficiency is such that a declaration of 
ineffectiveness would be in the public interest and consistent with the 
protection of investors.
---------------------------------------------------------------------------

    \390\ See supra note 342 and accompanying text.
    \391\ See supra note 343 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, one commenter questions how the Commission's 
review will be undertaken to help ensure consistency across filings 
when initial Form ATS-N filings are made ``without any prior knowledge 
of the detail the Commission expects,'' \392\ and another states that 
it ``would be helpful'' to have the Commission review initial filings 
to, among other things, help ``standardize the level of disclosure 
across NMS Stock ATSs.'' \393\ We have revised Form ATS-N in a number 
of ways in response to comments. For instance, we added more ``yes'' or 
``no'' questions, separated questions into distinct subject matter 
categories, provided additional examples as guidance, and made requests 
more explicit for more targeted responses.\394\ These changes to Form 
ATS-N are designed to better inform NMS Stock ATSs of the requirements 
of Form ATS-N and to solicit more consistent responses from NMS Stock 
ATSs. However, NMS Stock ATSs operate differently, and with different 
complexities, and use different terms to describe their systems. While 
this could lead to different levels of disclosures among ATSs, we 
believe that the combination of refinements to the form, and the 
Commission's review of all Forms ATS-N filed by Legacy NMS Stock ATSs 
during the same period of time, will assist the Commission in providing 
a consistent level of comment on the forms that will help facilitate a 
more consistent and standard level of information disclosed across NMS 
Stock ATSs.
---------------------------------------------------------------------------

    \392\ See Fidelity Letter at 9. See also supra note 346.
    \393\ See MFA/AIMA Letter at 4. See also supra note 330 and 
accompanying text.
    \394\ See infra Section V (discussing modifications to Proposed 
Form ATS-N).

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

[[Page 38797]]

    Any order declaring a Form ATS-N ineffective will require the 
Commission to find that such action is necessary or appropriate in the 
public interest, and consistent with the protection of investors. Rule 
304(a)(1)(iii) provides that the Commission must provide notice to the 
NMS Stock ATS and provide an opportunity for a hearing. As such, an NMS 
Stock ATS will have the opportunity to be heard before the Commission 
declares its Form ATS-N ineffective.
    As discussed above, we do not agree with a commenter's suggestion 
that a Form ATS-N be considered ineffective upon filing.\395\ We also 
do not agree with the comment that a declaration of ineffectiveness of 
a Form ATS-N will prejudice an entity such that a revised filed Form 
ATS-N will have no practical value.\396\ We anticipate a dialogue 
between Commission staff and the NMS Stock ATS regarding the Form ATS-N 
disclosures and an NMS Stock ATS will have the opportunity to amend its 
initial Form ATS-N during the Commission review period. If a Form ATS-N 
is declared ineffective by the Commission, the Commission's order will 
provide the basis for the declaration of ineffectiveness, and the NMS 
Stock ATS will have the opportunity to file another Form ATS-N that 
addresses the basis for the ineffectiveness determination. To the 
extent that the NMS Stock ATS files a revised initial Form ATS-N or 
Form ATS-N amendment that no longer contains, for example, material 
deficiencies with respect to its completeness or comprehensibility, the 
Form ATS-N would become effective, assuming no other basis for an 
ineffectiveness determination. Regarding the comment that the 
Commission should provide an NMS Stock ATS with a clear written 
statement of the reasons for a declaration of ineffectiveness,\397\ the 
Commission intends to provide the basis for declaring a Form ATS-N 
ineffective in an order declaring a Form ATS-N ineffective, which will 
help the NMS Stock ATS address disclosure deficiencies if the ATS 
decides to refile an initial Form ATS-N and help market participants 
understand the reason the Form ATS-N was declared ineffective.
---------------------------------------------------------------------------

    \395\ See supra notes 362-363 and accompanying text.
    \396\ See supra note 356 and accompanying text.
    \397\ See supra note 344 and accompanying text.
---------------------------------------------------------------------------

    We also received three comments regarding whether the Commission 
should add a requirement to make available Form ATS-N filings for 
public notice and comment before the Commission declares a Form ATS-N 
effective or ineffective. One commenter notes that the rule filings of 
national securities exchanges are made publicly available and subject 
to notice and comment before approval, and that Form ATS-N should be 
the same.\398\ Another commenter expresses the view that it would be 
helpful for the Commission to receive feedback from market participants 
regarding Form ATS-N filings, and supports harmonizing the process with 
the application and filing process for national securities 
exchanges.\399\ One commenter, however, expresses the view that Form 
ATS-N should not be subject to a public notice and comment 
process.\400\ This commenter states that the Commission has long 
recognized several fundamental differences between national securities 
exchanges and ATSs, and that imposing a public notice and comment 
period on ATSs would not be equitable and would impede dynamic market 
structure advances because the Commission has fostered competition 
among different types of trading venues.\401\
---------------------------------------------------------------------------

    \398\ See CBOE Letter at 2.
    \399\ See Citadel Letter at 3.
    \400\ See UBS Letter at 4.
    \401\ See id. Another commenter, in expressing the view that 
Form ATS-N amendments should not be made public upon filing, states 
that doing so would risk turning the effectiveness process into an 
extended review, notice, and comment period, which the commenter 
believes would be inappropriate and unwarranted. See SIFMA Letter at 
31-32.
---------------------------------------------------------------------------

    We believe that it would not be appropriate to subject Form ATS-N 
filings to public notice and comment, as some commenters suggest. The 
Commission did not propose to subject Form ATS-N filings to a public 
notice and comment process. As discussed above,\402\ the Commission is 
not performing a review of the merits of initial Form ATS-N 
disclosures, such as determining the strengths and weaknesses of the 
trading platform or a protocol offered by the NMS Stock ATS. The 
Commission also is not making findings regarding whether the means by 
which orders will interact on the trading platform are, or are not, 
consistent with the Exchange Act, as is the case with respect to 
certain SRO rule filings.\403\ Rather the Commission's review of Form 
ATS-N disclosures will focus on the completeness and comprehensibility 
of the disclosures, which does not lend itself to public notice and 
comment. We do not believe that public comment would facilitate the 
review of Form ATS-N, and are not subjecting Form ATS-N filings to a 
process similar to SROs' proposed rule change filings, which are 
subject to notice and comment, and consideration by the Commission.
---------------------------------------------------------------------------

    \402\ See supra Section IV.A.3.c.
    \403\ See supra note 359 and accompanying text.
---------------------------------------------------------------------------

    The standard of review for ineffectiveness of Form ATS-N filings 
that we are adopting does not include an evaluation of the merits of 
the services that an NMS Stock ATS offers to subscribers. As discussed 
above, some commenters raise concerns about whether the Commission 
review process will result in imposing substantive standards on NMS 
Stock ATSs.\404\ Rule 304 and Form ATS-N are designed to enhance 
operational transparency for NMS Stock ATSs, and therefore, the 
standard of review undergirding the Commission review will focus on the 
disclosures on Form ATS-N, as described above, and not the manner in 
which the NMS Stock ATS operates. Unlike proposed rule changes filed by 
national securities exchanges, the Commission will not make affirmative 
findings about Form ATS-N filings with regard to consistency with the 
Exchange Act.\405\ Regulation ATS was designed to encourage innovation 
\406\ and provide enough flexibility to accommodate the business 
objectives of, and benefits provided by, alternative trading 
systems.\407\ As follows, the standard of review for ineffectiveness of 
Form ATS-N is designed to enhance the transparency objectives of the 
new disclosure requirements in a manner consistent with allowing NMS 
Stock ATSs to continue to innovate and provide benefits to the market. 
The Commission review is not intended to evaluate an NMS Stock ATS's 
services against industry norms, nor approve or disapprove aspects of 
the NMS Stock ATS's operations, for example, a new trading 
functionality, order type, or execution protocol.
---------------------------------------------------------------------------

    \404\ See, e.g., supra note 346 and accompanying text.
    \405\ Proposed rule changes filed by national securities 
exchanges pursuant to Section 19 of the Exchange Act must be 
consistent with the Exchange Act. In addition, filings made pursuant 
to Section 19(b)(2) require the Commission to approve a proposed 
rule change if it finds the proposed rule change is consistent with 
the Exchange Act and the rules and regulations thereunder, or it 
must disapprove the proposed rule change. While a disclosure that 
reveals non-compliance with the federal securities laws or the rules 
and regulations thereunder may be a basis for the Commission finding 
that a declaration of ineffectiveness would be in the public 
interest and consistent with the protection of investors, Regulation 
ATS is a disclosure regime, and the Commission will not be making 
findings on consistency with the Exchange Act with respect to 
disclosures on Form ATS-N.
    \406\ See Regulation ATS Adopting Release, supra note 3, at 
70910.
    \407\ See id. at 70847.

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

[[Page 38798]]

4. Rule 304(a)(1)(iv): Transition for Legacy NMS Stock ATSs
a. Rule 304(a)(1)(iv)(A): Initial Filing Requirements
    Rule 304(a)(1)(iv) describes the process through which Legacy NMS 
Stock ATSs would file their initial Form ATS-N. We are adopting Rule 
304(a)(1)(iv) (``Transition for Legacy NMS Stock ATSs'') to provide a 
process for a Legacy NMS Stock ATS to file its initial Form ATS-N, and 
to continue to operate while its initial Form ATS-N is under Commission 
review.\408\ Adopted Rule 304(a)(1)(iv)(A) (``Initial Form ATS-N filing 
requirements'') requires that a Legacy NMS Stock ATS shall file with 
the Commission an initial Form ATS-N, in accordance with the conditions 
of Rule 304(a)(1)(iv), no earlier than January 7, 2019, and no later 
than February 8, 2019. Further, adopted Rule 304(a)(1)(iv)(A) provides 
that an initial Form ATS-N filed by a Legacy NMS Stock ATS shall 
supersede and replace for purposes of the exemption the previously-
filed Form ATS (including any amendments to Form ATS) of the Legacy NMS 
Stock ATS.\409\ The Legacy NMS Stock ATS may operate, on a temporary 
basis, pursuant to the filed initial Form ATS-N, and any amendment 
thereto, during the review of the initial Form ATS-N by the 
Commission.\410\ In addition, adopted Rule 304(a)(1)(iv)(A) provides 
that an initial Form ATS-N filed by a Legacy NMS Stock ATS, as amended, 
will become effective, unless declared ineffective, upon the earlier 
of: (1) The completion of review by the Commission and publication 
pursuant to Rule 304(b)(2) or (2) the expiration of the review period, 
or, if applicable, the end of the extended review period, pursuant to 
Rule 304(a)(1)(iv)(B).
---------------------------------------------------------------------------

    \408\ We are adopting Rule 304(a)(1)(iv) to delineate the 
initial filing process applicable to Legacy NMS Stock ATSs from the 
initial filing process applicable to non-Legacy NMS Stock ATSs. This 
differs from the proposed rule text, which integrated the 
requirements applicable to Legacy NMS Stock ATSs within the 
requirements applicable to all NMS Stock ATSs set forth in proposed 
Rule 304(a)(1)(i) through (iii). Providing these requirements in a 
separate section of the rule better organizes the rule text so 
filers can more easily understand the initial Form ATS-N filing 
process that is applicable to Legacy NMS Stock ATSs and is 
responsive to comments, which are discussed below.
    \409\ Although the Form ATS for a Legacy NMS Stock ATS will no 
longer have any legal effect for purposes of the exemption after the 
ATS files a Form ATS-N, a Form ATS will nevertheless continue to be 
subject to the federal securities laws and the regulations 
thereunder, including Regulation ATS, as a Form ATS previously filed 
with the Commission will 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. See 17 CFR 242.301(b)(2)(vi).
    \410\ See Rule 304(a)(1)(iv)(A).
---------------------------------------------------------------------------

    Adopted Rule 304(a)(1)(iv) modifies proposed Rule 304(a)(1)(i) to 
address certain commenter concerns, as described below. Under the 
proposed rule, an NMS Stock ATS operating as of the effective date of 
the final rule would continue to operate pursuant to its previously 
filed initial operation report on Form ATS, pending the Commission's 
review of the filed Form ATS. We modified this proposed process in 
response to comments. In the Proposal, we asked whether the Commission 
should allow a Legacy NMS Stock ATS to continue operations pursuant to 
Form ATS pending the Commission's review of Form ATS-N.\411\ Two 
commenters express support for certain aspects of the proposed 
transition process for Legacy NMS Stock ATSs (including that the 
Commission allow Legacy NMS Stock ATSs to operate during the Commission 
review period).\412\ One commenter states that it supports requiring 
Legacy NMS Stock ATSs to file an initial Form ATS-N.\413\
---------------------------------------------------------------------------

    \411\ See Proposal, supra note 2, at 81026.
    \412\ See CFA Institute Letter at 5; BIDS Letter at 3.
    \413\ See CFA Institute Letter at 4.
---------------------------------------------------------------------------

    A Legacy NMS Stock ATS will be required to file an initial Form 
ATS-N to continue to operate pursuant to the Rule 3a1-1(a)(2) exemption 
with respect to its Rule 3b-16 activity in NMS stocks beyond January 7, 
2019. This provision will allow a Legacy NMS Stock ATS to continue its 
current operations without disruptions to the ATS or its current 
subscribers and provide the Legacy NMS Stock ATS with sufficient time 
to make an orderly transition from compliance under the current 
Regulation ATS requirements to compliance with Rule 304.
    Under the adopted rule, both Legacy NMS Stock ATSs and non-Legacy 
NMS Stock ATSs will be required to file an initial Form ATS-N. We 
believe that market participants should have access to the same level 
of information disclosed by both Legacy NMS Stock ATSs and non-Legacy 
NMS Stock ATSs as market participants will consider routing orders to 
both types of NMS Stock ATS. Allowing Legacy NMS Stock ATSs to file 
Form ATS instead of Form ATS-N would limit the amount of information 
available to market participants about these ATSs' operations and the 
ATS-related activities of their broker-dealer operators, and would 
thereby make it difficult for market participants to assess Legacy NMS 
Stock ATSs as potential routing destinations for their orders.
    We believe that a Legacy NMS Stock ATS should be permitted to 
continue to operate during the Commission review period for initial 
Form ATS-N.\414\ Therefore, we are adopting Rule 304(a)(1)(iv)(A) to 
transition Legacy NMS Stock ATSs from operating pursuant to Form ATS to 
operating pursuant to Form ATS-N without interruption. As noted above, 
the transition for Legacy NMS Stock ATSs will benefit Legacy NMS Stock 
ATSs and their subscribers, as subscribers will be able to continue to 
send their orders to Legacy NMS Stock ATSs without disruption.
---------------------------------------------------------------------------

    \414\ See also supra note 412 and accompanying text.
---------------------------------------------------------------------------

    Two commenters request clarification about the process for a Legacy 
NMS Stock ATS to file an initial Form ATS-N and its obligations to 
update its Form ATS on file with the Commission while the Commission 
reviews its initial Form ATS-N.\415\ One commenter expresses concerns 
about the regulatory and legal uncertainties that could result from a 
Legacy NMS Stock ATS operating while having filed with the Commission 
both a Form ATS and a Form ATS-N.\416\ Similarly, another commenter 
requests clarification about how a Legacy NMS Stock ATS should handle 
material changes to the NMS Stock ATS's Form ATS.\417\ This commenter 
also asks the Commission to clarify whether a Legacy NMS Stock ATS 
should amend its Form ATS to avoid potential liability caused by the 
NMS Stock ATS submitting the additional information required in Form 
ATS-N.\418\
---------------------------------------------------------------------------

    \415\ See BIDS Letter at 2-3; SIFMA Letter at 29.
    \416\ See BIDS Letter at 2.
    \417\ See SIFMA Letter at 29.
    \418\ See id.
---------------------------------------------------------------------------

    These commenters suggest processes that they believe will address 
these concerns.\419\ One commenter suggests that the Commission deem 
effective a Legacy NMS Stock ATS's Form ATS-N upon filing but 
nevertheless subject it to a review and comment period by the 
Commission.\420\ We are not adopting this suggestion because labeling 
an initial Form ATS-N ``effective'' before the Commission has completed 
the review could mislead market participants. Another commenter 
suggests that a Legacy NMS Stock ATS that makes changes to its 
operations during the 120-calendar day review period or extended review 
period should only be required to amend its Form ATS, and that the 
Legacy NMS Stock ATS should not be required to

[[Page 38799]]

also amend its initial Form ATS-N until the Commission declares it 
effective, and that the NMS Stock ATS could then file a ``clean-up'' 
amendment to its initial Form ATS-N.\421\ We are not adopting this 
approach because, as discussed below, our adopted approach to require a 
Legacy NMS Stock ATS to amend Form ATS-N would be less burdensome for 
the ATS than requiring the Legacy NMS Stock ATS to amend its Form ATS 
during the Commission review period and Form ATS-N after the Form ATS-N 
becomes effective.
---------------------------------------------------------------------------

    \419\ See BIDS Letter at 2-3; SIFMA Letter at 29.
    \420\ See BIDS Letter at 2.
    \421\ See SIFMA Letter at 29.
---------------------------------------------------------------------------

    In response to these commenters, and after considering their 
alternative suggestions, we are adopting Rule 304(a)(1)(iv)(A), which 
is modified from proposed Rule 304(a)(1)(i), to provide that a filed 
Form ATS-N shall supersede and replace for purposes of the exemption a 
Legacy NMS Stock ATS's previously-filed Form ATS. After considering the 
comments, we acknowledge that if the Commission were to require a 
Legacy NMS Stock ATS to file and amend both Form ATS and Form ATS-N 
during the Commission review period for an initial Form ATS-N, the 
Legacy NMS Stock ATS could incur additional legal and regulatory risks, 
as it would be required to make changes to two forms and ensure that 
the information on the two forms is consistent. The disclosures on an 
initial Form ATS-N would include the vast majority of information 
provided to the Commission on Form ATS that pertains to the ATS's NMS 
stock operations. Therefore, we believe that the modifications to the 
proposed rule would alleviate the burden on Legacy NMS Stock ATSs of 
filing two separate documents with the Commission that would likely 
contain significantly overlapping information. In addition, to address 
the commenters' concerns, and facilitate the ability of a Legacy NMS 
Stock ATS to maintain only one filing for a limited time during the 
transition, we are also modifying proposed Rule 304(a)(1)(i), and 
adopting as Rule 304(a)(1)(iv)(A), to provide that the Legacy NMS Stock 
ATS may operate, on a provisional basis, pursuant to the filed Form 
ATS-N, and any amendments thereto,\422\ during the Commission review 
period of the filed initial Form ATS-N. This provision is designed to 
facilitate an orderly transition for Legacy NMS Stock ATSs from the 
Form ATS regime to the Form ATS-N regime while at the same time 
requiring an appropriate level of disclosure by NMS Stock ATSs.
---------------------------------------------------------------------------

    \422\ A Legacy NMS Stock ATS may file amendments pursuant to 
Rule 304(a)(1)(iv)(C) during the Commission review period. A change 
subject to a material amendment filed by a Legacy NMS Stock ATS 
within 30 calendar days of the end of the 240-calendar day extended 
review period, as provided by Rule 304(a)(1)(iv)(B)(1), or other 
period to which the Legacy NMS Stock ATS agrees in writing described 
in Rule 304(a)(1)(iv)(B)(2), may only be implemented by the Legacy 
NMS Stock ATS after the expiration of the 30-calendar day period 
provided by Rule 304(a)(2)(i)(A), and the Commission may declare 
such an amendment ineffective, as appropriate, until the 30-calendar 
day review period expires.
---------------------------------------------------------------------------

    In addition, we are adopting a provision in Rule 304(a)(1)(iv)(A) 
that provides that an initial Form ATS-N filed by a Legacy NMS Stock 
ATS, as amended, will become effective, unless declared ineffective, 
upon the earlier of: (1) The completion of review by the Commission and 
publication pursuant to Rule 304(b)(2) or (2) the expiration of the 
review period, or, if applicable, the end of the extended review 
period, pursuant to Rule 304(a)(1)(iv)(B). We are adding this provision 
to reflect changes to the effectiveness process; this provision is 
designed to replace parts of proposed Rule 304(a)(1)(iii). In addition, 
because we are adopting a process that allows a Legacy NMS Stock ATS to 
amend its initial Form ATS-N during the Commission review period, we 
are adding to Rule 304(a)(1)(iv)(A) that a Legacy NMS Stock ATS's Form 
ATS-N ``as amended'' will become effective, which will include any 
amendments made to an initial Form ATS-N during the Commission review 
period.
    Finally, proposed Rule 304(a)(1) would have required Legacy NMS 
Stock ATSs to submit their initial Form ATS-N filings within 120 days 
of the effective date of this rulemaking. We received one comment 
supporting the requirement that Legacy NMS Stock ATSs file Form ATS-N 
within 120 calendar days of the effective date of the final rule, 
``given the reasonable assumption that the operators of the ATS should 
be very familiar with the operational structure of said ATS.'' \423\ We 
are modifying proposed Rule 304(a)(1)(i) (as part of adopted Rule 
304(a)(1)(iv)(A)) to require Legacy NMS Stock ATSs to file an initial 
Form ATS-N no earlier than January 7, 2019, and no later than February 
8, 2019 and making additional technical modifications.\424\ We believe 
that this will provide adequate time following the date that the 
enhanced disclosure requirements under Rule 304 become effective and 
for NMS Legacy NMS Stock ATSs to prepare and file an initial Form ATS-N 
with the Commission. NMS Stock ATSs will file Form ATS-N via EDGAR, 
which will be ready to accept Form ATS-N filings on January 7, 2019. We 
agree with the commenter that a Legacy NMS Stock ATSs should be 
knowledgeable of the operations of its system and the ATS-related 
activities of the broker-dealer operator and its affiliates and 
believes that requiring Legacy NMS Stock ATSs to file their initial 
Form ATS-N between January 7, 2019 and February 8, 2019 provides these 
with reasonable time to prepare and file their disclosures on Form ATS-
N.\425\ We note that, until a Legacy NMS Stock ATS files its initial 
Form ATS-N with the Commission, the Legacy NMS Stock ATS must provide 
notice of changes to its operations by amending its Form ATS on file 
with the Commission pursuant to Rule 301(b)(2) of Regulation ATS.\426\
---------------------------------------------------------------------------

    \423\ See CFA Institute Letter at 5.
    \424\ This provision, which was proposed as the second sentence 
of proposed Rule 304(a)(1)(i) is now the first sentence of adopted 
Rule 304(a)(1)(iv)(A). In the adopted rule, we are making technical, 
non-substantive modifications to the proposed rule text, including: 
(1) Referring to ``an'' NMS Stock ATS rather than ``the'' NMS Stock 
ATS; (2) defining an NMS Stock ATS operating pursuant to an initial 
operation report on Form ATS as of the effective date as a ``Legacy 
NMS Stock ATS;'' (3) revising the definition of Legacy NMS Stock ATS 
to state that it operates pursuant to ``an initial operation 
report'' rather than a ``previously filed'' initial operation 
report; and (4) adding to Rule 304(a)(1)(i) the term ``initial'' 
before Form ATS-N. We are also changing the term ``in accordance 
with the instructions therein'' to ``in accordance with the 
conditions of this section'' because we intended for NMS Stock ATSs 
to comply with all of the applicable provisions of Rule 304, 
including any procedural provisions, in addition to the Instructions 
on Form ATS-N.
    \425\ See Proposal, supra note 2, at 81023.
    \426\ See 17 CFR 242.301(b)(2). See supra notes 57-63 and 
accompanying text.
---------------------------------------------------------------------------

b. Rule 304(a)(1)(iv)(B): Commission Review Period; Ineffectiveness 
Determination
    Rule 304(a)(1)(iv)(B) provides the process and timing for the 
Commission to review a Legacy NMS Stock ATS's initial Form ATS-N, and, 
if applicable, declare such initial Form ATS-N effective. We are 
adopting Rule 304(a)(1)(iv)(B) (``Commission review period; 
Ineffectiveness determination''), which provides that the Commission 
may, by order, as provided in Rule 304(a)(1)(iii), declare an initial 
Form ATS-N filed by a Legacy NMS Stock ATS ineffective no later than 
120 calendar days from the date of filing with the Commission, or, if 
applicable, the end of the extended review period. The Commission may 
extend the initial Form ATS-N review period for a Legacy NMS Stock ATS 
for: (1) An additional 120 calendar days if the initial 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

[[Page 38800]]

Legacy NMS Stock ATS in writing within the initial 120-calendar 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 Legacy NMS Stock ATS agrees in writing.
    As discussed above, we received comments on the 120-calendar day 
review period and extended review periods that either support or do not 
object to the time frames proposed for both non-Legacy NMS Stock ATSs 
and Legacy NMS Stock ATSs.\427\ We continue to believe that 120 
calendar days typically would provide the Commission adequate time to 
carry out its oversight functions with respect to the review of Forms 
ATS-N filed by Legacy NMS Stock ATSs, including its responsibilities to 
protect investors and maintain fair, orderly, and efficient markets, 
and that the extended review period for filings that are unusually 
lengthy or raise novel or complex issues will allow the Commission and 
its staff to conduct a thorough review and provide sufficient 
opportunity to discuss the filing with the NMS Stock ATS if 
necessary.\428\ We are adopting Rule 304(a)(1)(iv)(B), which was 
proposed as part of Rule 304(a)(1)(ii)(A), with modifications, 
consistent with and for the reasons discussed above with respect to the 
Commission review period for Form ATS-N filings by non-Legacy NMS Stock 
ATSs.\429\
---------------------------------------------------------------------------

    \427\ See supra notes 294-295 and accompanying text.
    \428\ See Proposal, supra note 2, at 81023-24. See also supra 
notes 296-297 and accompanying text.
    \429\ See supra Section IV.A.3. We added language to the 
proposed rule text, and created a separate paragraph (B) of Rule 
304(a)(1)(iv) to address the Commission review period for Legacy NMS 
Stock ATS amendments including: (1) Specifying, consistent with the 
proposed rule text, that the Commission will declare ``by order'' an 
initial Form ATS-N ineffective and referencing the paragraphs under 
the rule that delineate the process pursuant to which the Commission 
will do so; (2) specifying that the Commission will declare an 
initial Form ATS-N ineffective no later than 120 calendar days from 
``the date of'' filing with the Commission; (3) adding to the first 
sentence that the Commission may declare an initial Form ATS-N 
ineffective no later than 120 calendar days from the date of filing 
with the Commission, ``or, if applicable, the end of the extended 
review period'' to reduce ambiguity regarding the length of the 
Commission review period; (4) specifying that the Commission will 
notify the Legacy NMS Stock ATS of any extension of the review 
period within the 120 ``calendar day'' review period; (5) specifying 
that the Commission review period described in this section applies 
to ``initial'' Form ATS-N; and (6) using the defined term ``Legacy 
NMS Stock ATS'' throughout the paragraph.
---------------------------------------------------------------------------

    One commenter suggests that if the Commission declares a Legacy NMS 
Stock ATS's initial Form ATS-N ineffective, the NMS Stock ATS should 
have the opportunity to amend its Form ATS-N so that the form would be 
effective before the NMS Stock ATS is required to cease operating.\430\ 
During the review process, we expect to engage in dialogue with the 
Legacy NMS Stock ATSs about their Form ATS-N disclosures. To the extent 
any deficiencies exist with the Form ATS-N disclosures, we expect that 
the Legacy NMS Stock ATSs typically will have an opportunity to 
understand and cure deficiencies in the filing before the Commission 
declares the Form ATS-N ineffective. If, after discussion with 
Commission staff, a Legacy NMS Stock ATS determines that it needs more 
time to address deficiencies in its initial Form ATS-N to avoid a 
Commission declaration of ineffectiveness, a Legacy NMS Stock ATS could 
consent to an extended Commission review period under Rule 
304(a)(1)(iv)(B)(2). Prior to declaring a Legacy NMS Stock ATS's Form 
ATS-N ineffective, the Commission will provide the ATS with notice and 
opportunity for hearing about the Commission's intention to declare the 
form ineffective. After the Commission declares a Form ATS-N 
ineffective, however, the Legacy NMS Stock ATS will not have an 
opportunity to amend its Form ATS-N.\431\ Upon its Form ATS-N being 
declared ineffective, a Legacy NMS Stock ATS must cease operating 
pursuant to the Rule 3a1-1(a) exemption,\432\ and to the extent that 
the ATS does continue to operate, the Commission could find it to be an 
unregistered national securities exchange, and thus operating in 
violation of Section 5 of the Exchange Act.
---------------------------------------------------------------------------

    \430\ See SIFMA Letter at 29.
    \431\ Because its initial Form ATS-N supersedes and replaces a 
Legacy NMS Stock ATS's Form ATS for purposes of the exemption and 
the initial Form ATS-N can be amended, a Legacy NMS Stock ATS may 
not withdraw its initial Form ATS-N. See infra Section V.B.1.
    \432\ See infra note 434.
---------------------------------------------------------------------------

    This commenter also states that a declaration of ineffectiveness 
should remain confidential until the Legacy NMS Stock ATS has amended 
the Form ATS-N and the amended form is ``approved.'' \433\ We do not 
agree with the commenter's suggestion. As discussed immediately above, 
there will be an opportunity during the review process for the ATS to 
supplement its filing. Once its initial Form ATS-N is declared 
ineffective, a Legacy NMS Stock ATS would not be able to operate 
pursuant to the Rule 3a1-1(a)(2) exemption and would not be able to 
amend its Form ATS-N after it is declared ineffective. It could file a 
new Form ATS-N, which the Commission will review without prejudice. We 
believe that it is in the public interest for the Commission to make an 
order of ineffectiveness for a Legacy NMS Stock ATS publicly available 
so that market participants have notice of the operating status of the 
NMS Stock ATS and can make appropriate adjustments to their routing 
strategies.\434\
---------------------------------------------------------------------------

    \433\ See SIFMA Letter at 29.
    \434\ The Commission could also, in the case of a Legacy NMS 
Stock ATS, provide in its order of ineffectiveness a period of time 
for the NMS Stock ATS to wind down its operations. Because 
Commission orders of ineffectiveness would be made public, market 
participants would also have notice of any wind down period.
---------------------------------------------------------------------------

    Two commenters request clarification about whether amending an 
initial Form ATS-N as a result of a material change during the 
Commission review period would toll the review period, and suggest that 
the review period should not restart with every amendment.\435\ The 
filing of a Form ATS-N material amendment by a Legacy NMS Stock ATS, 
even if filed within 30 days of the expiration of the Commission's 
extended review period, would not toll the review period for the Form 
ATS-N; initial Form ATS-N will become effective in accordance with the 
timeframes set forth in Rule 304(a)(1)(iv)(A). However, a change 
reflected in a material amendment that is filed within 30 days of the 
expiration of the Commission review period could not be implemented 
until the end of the Commission's 30-calendar day review period 
pursuant to Rule 304(a)(2)(i)(A).
---------------------------------------------------------------------------

    \435\ See BIDS Letter at 3; SIFMA Letter at 29.
---------------------------------------------------------------------------

c. Rule 304(a)(1)(iv)(C): Amendments to Initial Form ATS-N
    Rule 304(a)(1)(iv)(C) describes the process through which Legacy 
NMS Stock ATSs would amend their initial Form ATS-N during the 
Commission review period. We are adopting Rule 304(a)(1)(iv)(C) 
(``Amendments to initial Form ATS-N''), which requires that during the 
review period of the initial Form ATS-N filed by a Legacy NMS Stock 
ATS, the Legacy NMS Stock ATS shall amend its initial Form ATS-N 
pursuant to the requirements of Rule 304(a)(2)(i)(A) through (D). The 
adopted rule differs from the Proposal. As proposed, during the 
Commission review period for an initial Form ATS-N filed by a Legacy 
NMS Stock ATS, the Legacy NMS Stock ATS would have been required to 
continue operating pursuant to its existing Form ATS initial operation 
report and file amendments on Form ATS to provide notice of changes to 
the operations of its

[[Page 38801]]

system.\436\ Because adopted Rule 304(a)(1)(iv)(A) states that a filed 
Form ATS-N will supersede and replace for purposes of the exemption a 
Legacy NMS Stock ATS's previously-filed Form ATS, a Legacy NMS Stock 
ATS will no longer file Form ATS amendments once it files an initial 
Form ATS-N. Instead, a Legacy NMS Stock ATS will be required to update 
Form ATS-N during the Commission review period.\437\ If the ATS trades 
both NMS stocks and non-NMS stocks, such ATS would update its Form ATS 
with respect to its non-NMS stock operations.
---------------------------------------------------------------------------

    \436\ See Proposal, supra note 2, at 81023; see also 17 CFR 
242.301(b)(2)(ii) through (iv). The Commission is modifying the 
proposed rule by creating a new paragraph (C) of Rule 304(a)(1)(iv), 
which provides a process for reporting changes during the Commission 
review period for Legacy NMS Stock ATSs.
    \437\ See supra note 409.
---------------------------------------------------------------------------

    As discussed above, two commenters request that the Commission 
clarify the process for filing amendments during the Commission review 
period for Legacy NMS Stock ATSs \438\ and suggest alternative 
approaches.\439\ The modifications in adopted Rule 304(a)(1)(iv)(C) are 
designed to address the comments requesting clarification about the 
process for reporting material changes during the time the Commission 
reviews the initial Form ATS-N of a Legacy NMS Stock ATS.\440\ Adopted 
Rule 304(a)(1)(iv)(C) also addresses the alternative approaches that 
the commenters suggest by requiring a Legacy NMS Stock ATS to update 
its Form ATS-N (rather than Form ATS), and operate pursuant to its Form 
ATS-N (rather than Form ATS).\441\ We believe that Rule 
304(a)(1)(iv)(C) will relieve any unnecessary burden from maintaining 
two forms and ease the transition to the Form ATS-N regime.
---------------------------------------------------------------------------

    \438\ See supra note 415 and accompanying text.
    \439\ See supra notes 420 and 421 and accompanying text.
    \440\ See supra note 415 and accompanying text.
    \441\ See id.
---------------------------------------------------------------------------

    In addition, one commenter asked the Commission to adopt a process 
that would allow Legacy NMS Stock ATSs to introduce a new functionality 
or make changes during the 120-calendar day review period for the 
initial Form ATS-N.\442\ We agree with the commenter that Legacy NMS 
Stock ATSs should have a method to make changes to their operations and 
introduce new functionalities during the Commission review period. In 
accordance with Rule 304(a)(1)(iv)(C), during the Commission review 
period, the Legacy NMS Stock ATSs may make changes to the operations of 
the ATS and shall file amendments to reflect those changes pursuant to 
the requirements of Rule 304(a)(2)(i)(A) through (D). For example, 
during the period of Commission review of its initial Form ATS-N, a 
Legacy NMS Stock ATS may make a material change to its operations, 
provided that it files with the Commission an amendment to its Form 
ATS-N describing such change at least 30 calendar days prior to the 
date of implementation of such change, pursuant to Rule 
304(a)(2)(i)(A). A change subject to a material amendment filed by a 
Legacy NMS Stock ATS may be implemented by the Legacy NMS Stock ATS 
after the expiration of the 30-calendar day period provided by Rule 
304(a)(2)(i)(A).
---------------------------------------------------------------------------

    \442\ See Liquidnet Letter at 4.
---------------------------------------------------------------------------

    Rule 304(a)(1)(iv)(C) provides that a Legacy NMS Stock ATS shall 
amend its initial Form ATS-N pursuant to the requirements of Rule 
304(a)(2)(i)(A) through (D), which govern the process for filing 
amendments to Form ATS-N. Amendments will be subject to Commission 
review and could be declared ineffective under Rule 304(a)(2)(ii). 
Filed Form ATS-N amendments will not be made public until the Legacy 
NMS Stock ATS's initial Form ATS-N becomes effective and publicly 
available. Once a Legacy NMS Stock ATS's initial Form ATS-N becomes 
effective, the Commission will make public the Form ATS-N, as amended, 
which will incorporate any amendments that the Legacy NMS Stock ATS 
filed to the initial Form ATS-N during the Commission review period, 
except for any material amendments still subject to the 30-calendar day 
Commission review period.\443\ In connection with the changes described 
above, we are adopting Rule 304(a)(1)(iv)(C), which provides that a 
Legacy NMS Stock ATS shall amend its filed Form ATS-N during the 
Commission review pursuant to the requirements of Rule 304(a)(2)(i)(A) 
through (D).
---------------------------------------------------------------------------

    \443\ See infra note 587 and accompanying text.
---------------------------------------------------------------------------

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

1. Rule 304(a)(2)(i): Filing Requirements
    Rule 304(a)(2)(i) describes the types of amendments that NMS Stock 
ATSs would be required to file to their Form ATS-N. We proposed Rule 
304(a)(2)(i) (``Form ATS-N amendment filing requirements'') to require 
an NMS Stock ATS to update information disclosed on Form ATS-N 
concerning its manner of operations and the ATS-related activities of 
its broker-dealer operator and its affiliates. Proposed Rule 
304(a)(2)(i) would have required 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 proposed Rule 304(a)(1)(i) or 
(a)(2)(i)(A) or (B) was inaccurate or incomplete when filed.
    We are adopting Rule 304(a)(2)(i) with modifications. As adopted, 
Rule 304(a)(2)(i) requires an NMS Stock ATS to amend a Form ATS-N in 
accordance with the conditions of Rule 304: \444\ (1) At least 30 
calendar days, except as provided by Rule 304(a)(2)(i)(D), 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) no later 
than 30 calendar days after the end of each calendar quarter to correct 
information that has become inaccurate or incomplete for any reason and 
was not required to be reported to the Commission as a Form ATS-N 
amendment pursuant to Rules 304(a)(2)(i)(A), (C), or (D); (3) promptly, 
to correct information in any previous disclosure on Form ATS-N, after

[[Page 38802]]

discovery that any material information previously filed on Form ATS-N 
was inaccurate or incomplete when filed; and (4) no later than seven 
calendar days after information required to be disclosed in Part III, 
Items 24 and 25 on Form ATS-N has become inaccurate or incomplete. Form 
ATS-N requires an NMS Stock ATS filing an amendment to ``select one'' 
of the four types of amendments; each amendment type is mutually 
exclusive.\445\
---------------------------------------------------------------------------

    \444\ The proposed rule text required that an NMS Stock ATS 
amend ``an effective'' Form ATS-N in accordance with the 
``instructions therein.'' We have modified this requirement in the 
Rule 304(a)(2)(i) as adopted by deleting the word ``effective'' 
because, as discussed in Section IV.A.4.c, we are adopting Rule 
304(a)(1)(ii) and Rule 304(a)(1)(iv)(C), which allow an NMS Stock 
ATS to amend a Form ATS-N that has not yet become effective.
    In addition, we are replacing the rule text that stated that an 
NMS Stock ATS shall amend Form ATS-N in accordance with ``the 
instructions therein'' with text requiring an NMS Stock ATS to amend 
Form ATS-N in accordance with ``the conditions of this section'' 
because we intended for NMS Stock ATSs to comply with all of the 
applicable provisions of Rule 304, including any procedural 
provisions, in addition to the Instructions on Form ATS-N.
    We are also adding a separate amendment filing process for 
changes to information disclosed in Part III, Item 24 and 25 of Form 
ATS-N. See infra Sections IV.B.1.a.iii. Because in Rule 
304(a)(2)(i)(D) we are specifying treatment for order display and 
fair access amendments, which generally would be material changes, 
we are also adding that Rule 304(a)(2)(i)(A) applies ``except as 
provided by'' Rule 304(a)(2)(i)(D). See infra Sections IV.B.1.a.iii.
    \445\ See cover page to Form ATS-N.
---------------------------------------------------------------------------

a. Material Changes
(i) Comments on Advance Notice
    We proposed that an NMS Stock ATS would be required to amend an 
effective Form ATS-N 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.\446\ In the 
Proposal, we stated that a 30-calendar day advance notice period would 
give the Commission the opportunity to clarify any questions that might 
arise or to take action, if appropriate, regarding problems that may 
impact market participants, before the NMS Stock ATS implemented the 
change.\447\ We also stated that such advance notice would allow market 
participants to evaluate the changes before implementation and assess 
the NMS Stock ATS as a continued, or potential, trading venue.\448\
---------------------------------------------------------------------------

    \446\ See proposed Rule 304(a)(2)(i)(A).
    \447\ See Proposal, supra note 2, at 81027-28.
    \448\ See id. at 81028.
---------------------------------------------------------------------------

    We received several comments relating to the proposed 30-calendar 
day advance notice requirement for material changes in proposed Rule 
304(a)(2)(i)(A). One commenter states that it supports the requirement 
that an NMS Stock ATS file a material amendment to Form ATS-N 30 days 
in advance of implementing a material change to the operations of the 
NMS Stock ATS, or the activities of the broker-dealer operator or its 
affiliates.\449\ Another commenter states that although advance notice 
of 20 calendar days before implementing a material change may be 
adequate, it believes that the 30-calendar day advance notice 
requirement strikes an appropriate balance between an NMS Stock ATS's 
ability to innovate, while also providing market participants and 
regulators adequate time to evaluate and respond to the intended 
change.\450\
---------------------------------------------------------------------------

    \449\ See MFA/AIMA Letter at 4.
    \450\ See HMA Letter at 9.
---------------------------------------------------------------------------

    Two commenters suggest that instead of requiring 30 calendar days 
of advance notice, the Commission should require NMS Stock ATSs to file 
an amendment on Form ATS-N at least 20 calendar days in advance of 
implementing a material change, which is the same as the current 
requirement for filing amendments to Form ATS.\451\ One commenter 
believes the 30-calendar day advance notice period would provide 
minimal benefit for the Commission because the Commission may at any 
time object to an NMS Stock ATS's functionality or require 
clarification.\452\ This commenter also states that lengthening the 
advance notice period would create an unnecessary delay for NMS Stock 
ATSs in introducing new functionality and improving existing 
functionality and processes.\453\ The other commenter supports 
retaining the 20-calendar day advance notice period, stating that due 
to the breadth of disclosures on Form ATS-N and the fact that Form ATS-
N disclosures will be made public, market participants will have access 
to a much greater level of information about ATS operations and changes 
than in the past.\454\ Another commenter states that a process for 
reviewing Form ATS-N amendments that extends beyond 30 days could have 
a significant impact on NMS Stock ATS operations, particularly with 
regard to the launch of new technologies.\455\
---------------------------------------------------------------------------

    \451\ See Liquidnet Letter at 4; KCG Letter at 5.
    \452\ See Liquidnet Letter at 4.
    \453\ See id.
    \454\ See KCG Letter at 5.
    \455\ See Fidelity Letter at 10.
---------------------------------------------------------------------------

    We are adopting Rule 304(a)(2)(i)(A) with modifications. We do not 
agree with commenters who believe that the current 20-calendar day 
advance notice period for material amendments to be filed on Form ATS 
would be more appropriate for NMS Stock ATSs than a 30-calendar day 
period. We believe that a 30 calendar day advance notice period for a 
material change would allow the Commission sufficient time to review 
the amendment and determine, if necessary, whether the filing should be 
declared ineffective. Although we agree with the commenter that states 
that market participants will have access to more information regarding 
NMS Stock ATS operations than in the past,\456\ given the complexity of 
NMS Stock ATSs today and the breadth of disclosures required on Form 
ATS-N, the 10 additional calendar days provides the Commission with the 
necessary time to review, and communicate with the NMS Stock ATS about, 
the Form ATS-N disclosures. We believe that the benefits of a longer 
advance notice period justify any potential burden on an NMS Stock ATS 
and any potential delay to the introduction of a new technology. We 
believe that a 30-calendar day review period will benefit subscribers 
and market participants as the time will allow the Commission to help 
ensure that disclosures made available to the public are complete and 
comprehensible.
---------------------------------------------------------------------------

    \456\ See KCG Letter at 5.
---------------------------------------------------------------------------

    One commenter states that the advance notice requirement for 
material changes would be close to an ``advance notice and approval'' 
approach that may effectively result in a merit review process of NMS 
Stock ATS operations.\457\ As discussed above with respect to the 
Commission's review of an initial Form ATS-N pursuant to Rule 
304(a)(1)(iii),\458\ the Commission's review of a Form ATS-N amendment 
does not weigh the merits of a change that is the subject of a Form 
ATS-N amendment. Rather, the Commission's review is focused on the 
completeness and comprehensibility of the disclosures themselves.
---------------------------------------------------------------------------

    \457\ See KCG Letter at 4.
    \458\ See supra Section IV.A.3.
---------------------------------------------------------------------------

    Another commenter expresses concern regarding situations in which 
it files a material amendment to Form ATS-N but needs to modify a 
functionality based on customer feedback or unanticipated workflows or 
scenarios.\459\ The commenter states that it would be beneficial for an 
NMS Stock ATS to have the flexibility to make modifications without 
delay, as long as any modifications were disclosed in advance to 
customers, would not adversely impact customers, and do not change the 
key elements of the new functionality that had been previously 
described in a Form ATS-N amendment.\460\ In addition to providing 
advance notice to the public about a potential material change to the 
NMS Stock ATS, the advance notice period allows the Commission to 
review the disclosures on Form ATS-N, and we believe that the review 
will help ensure that market participants receive complete and 
comprehensible disclosures. We are providing guidance for determining 
whether a change is material.\461\ In deciding whether to implement a 
modification to a functionality without delay in response to customer 
feedback or unanticipated workflows or scenarios, an NMS Stock ATS is 
required to determine if, in light of all relevant facts and 
circumstances,

[[Page 38803]]

the modification constitutes a material change. If the modification 
does not constitute a material change, the NMS Stock ATS could 
implement the change and file an updating amendment. However, if the 
modification is material, the NMS Stock ATS must file a material 
amendment and wait 30 calendar days before implementing the 
change.\462\
---------------------------------------------------------------------------

    \459\ See Liquidnet Letter at 5.
    \460\ See id.
    \461\ See infra Section IV.B.1.a.ii.
    \462\ In the event that it is appropriate for the Commission to 
exempt an NMS Stock ATS, conditionally or unconditionally, by 
Commission order, after application by the ATS, from the advance 
filing requirement, the Commission will be able to issue exemptions. 
See supra note 226 and accompanying text.
---------------------------------------------------------------------------

(ii) Comments on Materiality
    In the Proposal, we stated our belief 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.\463\ We continue to believe 
that this standard of materiality is appropriate. This standard of 
materiality is similar to materiality standards applied in the context 
of securities disclosures made pursuant to other rules.\464\
---------------------------------------------------------------------------

    \463\ See Proposal, supra note 2, at 81028.
    \464\ See id. at 81028 n.309.
---------------------------------------------------------------------------

    Some commenters agree that materiality is an appropriate standard 
for requiring advance notice.\465\ One commenter states that it agrees 
with the guidance regarding materiality set forth in the Proposal \466\ 
but notes that facts and circumstances could determine whether the 
scenarios the Commission provided in the Proposal would likely 
constitute material changes, and states that although the scenarios set 
forth in the Proposal are helpful examples, they are broadly 
written.\467\ We continue to believe that scenarios that are 
particularly likely to implicate a material change would include: (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 
subscribers' confidential trading information.\468\ This list is not 
intended to be exhaustive, and we do not mean to imply that other 
changes to the operations of an NMS Stock ATS or the activities of the 
broker-dealer operator or its affiliates could not constitute material 
changes. Further, the NMS Stock ATS should generally consider whether 
the cumulative effect of a series of changes to the operations of the 
NMS Stock ATS or the activities of the broker-dealer operator or its 
affiliates with regard to the NMS Stock ATS is material. In addition, 
in determining whether a change is material, an ATS generally should 
consider whether such change would affect: (1) The competitive dynamics 
among ATS subscribers; (2) the execution quality or performance of the 
orders of any subscriber or category of subscribers; (3) the fees that 
any subscriber or category of subscribers would pay to access and/or 
use the ATS; (4) the nature or composition of counter-parties with 
which any subscriber or category of subscribers interact; and (5) the 
relative speed of access or execution of any subscriber or group of 
subscribers.
---------------------------------------------------------------------------

    \465\ See BIDS Letter at 3; SIFMA Letter at 30-31.
    \466\ See infra note 468 and accompanying text.
    \467\ See Liquidnet Letter at 4.
    \468\ See Proposal, supra note 2, at 81028.
---------------------------------------------------------------------------

    Some commenters ask that we provide greater clarity with respect to 
the types of changes that would be material changes.\469\ One commenter 
states that we should provide examples of types of changes that would 
not be considered material or would be excluded from being considered 
``material'' given the impracticality of the 30-calendar day amendment 
period, and states that changes that are not subscriber-facing (e.g., 
changes to software, hardware, or other trading infrastructure) should 
not be deemed to be material changes.\470\ This commenter also states 
that NMS Stock ATSs should not be required to make a good-faith 
decision that a change is not material ``only to be informed that the 
Commission has decided the change is material based on an unpublished 
standard.'' \471\ Another commenter states that the ``standard'' for 
determining material changes is one of the most difficult and 
potentially unworkable obligations under the Proposal.\472\ Another 
commenter states that the Commission should provide ``clear and 
objective standards'' on what triggers the requirement for an NMS Stock 
ATS to file a Form ATS-N amendment; this commenter states that if the 
Commission staff regards every change as material, then it means 
nothing to provide that amendments are required only for material 
changes.\473\ In addition, one commenter states that a clearer 
``definition'' of what is considered a ``material amendment'' is 
critical to NMS Stock ATS broker-dealer operators due to the fact that 
NMS Stock ATSs must provide advance notice before implementing a 
material change.\474\ Another commenter observes that NMS Stock ATSs 
have operations, offerings, and interactions that regularly evolve and 
states that it is ``essential'' for NMS Stock ATSs to have ``clear and 
specific expectations'' on what types of changes would be deemed 
material and what level of detail should be included in the 
disclosures.\475\ Another commenter states that without descriptive and 
informative commentary from the Commission, there will be uncertainty 
and disparity as to which changes are actually filed by NMS Stock ATS 
operators as material changes, and suggests that the Commission provide 
a clear set of standards that would trigger a Form ATS-N 
amendment.\476\
---------------------------------------------------------------------------

    \469\ See BIDS Letter at 3-4; Fidelity Letter at 10; UBS Letter 
at 3; SIFMA Letter at 31.
    \470\ See SIFMA Letter at 31.
    \471\ See id.
    \472\ See KCG Letter at 5.
    \473\ See SIFMA Letter at 30-31.
    \474\ See Fidelity Letter at 10.
    \475\ See SIFMA Letter at 5.
    \476\ See UBS Letter at 3.
---------------------------------------------------------------------------

    We continue to believe that the Proposal's guidance regarding 
whether a change is material is appropriate. In addition, we agree with 
the comment that a change that falls in one of the categories set forth 
in the Proposal, including a change to the manner in which the NMS 
Stock ATS displays orders or trading interest, such as the font size in 
which orders are displayed,\477\ would not be a material change if 
there would not be a substantial likelihood that a reasonable market 
participant would consider the change important when evaluating the NMS 
Stock ATS as a potential trading venue. We also do not believe that 
market participants should be concerned, as suggested by one 
commenter,\478\ that the Commission staff may regard ``every change'' 
as material and thereby render

[[Page 38804]]

meaningless the Commission's materiality guidance.
---------------------------------------------------------------------------

    \477\ See Liquidnet Letter at 4.
    \478\ See SIFMA Letter at 30-31.
---------------------------------------------------------------------------

    One commenter notes that NMS Stock ATSs may over-file material 
amendments to avoid risk, and that over-filing would cost substantial 
time and resources for NMS Stock ATSs, as well as burden the Commission 
staff that will be processing and reviewing the submissions.\479\ 
Another commenter expresses concern that the requirements for amending 
Form ATS-N would create a reporting regime that is ``overly 
voluminous'' and may be less effective for market participants seeking 
transparency.\480\
---------------------------------------------------------------------------

    \479\ See BIDS Letter at 3-4.
    \480\ See STA Letter at 5.
---------------------------------------------------------------------------

    The Commission does not believe that its materiality standard will 
result in overreporting or underreporting of information by an NMS 
Stock ATS or create an overly time-consuming and voluminous Form ATS-N 
amendment filing process for NMS Stock ATSs or the Commission. The 
Commission recognizes that Form ATS-N will require an NMS Stock ATS to 
provide more information about its operations and ATS-related 
activities of the broker-dealer operator and its affiliates than Form 
ATS. The Commission also recognizes that the structure and complexities 
of NMS Stock ATS operations have significantly changed since Regulation 
ATS was adopted, and believes that these changes require enhanced 
disclosures for subscribers to better understand how NMS Stock ATSs 
operate. Given the technology advancements and the proclivity for NMS 
Stock ATSs to enhance the operations of their ATSs, and the fact that 
market participants search for the best trading venue for their orders, 
we believe that it is important for an NMS Stock ATS to amend its Form 
ATS-N as required to ensure disclosures on Form ATS-N are complete and 
comprehensible. Based on the Commission experience with Form ATS 
filings, we believe that we have provided reasonable estimates of the 
time and resources that NMS Stock ATSs will need to expend to ensure 
that disclosures on amended Form ATS-N are accurate, current, and 
complete.
    With regard to the commenter that asks for more specificity about 
the level of detail that amendments to Form ATS-N require,\481\ we have 
revised Parts II and III of adopted Form ATS-N to make requests more 
explicit and clear about information that would be responsive to form 
requirements, and in some questions, we are requiring NMS Stock ATSs to 
provide a ``summary'' or a ``list'' of information.\482\ These changes 
are designed to provide an NMS Stock ATS with more specificity about 
the level of detail that is required by the form and to alleviate the 
burden on NMS Stock ATSs. Further, we revised Form ATS-N to remove 
certain terms that commenters believe are vague and, in some cases, 
reduced the scope of information requested, and revised requests in 
adopted Form ATS-N to make more explicit what we meant by these terms. 
We believe that the requests in adopted Form ATS-N, as revised from the 
Proposal, provide NMS Stock ATSs the appropriate level of specificity 
for them to understand the information that is required by the form. In 
addition, the Commission will apply the same standard of review for 
declaring ineffective a Form ATS-N amendment as it will apply for 
declaring ineffective an initial Form ATS-N.
---------------------------------------------------------------------------

    \481\ See supra note 475 and accompanying text.
    \482\ See Part II, Items 4, 5, 6, and 7 of adopted Form ATS-N; 
Part III, Items 2, 3, 5, 6, 11, 13, and 19 of adopted Form ATS-N.
---------------------------------------------------------------------------

    One commenter states that it may be worth considering an approach 
that leverages the Regulation SCI framework of major changes determined 
to be material because such an approach would help ensure consistency 
between different Commission regulations that impact and govern 
ATSs.\483\ We are declining to adopt the commenter's suggestion to 
apply the Regulation SCI framework for materiality. Regulation SCI does 
not define material systems changes but requires an SCI entity to 
establish written criteria for identifying a change to its SCI systems 
and the security of indirect SCI systems as material and to report to 
the Commission those changes the SCI entity identified as material in 
accordance with such criteria.\484\ Additionally, Form ATS-N is a 
public reporting form, and we believe the materiality guidance for 
material amendments to Form ATS-N is more appropriate than the 
Regulation SCI framework because it provides NMS Stock ATSs, market 
participants, and the Commission a clearer standard for determining 
whether a change would be material in the context of public reporting.
---------------------------------------------------------------------------

    \483\ See UBS Letter at 3.
    \484\ See Regulation SCI Adopting Release, supra note 76, 79 FR 
at 72341-42.
---------------------------------------------------------------------------

    In addition, one commenter states that because consumers of ATS 
disclosures vary widely in business models and sophistication, the 
Commission should not create ``tiers'' of materiality, and states that 
although the Commission has always understood that some ``material'' 
factors may be more or less important to different market participants, 
it should not substitute its priorities and relative rankings of 
importance for those of diverse market participants.\485\ We are not 
adopting ``tiers'' of materiality or using our own priorities or other 
relative ``rankings'' to determine whether a change to an NMS Stock 
ATS's operations is material. The materiality of any change is 
dependent on the specific facts and circumstances, and we believe that 
creating tiers of materiality would add unnecessary complexity and 
would be inconsistent with the Commission's approach to materiality in 
other contexts.
---------------------------------------------------------------------------

    \485\ See HMA Letter at 9-10.
---------------------------------------------------------------------------

(iii) Order Display and Fair Access Amendments
    In the Proposal, we stated that if an NMS Stock ATS triggers the 
Rule 301(b)(3)(i) order display and execution access volume 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.\486\ We also stated in the Proposal 
that if an NMS Stock ATS triggers the Rule 301(b)(5)(i) fair access 
volume 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.\487\
---------------------------------------------------------------------------

    \486\ See Proposal, supra note 2, at n.500.
    \487\ See id. at n.506.
---------------------------------------------------------------------------

    Under Rule 304(a)(i)(2)(A), an NMS Stock ATS is required to file a 
material amendment at least 30 calendar days prior to the date of 
implementation of a material change. We continue to believe that it 
generally would be a material change to the operations of an NMS Stock 
ATS if the ATS were to exceed the order display and execution access 
threshold or become subject to the order display and execution access 
requirements under Rule 301(b)(3). Likewise, we continue to believe 
that it generally would be a material change to the operations of an 
NMS Stock ATS if the ATS were to exceed the fair access threshold or 
become subject to the order display and execution access requirements 
under Rule 301(b)(5). We recognize, however, that an NMS Stock ATS may 
not be able to comply with the 30-calendar day advance notice period 
for material amendments because the ATS may not be able to foresee when 
it will exceed the order display and execution access or fair access 
volume thresholds. To provide market participants with information 
about when an NMS Stock ATS becomes subject to, or no longer is subject 
to, the

[[Page 38805]]

order display and execution access and fair access requirements, while 
not placing an undue burden on the NMS Stock ATS, we are adding to Rule 
304(a)(2)(i) new subparagraph (D) to require an NMS Stock ATS to amend 
its Form ATS-N no later than seven calendar days after a change to the 
information required to be disclosed in Part III, Items 24 and 25 on 
Form ATS-N by an NMS Stock ATS (``order display and fair access 
amendments'').\488\ We believe that requiring NMS Stock ATSs to 
disclose changes to the information required to be disclosed in Part 
III, Items 24 and 25 of adopted Form ATS-N no later than seven calendar 
days from such changes will provide sufficient time for NMS Stock ATSs 
to comply with the requirement, while providing market participants 
with timely notice.
---------------------------------------------------------------------------

    \488\ Because order display and fair access amendments generally 
would be material changes, we are also adding to Rule 
304(a)(2)(i)(A) that such amendments must be filed under Rule 
304(a)(2)(i)(A) ``except as provided by'' Rule 304(a)(2)(i)(D).
---------------------------------------------------------------------------

b. Updating Amendments
    We proposed in Rule 304(a)(2)(i)(B) that an NMS Stock ATS is 
required to update its 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.
    We are amending Rule 304(a)(2)(i)(B) to expand the circumstances 
under which ``updating amendments'' \489\ would be filed. As proposed, 
NMS Stock ATSs would have been required to file updating amendments to 
correct information that has become ``inaccurate.'' \490\ We are 
amending Rule 304(a)(2)(i)(B) also to require that NMS Stock ATSs file 
updating amendments to correct information that has become 
``incomplete.'' Although we received no comments directly on proposed 
Rule 304(a)(2)(i)(B), one comment on the amendment process in general 
expresses the view that an ATS must have the ability to update its 
filing to address ambiguities in how its rules would apply to different 
scenarios or uses.\491\ The commenter also states that if an ATS 
determines that it can ``make its disclosure clearer, add detail, or 
improve the organization of the disclosure, the ATS should be 
encouraged to do so.'' \492\ We are modifying proposed Rule 
304(a)(2)(i)(B) to specify that an NMS Stock ATS will be required to 
file an updating amendment to revise disclosures that become 
``inaccurate or incomplete.'' Although, as proposed, Rule 304(a)(2)(i) 
did not explicitly require an NMS Stock ATS to disclose changes (other 
than material changes under Rule 304(a)(2)(i)(A)) that would render its 
Form ATS-N incomplete, the Commission stated its intent for Rule 
304(a)(2)(i)(B) to provide a ``a mechanism for NMS Stock ATSs to 
disclose changes to their operations or to update information that does 
not constitute a material change.'' \493\ We continue to believe that 
it is important that market participants have access to accurate, 
current, and complete disclosures on Form ATS-N. Accordingly, the 
Commission is requiring that an NMS Stock ATS disclose, no later than 
30 calendar days after the end of the calendar quarter, changes that 
would render its Form ATS-N inaccurate or incomplete, but would not be 
required to be filed as correcting, material, or order display and fair 
access amendments.
---------------------------------------------------------------------------

    \489\ In the Proposal, we referred to these amendments as 
``periodic amendments.'' See Proposal, supra note 2, at 81029. We 
believe that calling these amendments ``updating amendments'' 
reduces any potential ambiguity regarding the timing and purpose of 
these amendments, which is discussed below.
    \490\ Proposed Rule 304(a)(2)(i)(B).
    \491\ See Liquidnet Letter at 7.
    \492\ See id.
    \493\ See Proposal, supra note 2, at 81029.
---------------------------------------------------------------------------

    We also are revising Rule 304(a)(2)(i)(B) to provide that an 
updating amendment shall be filed ``no later than'' 30 calendar days 
after the end of the calendar quarter. This change allows, but does not 
require, an NMS Stock ATS to file amendments required by Rule 
304(a)(2)(i)(B) earlier than the 30 calendar day window at the end of 
each calendar quarter.
    In addition, proposed Rule 304(a)(2)(i)(B) would have required an 
NMS Stock ATS to file an amendment to correct ``any other'' information 
that has not been previously reported as a Form ATS-N amendment. We 
believe that, as proposed, the phrase ``any other'' information could 
be vague and therefore, it could have been unclear when it would be 
permitted for an NMS Stock ATS to file an updating amendment, as 
opposed to a material or correcting amendment. To distinguish between 
what information may be filed pursuant to Rule 304(a)(2)(i)(B), rather 
than as a material amendment under Rule 304(a)(2)(i)(A), correcting 
amendment under Rule 304(a)(2)(i)(C), or order display and fair access 
amendment under Rule 304(a)(2)(i)(D), we are making a change to provide 
that updating amendments shall be filed to correct information that 
``was not required to be reported to the Commission as a Form ATS-N 
amendment pursuant to paragraphs 304(a)(2)(i)(A), (C), or (D) of this 
section.''
    We believe that requiring NMS Stock ATSs to correct information 
that has become inaccurate or incomplete for any reason (and was not 
required to be reported to the Commission as a material amendment, 
correcting, or order display and fair access amendment) no later than 
30 calendar days after the end of each calendar quarter would tailor 
the reporting burden for filing amendments 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. For example, if an NMS 
Stock ATS that publishes or otherwise provides to one or more 
subscribers or persons aggregate platform-wide order flow and execution 
statistics of the NMS Stock ATS that are not otherwise required 
disclosures under Rule 605 of Regulation NMS, the NMS Stock ATS could, 
depending on the facts and circumstances, disclose changes to such 
statistics in a updating amendment no later than 30 calendar days after 
the end of the calendar quarter in which the changes occurred.\494\
---------------------------------------------------------------------------

    \494\ See Proposal, supra note 2 at 81084 (stating that to 
comply with the requirements of Part IV, Item 16 (adopted Part III, 
Item 26), an NMS Stock ATS would file a Form ATS-N amendment within 
30 calendar days after the end of each calendar quarter). See also 
infra Section V.D.26.a.
---------------------------------------------------------------------------

    We continue to believe that allowing NMS Stock ATSs to implement 
non-material changes immediately would allow NMS Stock ATSs to make 
updating changes to their operations and disclosures without delay, 
while at the same time provide disclosure about those changes to market 
participants and the Commission within an appropriate time frame. 
Updating amendments, like all amendments to Form ATS-N, will be subject 
to Commission review pursuant to Rule 304(a)(2)(ii) and could be 
declared ineffective if the Commission makes the required findings.
c. Correcting Amendments
    We proposed in Rule 304(a)(2)(i)(C) to require an NMS Stock ATS to 
amend its Form ATS-N promptly to correct information in any previous 
disclosure on Form ATS-N after discovery that any information 
previously filed on Form ATS-N was inaccurate or incomplete when filed. 
We proposed that such amendments will be subject to

[[Page 38806]]

Commission review pursuant to Rule 304(a)(2)(ii).\495\
---------------------------------------------------------------------------

    \495\ See Proposed Rule 304(a)(2)(ii).
---------------------------------------------------------------------------

    We received one comment regarding proposed Rule 304(a)(2)(i)(C) 
that supports allowing an NMS Stock ATS to file a Form ATS-N amendment 
to correct information in a previous Form ATS-N disclosure that was 
inaccurate or incomplete when filed.\496\
---------------------------------------------------------------------------

    \496\ See Liquidnet Letter at 7.
---------------------------------------------------------------------------

    Another commenter is generally concerned about the amount and types 
of amendment filings required under the Proposal, and the burden that 
filing such amendments could impose on NMS Stock ATSs.\497\ To address 
this concern, we are modifying proposed Rule 304(a)(2)(i)(C) to require 
that NMS Stock ATSs file correcting amendments after discovery that any 
information previously filed on Form ATS-N was materially inaccurate or 
incomplete when filed.\498\ We believe that it is appropriate to 
require NMS Stock ATSs to promptly file an amendment only when the 
information previously filed was materially inaccurate or incomplete 
because such information is likely to be important to current 
subscribers and market participants and could impact their decision to 
use the NMS Stock ATS's services. Corrections of immaterial 
inaccuracies and completeness can be made by updating amendments. In 
determining whether previously filed information is materially 
inaccurate or incomplete, an NMS Stock ATS should consider the factors 
it would consider in determining whether a change would require a 
material amendment.\499\
---------------------------------------------------------------------------

    \497\ See Fidelity Letter at 10.
    \498\ In addition, we are adopting Rule 304(a)(2)(i)(C) with 
technical modifications. The rule text of proposed Rule 
304(a)(2)(i)(C) stated that an NMS Stock ATS must amend Form ATS-N 
upon discovery that any information ``filed under paragraphs 
(a)(1)(i) or (a)(2)(i)(A) or (B)'' was inaccurate or incomplete when 
filed. This inadvertently excluded applying the requirement to 
inaccurate or incomplete information filed under paragraph 
(a)(2)(i)(C). We believe that deleting the cross-references and 
simply stating that an NMS Stock ATS must file an amendment when 
``any previous disclosure on Form ATS-N'' was materially inaccurate 
or incomplete when filed would require that an NMS Stock ATS correct 
materially incomplete or inaccurate information on initial Form ATS-
N and any amendment thereto (including any amendment previously 
required by Rule 304(a)(2)(C)). We are making this change to correct 
this error, and to specify that an NMS Stock ATS would have an 
obligation to promptly correct a materially inaccurate or incomplete 
disclosure on any initial Form ATS-N or amendment thereto.
    Generally, we will consider a correcting amendment to be filed 
``promptly,'' if it is filed within five business days after 
discovery that any material information previously filed on Form 
ATS-N was materially inaccurate or incomplete when filed.
    In addition, we are making a technical change by defining the 
type of amendment described in Rule 304(a)(2)(i)(C) as a 
``correcting amendment.''
    \499\ See supra Section IV.B.1.a.
---------------------------------------------------------------------------

2. Rule 304(a)(2)(ii): Commission Review Period; Ineffectiveness 
Determination
    Rule 304(a)(2)(ii) provides the process through which the 
Commission would review and declare Form ATS-N amendments to Form ATS-
N. Proposed Rule 304(a)(2)(ii) (``Commission review period; 
Ineffectiveness determination'') provided 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. The proposed rule also provided that 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. Under proposed Rule 304(a)(2)(ii), the NMS Stock ATS 
could have, however, continued to operate pursuant to a Form ATS-N that 
was previously declared effective. In addition, the proposed rule 
provided that 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. We are adopting Rule 304(a)(2)(ii) with 
modifications to provide that the Commission will, by order, declare 
ineffective any Form ATS-N amendment filed pursuant to Rule 
304(a)(2)(i)(A) through (D), no later than 30 calendar days from filing 
with the Commission, if the Commission finds that such action is 
necessary or appropriate in the public interest, and is consistent with 
the protection of investors.\500\
---------------------------------------------------------------------------

    \500\ We are also making several other changes to Rule 
304(a)(2)(ii): (1) Reordering some of the language of Rule 
304(a)(2)(ii) from the proposed rule text; (2) changing the heading 
of the paragraph from ``Commission review period'' to ``Commission 
review period; Ineffectiveness determination''; (3) revising the 
proposed rule text that stated ``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'' to simply 
state ``A Form ATS-N amendment declared ineffective shall prohibit 
the NMS Stock ATS from operating pursuant to the ineffective Form 
ATS-N amendment''; (4) deleting references to the defined term 
``Form ATS-N Amendment''; (5) stating that a Form ATS-N amendment 
declared ineffective ``does'' not (rather than ``would'' not) 
prevent the NMS Stock ATS from subsequently filing a new Form ATS-N 
amendment; and (6) referring to amendments filed pursuant to Rule 
304(a)(2)(i)(A) ``through (D)''.
---------------------------------------------------------------------------

    We stated in the Proposal that the Commission could declare 
ineffective a Form ATS-N amendment if one or more disclosures on an 
amended Form ATS-N are materially deficient with respect to its 
accuracy, currency, completeness, or fair presentation.\501\ We also 
stated that it could 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 disclosures reveal that, under a ``red flag'' review, the 
activity described would not comply with the federal securities laws or 
the rules or regulations thereunder, including Regulation ATS.\502\ We 
further stated that like the review of an initial Form ATS-N, the 
Commission's review of a Form ATS-N amendment would focus on the 
disclosures made on Form ATS-N, and that 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.\503\ 
As discussed above in the context of initial Form ATS-N filings, we are 
not performing a review of the merits of the disclosures on Form ATS-N 
amendments, such as determining the strengths and weaknesses of the 
trading platform or a protocol offered by the NMS Stock ATS. The 
Commission also is not making findings regarding whether the means by 
which orders will interact on the trading platform are, or are not, 
consistent with the Exchange Act, as is the case with respect to 
certain SRO rule filings.\504\ As with respect to initial filings of 
Form ATS-N, the Commission could declare a Form ATS-N amendment 
ineffective if the Commission finds that such action is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors. The Commission notes that this process will be 
similar to the review process for initial Form ATS-N. Accordingly, the 
examples provided above to illustrate scenarios that would cause the 
Commission to declare an initial Form ATS-N ineffective (e.g., 
materially deficient disclosures with respect to completeness or 
comprehensibility) would equally apply in the context of a Form ATS-N 
amendment filed with the Commission.\505\
---------------------------------------------------------------------------

    \501\ See Proposal, supra note 2, at 81029.
    \502\ See id. at 81030.
    \503\ See id.
    \504\ See supra note 359 and accompanying text.
    \505\ See supra Section IV.A.3.

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

[[Page 38807]]

    We received comments regarding the proposed process for reviewing 
Form ATS-N amendments. One commenter expresses support for the proposal 
not to require the Commission to affirmatively declare material 
amendments effective, and states that such a requirement might serve as 
an impediment to NMS Stock ATSs seeking to introduce a new 
functionality, would unnecessarily burden Commission staff, and would 
discourage NMS Stock ATSs from filing changes more than 30 days in 
advance of implementation.\506\ This commenter expresses concern that 
requiring pre-approval of changes to Form ATS-N would inhibit informal 
communication between an NMS Stock ATS and the Commission staff in 
cases where an ATS may otherwise be willing to share information with 
the Commission staff in advance of filing.\507\ We are not adopting a 
rule to declare a Form ATS-N amendment effective. The Commission's 
oversight function of NMS Stock ATSs will be preserved because the 
Commission will be able to declare ineffective a Form ATS-N if it finds 
that such action is necessary or appropriate in the public interest and 
consistent with the protection of investors. This process will be 
similar to the review process for initial Form ATS-N.\508\ Accordingly, 
the examples provided above to illustrate scenarios that would cause 
the Commission to declare an initial Form ATS-N ineffective (e.g., 
materially deficient disclosures with respect to completeness or 
comprehensibility) would equally apply in the context of a Form ATS-N 
amendment filed with the Commission.
---------------------------------------------------------------------------

    \506\ See Liquidnet Letter at 5-6.
    \507\ See id. at 6.
    \508\ See supra Section IV.A.3.
---------------------------------------------------------------------------

    One commenter does not object to the Commission having the ability 
to declare a material amendment ineffective, but hopes the Commission 
would identify concerns as soon as practical during the review period 
so an NMS Stock ATS could address any issues.\509\ The Commission 
intends to engage in dialogue with an NMS Stock ATS regarding its Form 
ATS-N amendment disclosures and communicate to the NMS Stock ATS any 
concerns so the ATS may amend its disclosures, as appropriate or 
necessary to avoid an ineffective declaration. Such dialogue will 
benefit market participants by creating more effective disclosures in 
Form ATS-N amendments that will help enable them to make more informed 
routing decisions. To facilitate this, we are adopting a process for an 
NMS Stock ATS to file, during the Commission's review of a material 
amendment, a correcting or updating amendment pursuant to Rule 
304(a)(2)(i)(B) through (C) to the material amendment.\510\ This 
process is designed to promote transparency and facilitate complete and 
comprehensible disclosure. Any updating or correcting amendments to a 
material amendment filed during the Commission review period will be 
subject to Commission review under Rule 304(a)(2)(ii).\511\ Although a 
correcting or updating amendment is not subject to an implementation 
delay, Rule 304(a)(2)(i)(A) requires that the NMS Stock ATS delay the 
implementation of the change subject to the material amendment until 30 
calendar days following filing of the material amendment; therefore, 
any correcting or updating amendment that amends a material amendment 
during the Commission review could not be implemented before the 
material amendment that it is amending is effective.
---------------------------------------------------------------------------

    \509\ See Liquidnet Letter at 5.
    \510\ Although we acknowledged in the Proposal that the 
Commission staff would likely engage in discussions with NMS Stock 
ATSs during the review period, we did not propose a process for NMS 
Stock ATSs to amend a material amendment during the Commission 
review period. See Proposal, supra note 2, at 81035. The adopted 
process is similar to the process we are adopting to allow non-
Legacy NMS Stock ATSs to amend initial Form ATS-N during the 
Commission review period. See supra Section IV.A.2.
    \511\ Rule 304(a)(2)(ii) states that the Commission will, by 
order, declare ineffective any Form ATS-N amendment no later than 30 
calendar days from filing of such amendment with the Commission. We 
will have 30 calendar days to declare any amendment ineffective, 
including updating or correcting amendments to material amendments 
that are filed during the Commission review period. For example, if 
an NMS Stock ATS files an updating or correcting amendment to a 
material amendment on calendar day 25 of the Commission review 
period of the material amendment, the updating or correcting 
amendment could be declared ineffective by the Commission up to 25 
calendar days after the Commission review period for the material 
amendment expires--until the Commission's 30-calendar day review 
period for the updating or correcting amendment has expired.
---------------------------------------------------------------------------

    In contrast, we believe a material change to a Form ATS-N material 
amendment could reflect a significant change to the intended operations 
of the ATS or the ATS-related activities of its broker-dealer operator, 
which would necessitate a full review period. Therefore, we are 
modifying Rule 304(a)(a)(2)(ii) to specify that an NMS Stock ATS making 
material changes to a filed material amendment during the Commission 
review period shall withdraw its filed material amendment and, if the 
NMS Stock ATS chooses to pursue the change, must file a new material 
amendment pursuant to Rule 304(a)(2)(i)(A).
    Another commenter suggests that similar to the current process for 
reviewing Form ATS amendments, the Commission should require advanced 
notice of material changes, but not impose a review process for 
ineffectiveness.\512\ The commenter states that requiring NMS Stock 
ATSs to provide advance notice and receive Commission ``approval'' 
before an NMS Stock ATS can implement a material change could incent an 
NMS Stock ATS to err on the side of submitting ``vague'' disclosures, 
which are less helpful to market participants, so that it has 
``sufficient operational flexibility'' to make future changes, or could 
stifle ATS innovation as NMS Stock ATSs may be reluctant to make 
changes that would be subject to the ``approval/disapproval'' review 
process.\513\ The commenter further states that NMS Stock ATS operators 
should be allowed to furnish universal operations and systems material 
via a web link, and updates to such materials should not be subject to 
advance notice and Commission review because requiring an NMS Stock ATS 
to provide advance notice of changes to operations and systems ``would 
cause lengthy delays and stifle NMS Stock ATS technical innovation.'' 
\514\ Another commenter observes that ``approval'' of Form ATS-N 
amendments ``would require positive response from the Commission 
instead of the current passive approval after a certain period of 
time.'' \515\
---------------------------------------------------------------------------

    \512\ See KCG Letter at 5.
    \513\ See id.
    \514\ See id. at 7-8.
    \515\ See PDQ Letter at 1.
---------------------------------------------------------------------------

    We are declining to adopt the commenter's suggestion to not review 
Form ATS-N amendments for ineffectiveness because the review process 
allows the Commission to better fulfill its oversight responsibilities 
of NMS Stock ATSs and to help ensure that Form ATS-N amendments contain 
disclosures that are complete and comprehensible. We also disagree with 
the commenter's view that the Commission review process will 
incentivize NMS Stock ATSs to make vague disclosures to allow for 
operational flexibility. Rather, we believe that without a process to 
declare ineffective a Form ATS-N amendment, an NMS Stock ATS may have 
less incentive to provide complete and comprehensible disclosures.
    While the review process for Form ATS-N amendments may have some

[[Page 38808]]

impact on innovation by ATSs,\516\ under the rules adopted today and 
consistent with proposed Rule 304(a)(2)(ii), the Commission will not be 
declaring Form ATS-N amendments ``effective;'' if the 30-calendar day 
review period elapses and the Commission has not declared an amendment 
ineffective, the NMS Stock ATS may commence operating pursuant to the 
Form ATS-N amendment. Further, Form ATS-N amendments will not be 
approved by the Commission and the amendment review process, like the 
review process for initial Form ATS-N, will not be a merit-based 
review, but rather will focus on the completeness and comprehensibility 
of the disclosures. We are declining to adopt the commenter's 
suggestion to allow an NMS Stock ATS to change its operations and 
systems without a review process and by furnishing a web link.\517\ We 
believe that it is important that subscribers have advance notice of 
material changes and that the Commission has the opportunity to review 
material amendments to the Form ATS-N disclosures. If the NMS Stock ATS 
makes changes that are not material, the NMS Stock ATS can implement 
such changes and report them by way of an updating amendment.\518\
---------------------------------------------------------------------------

    \516\ See infra Section X.C.
    \517\ See supra note 514 and accompanying text.
    \518\ See Rule 304(a)(2)(i)(B).
---------------------------------------------------------------------------

    Other commenters express the same concerns with regard to the 
review process for Form ATS-N amendments as they did for the review 
process for initial Form ATS-N. These comments are addressed 
above.\519\ With respect to determining whether to declare an amendment 
to Form ATS-N ineffective, the Commission will apply the same standard 
of review that will be applied to initial filings.
---------------------------------------------------------------------------

    \519\ Several commenters address our proposed review process for 
all Form ATS-N filings, rather than specifically addressing the 
review of Form ATS-N amendments. See supra Section IV.A.3.
---------------------------------------------------------------------------

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

    Rule 304(a)(3) provides the requirement for NMS Stock ATSs to 
provide notice if they plan to cease to operate. Proposed Rule 
304(a)(3) (``Notice of cessation'') provided that 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. Proposed Rule 304(a)(3) also provided that a notice of 
cessation shall cause the Form ATS-N to become ineffective on the date 
designated by the NMS Stock ATS.
    We received no comments regarding proposed Rule 304(a)(3). We 
believe that 10 business days is a reasonable period within which an 
NMS Stock ATS will provide notice that it intends to cease operations 
and will give market participants sufficient time to seek alternative 
routing destinations for their orders.\520\ We are adopting Rule 
304(a)(3) with non-substantive modifications.\521\
---------------------------------------------------------------------------

    \520\ After ceasing operations, the broker-dealer operator of an 
NMS Stock ATS will be required to file Form ATS-R within 10 calendar 
days as required by Rule 301(b)(9) of Regulation ATS.
    \521\ As proposed, Rule 304(a)(3) states that an NMS Stock ATS 
shall notice its cessation at least 10 business days ``before'' the 
date it ``ceases'' to operate. As adopted, Rule 304(a)(3) states 
that an NMS Stock ATS shall notice its cessation at least 10 
business days ``prior to the date'' it ``will cease'' to operate. We 
believe these changes enhance the readability of the rule.
---------------------------------------------------------------------------

D. Rule 304(a)(4): Suspension, Limitation, or Revocation of the 
Exemption From the Definition of Exchange

    Paragraph (i) of proposed Rule 304(a)(4) (``Suspension, limitation, 
and revocation of the exemption from the definition of exchange'') 
provided 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 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). Further, 
proposed Rule 304(a)(4)(ii) provided 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 an ``exchange'' 
pursuant to Rule 3a1-1(a)(2). In addition, proposed Rule 304(a)(4)(i) 
provided that if an NMS Stock ATS's exemption is limited pursuant to 
proposed Rule 304(a)(4)(i), the NMS Stock ATS shall be prohibited from 
operating in a manner otherwise inconsistent with the terms and 
conditions of the Commission order. We are adopting Rule 304(a)(4) with 
minor modifications.\522\
---------------------------------------------------------------------------

    \522\ We made technical, non-substantive changes from the 
proposed rule by: (1) Replacing references to an ``NMS Stock ATS's 
exemption'' to ``the exemption for an NMS Stock ATS'' throughout 
Rule 304(a)(4); and (2) deleting the reference to ``the definition 
of an `exchange' '' in Rule 304(a)(4).
---------------------------------------------------------------------------

    We received four comments regarding proposed Rule 304(a)(4).\523\ 
One commenter supports the Commission's proposal to introduce a 
mechanism for the suspension for a period not exceeding 12 months, 
limitation, or revocation of the exemption provided under Rule 3a1-
1(a)(2) because it believes that there must be a clear mechanism for 
removing non-compliant trading venues from ``the exchange-waiver regime 
rather than relying on more general enforcement powers.'' \524\ This 
commenter asserts that considering whether an NMS Stock ATS has 
accurately and timely filed Form ATS-N in determining whether the ATS 
qualifies for an exemption ``is necessary to ensure the credibility of 
these public disclosure documents and the accountability of the 
entities seeking the exemption.'' \525\
---------------------------------------------------------------------------

    \523\ See CFA Institute Letter at 4; Liquidnet Letter at 7-8; 
HMA Letter at 5-6; Better Markets Letter at 7.
    \524\ See CFA Institute Letter at 4.
    \525\ See id.
---------------------------------------------------------------------------

    In addition, one commenter states that the Commission ``should be 
empowered to suspend, limit, or revoke an ATS's exemption from the 
definition of an `exchange', irrespective of the assets traded on the 
ATS.'' \526\ We have determined to apply the additional conditions to 
the Exchange Act Rule 3a1-1(a) exemption, including Rule 304(a)(4), 
only to NMS Stock ATSs \527\ and are not adopting Rule 304(a)(4) to 
apply to non-NMS Stock ATSs at this time. We will consider the comment 
if we propose in the future to apply Rule 304, including Rule 
304(a)(4), to non-NMS Stock ATSs. We intend to monitor the 
implementation of Rule 304 to NMS Stock ATSs, and should we decide to 
take further action with applying Rule 304, including Rule 304(a)(4), 
to non-NMS Stock ATSs, we would do so in a separate rulemaking and take 
into account our experience with Rule 304 and NMS Stock ATSs.
---------------------------------------------------------------------------

    \526\ See HMA Letter at 5.
    \527\ See supra Section III.A.2.
---------------------------------------------------------------------------

    One commenter is concerned that the process to suspend, limit, or 
revoke an NMS Stock ATS's exemption provided under Rule 3a1-1(a)(2) 
could result in a sanction (such as suspension or revocation of its 
exemption) that is ``disproportionate to the alleged violation,'' and 
asks the Commission to reconsider such requirement.\528\ The Rule 
304(a)(4) process for the suspension, limitation, or revocation of the 
Rule 3a1-1(a)(2) exemption is designed in part to help prevent failure 
by an NMS Stock ATS to adhere to the conditions for the exemption. The 
conditions of the Rule 3a1-1(a) exemption are designed to, among other 
things, protect investors.\529\ We believe

[[Page 38809]]

that it is important to provide a process tailored to the regulatory 
structure for NMS Stock ATSs for the Commission to use in the event an 
NMS Stock ATS does not meet the conditions of the exemption as investor 
protections may be at risk. As proposed, prior to issuing an order 
suspending, limiting, or revoking an NMS Stock ATS's exemption pursuant 
to 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 Rule 304(a)(4)(i), 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. We believe that this process will provide an NMS Stock ATS 
with adequate opportunity to respond before Commission action, and will 
provide the Commission with an appropriate tool, subject to notice and 
hearing safeguards, to protect the public from an NMS Stock ATS that 
fails to comply with Regulation ATS or otherwise violates any provision 
of the federal securities laws.
---------------------------------------------------------------------------

    \528\ See Liquidnet Letter at 7-8.
    \529\ In the Regulation ATS Adopting Release, we stated our 
belief that the enhanced regulation of alternative trading systems 
that choose to remain registered broker-dealers under Regulation ATS 
provides more protection for the investors who use these systems. 
See Regulation ATS Adopting Release, supra note 3, at 70857.
---------------------------------------------------------------------------

    The exemption from the definition of ``exchange'' provided under 
Rule 3a1-1(a)(2) is conditional upon initial and ongoing compliance 
with Regulation ATS. As a result of this rulemaking, the conditions of 
the Rule 3a1-1(a)(2) exemption are being expanded for NMS Stock ATSs. 
An ATS that fails to comply with those conditions would fall outside 
the scope of the exemption. We believe 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 provided under Rule 3a1-
1(a)(2) if the NMS Stock ATS is operating or has operated in a manner 
such that the exemption for the NMS Stock ATS is not necessary or 
appropriate in the public interest, or is inconsistent with the 
protection of investors,\530\ and are adopting Rule 304(a)(4) 
substantially as proposed.\531\ We believe 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, we believe 
that revocation of the exemption would be appropriate upon the 
existence of a problem involving the ATS that significantly impacts the 
public interest and the protection of investors.
---------------------------------------------------------------------------

    \530\ See Proposal, supra note 2, at 81032.
    \531\ See supra note 522 and accompanying text. In the Proposal, 
we provided examples of when it would be appropriate to provide for 
the suspension, limitation, or revocation of an NMS Stock ATS's 
exemption pursuant to Rule 3a1-1(a)(2). See Proposal, supra note 2 
at 81032.
---------------------------------------------------------------------------

    Pursuant to Rule 304(a)(4)(ii), an NMS Stock ATS whose exemption 
has been suspended or revoked would be prohibited from operating 
pursuant to the Rule 3a1-1(a)(2) exemption; if an NMS Stock ATS were to 
continue to engage in Rule 3b-16 activity in NMS stocks without the 
exemption, it would be operating as an unregistered national securities 
exchange because it would no longer qualify for the exemption.\532\ If 
an NMS Stock ATS's exemption were limited pursuant to Rule 
304(a)(4)(i), 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 operated in a manner inconsistent with the 
terms and conditions of the order, it 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. We believe that the process for suspending, 
limiting, or revoking an NMS Stock ATS's exemption, if necessary or 
appropriate in the public interest, and consistent with the protection 
of investors, will protect investors in the event of non-compliance by 
an NMS Stock ATS with the conditions with which the NMS Stock ATS must 
adhere to continue to qualify for the exemption.
---------------------------------------------------------------------------

    \532\ If the Commission revoked or suspended the exemption of an 
NMS Stock ATS, the Commission could provide in its order a period of 
time for the NMS Stock ATS to wind down its operations. Because 
Commission orders revoking or suspending the exemption would be made 
public, market participants would also have notice of any wind down 
period. Additionally, if the Commission revoked the exemption of an 
NMS Stock ATS and the entity wished to continue operations, the 
entity could do so only if it were registered as a national 
securities exchange pursuant to Section 6 of the Exchange Act or 
were 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 entity would 
not be prohibited from filing a new Form ATS-N, pursuant to Rule 
304(a)(1)(i). 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.
---------------------------------------------------------------------------

    We also continue to believe that providing a process by which the 
Commission can determine to suspend, limit, or revoke an NMS Stock 
ATS's exemption will provide appropriate flexibility to address the 
specific facts and circumstances of an NMS Stock ATS's failure to 
comply with Regulation ATS.\533\ This process will also allow the 
Commission to consider the nature of the violation of federal 
securities laws and the potential harm to investors as a result of the 
non-compliance or violation. The process for the Commission to limit 
the exemption in Rule 3a1-1(a)(2) will allow flexibility to address 
specific disclosures or activities that are the cause of the non-
compliance with Regulation ATS or that violate federal securities 
laws.\534\ We believe 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 operating as an ATS.\535\ By comparison, we 
believe 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.\536\ Additionally, we believe that it could 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 NMS Stock ATS appears to be violating, or to 
have violated, the antifraud provisions of the federal securities 
laws.\537\ 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.\538\
---------------------------------------------------------------------------

    \533\ See Proposal, supra note 2, at 81033.
    \534\ See id. If the Commission finds 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 ATS to continue to operate as disclosed on 
its Form ATS-N, but prohibit the ATS from engaging in the 
undisclosed activity until the ATS properly amends its Form ATS-N in 
accordance with Rule 304(a)(2). Or, if the Commission finds that an 
NMS Stock ATS offers 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 ATS to continue to operate but prohibit the ATS from 
offering the order type, if it finds that doing so is necessary or 
appropriate in the public interest, and consistent with the 
protection of investors.
    \535\ See Proposal, supra note 2, at 81033.
    \536\ See id.
    \537\ See id.
    \538\ See id.
---------------------------------------------------------------------------

    Another commenter requests clarification regarding the process for 
revoking, suspending, or limiting an NMS Stock ATS's exemption. The 
commenter asks the Commission to clarify how an ATS could reestablish 
its exemption provided under Rule 3a1-1(a)(2) after it has been 
revoked. This commenter also questions whether there

[[Page 38810]]

will be penalties for non-compliance or whether the Commission's 
deliberations on the re-submitted Form ATS-N would in any way differ 
from those on initial Form ATS-N.\539\ An NMS Stock ATS whose exemption 
has been revoked cannot operate pursuant to the Rule 3a1-1(a)(2) 
exemption, and if such entity were to continue to engage in Rule 3b-16 
activity, it could be determined to be an unregistered national 
securities exchange in violation of Section 5 of the Exchange Act.\540\ 
To operate as an NMS Stock ATS after revocation, the entity would need 
to file a new initial Form ATS-N with the Commission. The Commission 
would review the Form ATS-N without prejudice and would not apply a 
different standard than it would to any other entity filing Form ATS-N 
pursuant to Rule 304(a)(1).
---------------------------------------------------------------------------

    \539\ See CFA Institute Letter at 5.
    \540\ See infra note 532 and accompanying text.
---------------------------------------------------------------------------

    One commenter also requests clarification regarding the procedure 
that the Commission will follow for an NMS Stock ATS that has had its 
exemption suspended for the maximum 12 months.\541\ Upon the expiration 
of the suspension period, an NMS Stock ATS could operate pursuant to 
its initial Form ATS-N, as long as its exemption is not otherwise 
limited or revoked and the NMS Stock ATS is otherwise in compliance 
with Rule 304. The suspension period is not to exceed 12 months, and 
the Commission could order a suspension period of less than 12 months. 
During the suspension period, the Commission could reevaluate the 
status of the NMS Stock ATS's exemption and determine, pursuant to Rule 
304(a)(4), to revoke or limit the Rule 3a1-1(a) 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.
---------------------------------------------------------------------------

    \541\ See CFA Institute Letter at 5.
---------------------------------------------------------------------------

    An additional commenter questions what action the Commission would 
take in the event that there are ``ambiguous, seemingly incomplete, or 
otherwise questionable disclosures that do not rise to the level of 
material deficiency,'' and suggests that the Commission apply 
``intermediate'' sanctions, such as monetary fines and the temporary 
suspension of the right to operate as an NMS Stock ATS without notice 
or hearing.\542\ The purpose of Rule 304(a)(4) is to prohibit the NMS 
Stock ATSs from operating in a manner inconsistent with the Rule 3a1-
1(a)(2) exemption, which we believe is necessary or appropriate in the 
public interest and consistent with the protection of investors. We do 
not believe it is appropriate to impose monetary fines or temporarily 
suspend an NMS Stock ATS's exemption without such due process, as 
suggested by the commenter. Any suspension, limitation, or revocation 
of an NMS Stock ATS's exemption provided by Rule 3a1-1(a)(2) would not 
preclude the Commission from using its enforcement authority if the NMS 
Stock ATS fails to comply with the federal securities laws.\543\
---------------------------------------------------------------------------

    \542\ See Better Markets Letter at 7.
    \543\ See generally Exchange Act Section 21C. The use of the 
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 enforcement authority, such as, for 
example, pursuant to Sections 10(b), 15(b)(4), and 15(c) (15 U.S.C. 
78(j)(b), 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 the exemption. For example, if an NMS Stock ATS 
failed to file a Form ATS-N amendment to disclose material changes 
to the operation of the ATS, the Commission could invoke the process 
to suspend, limit, or revoke the ATS's exemption, but would not be 
precluded from bringing an action against the broker-dealer operator 
of the ATS for failing to comply with Rule 304(a)(2), or violating 
the antifraud provisions of the federal securities laws.
---------------------------------------------------------------------------

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

1. Rule 304(b)(1): Form ATS-N ``Report''
    Rule 304(b)(1) provides that every Form ATS-N would constitute a 
report under the Exchange Act. Paragraph (1) of proposed Rule 304(b) 
(``Public disclosures'') provided 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. Proposed Rule 304(b)(1) is nearly identical to current 
Rule 301(b)(2)(vi),\544\ 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.\545\
---------------------------------------------------------------------------

    \544\ See 17 CFR 301(b)(2)(vi).
    \545\ 15 U.S.C. 78k-1, 78q(a), 78r(a), and 78ff(a). See 17 CFR 
242.301(b)(2)(vi). Section 17(a) of the Exchange Act imposes 
recordkeeping requirements on national securities exchanges and 
registered securities associations; Section 18(a) of the Exchange 
Act imposes liability for false or misleading statements with 
respect to a material fact in applications, reports, or documents 
filed pursuant to the Exchange Act or any rule or regulation 
thereunder; and Section 32(a) of the Exchange Act provides for 
penalties against any person that willfully violates any provision 
of, or that willfully and knowingly makes, or causes to be made, any 
false or misleading statements with respect to a material fact in 
any application, report, or document required to be filed under the 
Exchange Act or any rule or regulation thereunder.
---------------------------------------------------------------------------

    We received two comments on proposed Rule 304(b)(1).\546\ One 
commenter supports that Form ATS-N shall constitute a ``report'' within 
the meaning of applicable provisions of the Exchange Act.\547\ The 
other commenter expresses concern regarding the potential liability and 
consequences of the provision that Form ATS-N would constitute a 
``report'' within the meaning of Sections 11A, 17(a), 18(a), and 32(a) 
of the Exchange Act in light of the increased disclosure requirements 
under Form ATS-N.\548\ This commenter states that although this same 
standard applies to current Form ATS, the potential for an NMS Stock 
ATS to unknowingly but willfully file a statement that turns out to be 
false is heightened by the increased amount and scope of disclosure 
contemplated under Form ATS-N.\549\
---------------------------------------------------------------------------

    \546\ See Better Markets Letter at 7; SIFMA Letter at 33.
    \547\ See Better Markets Letter at 7.
    \548\ See SIFMA Letter at 33.
    \549\ See id.
---------------------------------------------------------------------------

    We do not believe that the fact that Form ATS-N requires more 
detailed disclosures than Form ATS would justify reducing the potential 
liability for false or misleading statements made in Form ATS-N 
disclosures. The information required on Form ATS-N is designed to 
provide the public with transparency into an NMS Stock ATS's operations 
and the ATS-related activities of the broker-dealer operator and its 
affiliates. Although the commenter does not directly object to Rule 
304(b)(1), the commenter argues that the Commission should narrow the 
scope of disclosures and standardize the Form ATS-N format in light of 
the potential liability this presents.\550\ In response to the 
comments, we have modified certain requests on Form ATS-N to remove 
language that some commenters believe is vague, and in many cases, 
changed questions to solicit more general information.\551\ Further, 
given that Form ATS-N will be made public, we expect that market 
participants will rely on these disclosures when making routing

[[Page 38811]]

decisions or assessing their brokers' routing practices, so it is 
critical that the disclosures constitute a ``report'' and are subject 
to the applicable consequences. We also believe that making Form ATS-N 
disclosures subject to liability as a ``report'' under the Exchange Act 
further will incentivize NMS Stock ATS operators to make truthful 
statements on Form ATS-N. We are adopting Rule 304(b)(1) as proposed.
---------------------------------------------------------------------------

    \550\ See id.
    \551\ See infra Section V.
---------------------------------------------------------------------------

2. Rule 304(b)(2): Making Public Form ATS-N Filings and Commission 
Orders.
    Rule 304(b)(2) provides which Form ATS-N filings and related orders 
the Commission would make public. Proposed Rule 304(b)(2) provided that 
we would make public, via posting on the Commission's website, each (1) 
order of effectiveness of a Form ATS-N; (2) order of ineffectiveness of 
a Form ATS-N; (3) effective Form ATS-N; (4) filed Form ATS-N amendment; 
(5) order of ineffectiveness of a Form ATS-N amendment; (6) notice of 
cessation; and (7) order suspending, limiting, or revoking the 
exemption from the definition of an ``exchange'' pursuant to Exchange 
Act Rule 3a1-1(a)(2). We are adopting Rule 304(b)(2) with modifications 
discussed below.\552\ In addition, as proposed, we specify that we will 
make NMS Stock ATS filings public via posting on the Commission's 
website.
---------------------------------------------------------------------------

    \552\ To conform to changes that provide that we will not issue 
orders of effective initial Form ATS-N, we have eliminated proposed 
Rule 304(b)(2)(i) from adopted Rule 304(b)(2). See supra Section 
IV.A.1. In addition, the Commission made the following technical, 
non-substantive modifications to the proposed text of Rule 
304(b)(2): (1) Renumbered proposed Rule 304(b)(2)(ii) through (vii); 
(2) reordered proposed Rule 304(b)(2)(iii) so that ``Effective Form 
ATS-N'' is adopted Rule 304(b)(2)(i); (3) changed the proposed 
language stating that the Commission ``would'' make public the 
documents specified in Rule 304(b)(2)(i)-(vii) to the Commission 
``will'' make public the documents specified in Rule 304(b)(2)(i) 
through (vi); (4) specified that the Commission will publish 
``initial'' Form ATS-N, as amended, under adopted Rule 304(b)(2)(i); 
(5) changed the proposed language that the Commission will make 
public each ``Order of ineffectiveness of a Form ATS-N'' to ``Order 
of ineffective initial Form ATS-N''; (6) changed references to 
uppercase ``Amendment'' in adopted Rule 304(b)(2)(iii) and (iv) to 
lowercase; (7) changed the language in adopted Rule 304(b)(2)(iv) 
from describing an ``Order of ineffectiveness of a'' Form ATS-N 
amendment to a ``Order of ineffective'' Form ATS-N amendment; and 
(8) modified language in the rule to state that the order 
suspending, limiting, or revoking the exemption in adopted Rule 
304(b)(2)(vi) will apply to the exemption for an ``NMS Stock ATS.'' 
We are adopting these changes to simplify and improve the clarity of 
the rule text and we do not believe that these changes impact the 
operation of the proposed rules. Because we are providing a process 
for NMS Stock ATSs to amend their initial Forms ATS-N during the 
Commission review period, we are also revising proposed Rule 
304(b)(2)(iii) (renumbered as Rule 304(b)(2)(i)) to state that the 
Commission will publish initial Form ATS-N, ``as amended,'' to 
specify that the initial Form ATS-N will reflect amendments made 
during the Commission review period. See supra Section IV.A.2 and 
Section IV.A.4.b. In addition, in response to comments, we are 
adopting a modified requirement that for material amendments, the 
cover page of the material amendment will be made public upon filing 
and the entirety of the material amendment, as amended, will be made 
public upon the expiration of the Commission review period. See 
infra Section IV.E.2.c. We are also adding to Rule 304(b)(2)(iii)(B) 
that the Commission will make public each updating or correcting 
amendment filed to a material amendment following the expiration of 
the review period for the material amendment pursuant to Rule 
304(a)(2)(ii). See id. We are also adopting Rule 304(b)(2)(iii)(B) 
to provide that the Commission will make the entirety of order 
display and fair access amendments, as well as updating amendments 
and correcting amendments, public upon filing. See id. We are also 
adopting Rule 304(b)(2)(iii)(A) to specify that the Commission will 
not make public the entirety of a material amendment that it 
declares ineffective. See id.
---------------------------------------------------------------------------

    As discussed above, many commenters support making Form ATS-N 
public, observing that market participants do not currently have access 
to sufficient, standardized information about the operations and 
ownership of NMS Stock ATSs.\553\ Nearly all commenters agree with the 
Commission's stated goal of enhancing transparency.\554\ Although many 
commenters express general support for public disclosure of Form ATS-N, 
many commenters recommend certain modifications or clarifications.
---------------------------------------------------------------------------

    \553\ See supra note 93 and accompanying text.
    \554\ See supra note 108.
---------------------------------------------------------------------------

    We continue to believe that making Form ATS-N filings publicly 
available is important because most market participants have limited 
access to information that permits them to adequately compare and 
contrast how an NMS Stock ATS would handle its orders with how a 
national securities exchange or other NMS Stock ATS would handle its 
orders.\555\ Currently, a Form ATS filed with the Commission by an ATS 
that trades NMS stocks is ``deemed confidential when filed'' under Rule 
301(b)(2)(vii) of Regulation ATS,\556\ whereas a national securities 
exchange is required to both (1) make available to the public its 
entire rulebook and (2) publicly file all proposed rule changes 
pursuant to Section 19(b) of the Exchange Act.\557\ The only 
information the Commission currently makes publicly available regarding 
ATSs is a list of the names and locations of ATSs with a Form ATS on 
file with the Commission, which is updated monthly.\558\ Unless an NMS 
Stock ATS voluntarily publicizes how its functionalities operate, 
market participants have limited information to adequately compare and 
contrast the operation of the ATS with that of a national securities 
exchange or another NMS Stock ATS. And when NMS Stock ATSs voluntarily 
make their Forms ATS-N public, the lack of uniformity or 
standardization makes it difficult to compare disclosures across ATSs. 
Currently, approximately 20 NMS Stock ATSs voluntarily post a Form ATS 
on their website. Some commenters, however, observe that in the absence 
of mandatory and uniform disclosure requirements, Forms ATS vary in 
content and the level of detail disclosed, and are therefore difficult 
to compare.\559\ Accordingly, through Form ATS-N, we are adopting 
disclosures that will provide information that market participants can 
use to perform these comparisons as they evaluate the ATS as a 
potential destination for their orders.
---------------------------------------------------------------------------

    \555\ See Proposal, supra note 2, at 81035.
    \556\ See 17 CFR 240.301(b)(2)(vii).
    \557\ See 15 U.S.C. 78s(b).
    \558\ See Alternative Trading System (``ATS'') List, https://www.sec.gov/foia/docs/atslist.htm.
    \559\ See, e.g., Consumer Federation of America Letter at 3; HMA 
Letter at 2; Morgan Stanley Letter at 1.
---------------------------------------------------------------------------

    We are adopting Rule 304(b)(2), with the modifications to address 
commenters' concerns, to mandate greater public disclosure of NMS Stock 
ATS operations through the publication of Form ATS-N. Adopted Rule 
304(b)(2) provides that the Commission will make Form ATS-N and related 
filings available via posting on the Commission's website. NMS Stock 
ATS broker-dealer operators will submit Form ATS-N filings via EDGAR, 
and the Commission will make such filings available on its website.
a. Public Disclosure of Effective Initial Form ATS-N, As Amended
    Several commenters express support for proposed Rule 
304(b)(2)(iii), which would make public an effective Form ATS-N.\560\ 
Four commenters agree with the Commission's approach of making initial 
Forms ATS-N publicly available once the Commission declared such forms 
effective.\561\ One commenter asserts that publishing a filing that is 
not yet effective, and may ultimately not be ``approved,'' will cause 
confusion among market participants regarding the manner of operation 
of the NMS Stock ATS.\562\ Another commenter states that requiring 
disclosure of Forms ATS-N that the Commission has declared ineffective 
``may place undue suspicion from market participants on ATSs that fail 
to gain exemption status on the first

[[Page 38812]]

attempt.'' \563\ The Commission will make only effective Forms ATS-N 
public because this would be less confusing for market participants. We 
expect that in the course of reviewing an initial Form ATS-N, 
Commission staff would likely engage in discussions with the entity 
regarding its disclosures and could request the entity to revise or 
augment its disclosures to cure deficiencies and provide market 
participants with greater clarity regarding the entity's operations. 
Accordingly, we continue to believe that it would be premature to make 
publicly available an initial Form ATS-N filing before it becomes 
effective because of the potential confusion that may result from 
making public disclosures on an initial Form ATS-N that is not 
effective. Therefore, under adopted Rule 304(b)(2)(i), the Commission 
will make public an effective initial Form ATS-N, as amended.
---------------------------------------------------------------------------

    \560\ See supra notes 110-123 and accompanying text.
    \561\ See CFA Institute Letter at 6; BIDS Letter at 3; UBS 
Letter at 3; LeveL ATS Letter at 7.
    \562\ See LeveL ATS Letter at 7.
    \563\ See CFA Institute Letter at 6.
---------------------------------------------------------------------------

    Adopted Rule 304(a)(1)(ii)(B) and Rule 304(a)(1)(iv)(C) provide 
processes for NMS Stock ATSs to amend their initial Forms ATS-N during 
the Commission review period. If, for example, the Commission staff 
provides comments to a broker-dealer operator suggesting modifications 
designed to enhance the completeness and comprehensibility of its 
initial Form ATS-N disclosures, the NMS Stock ATS would have the 
opportunity to file an amendment to respond to such comments during the 
Commission review period. We believe that it is appropriate to make 
public initial Form ATS-N, as revised by any such amendments (except 
for material amendments during the Commission review period),\564\ when 
the initial Form ATS-N becomes effective. Accordingly, we are revising 
proposed Rule 304(b)(2)(iii) (renumbered as Rule 304(b)(2)(i)) to state 
that the Commission will publish initial Form ATS-N, ``as amended.''
---------------------------------------------------------------------------

    \564\ Material amendments filed by Legacy NMS Stock ATSs during 
the Commission review period are subject to Rule 304(b)(2)(iii)(A), 
which provides that the entirety of a material amendment will not be 
made public until the expiration of the Commission's 30-calendar day 
review period. Therefore, under Rule 304(b)(2)(iii)(A), material 
amendments filed during the final 30 calendar days of the Commission 
review period would not be made public until the 30-calendar day 
Commission review period for such amendments has expired. For 
example, if an NMS Stock ATS files a material amendment on calendar 
day 230 of the Commission review period, and the Form ATS-N becomes 
effective on calendar day 240, the material amendment would remain 
subject to the Commission's review, and not publicly disclosed, for 
an additional 20 calendar days--until the Commission's 30-calendar 
day review period has expired. Under Rule 304(b)(2)(iii)(A), the 
cover page for any material amendments during the Commission review 
would be made public when the initial Form ATS-N becomes effective.
---------------------------------------------------------------------------

    Some commenters express concerns regarding the timing of publicly 
disclosing a filed Form ATS-N.\565\ One commenter states its view that 
for Legacy NMS Stock ATSs that are filing Form ATS-N for the first 
time, the Commission should not make any Forms ATS-N public until the 
date on which the Commission has completed the review of the initial 
Form ATS-N filings for all Legacy NMS Stock ATSs, so that a Legacy NMS 
Stock ATS is not disadvantaged by making its Form ATS-N public prior to 
other Legacy NMS Stock ATSs.\566\ As we stated in the Proposal, and as 
many commenters have agreed,\567\ the public has a strong interest in 
public disclosure about the operations of NMS Stock ATSs. For some 
Legacy NMS Stock ATSs, the review period may be extended pursuant to 
Rule 304(a)(1)(iv)(B). We believe that disclosure of all Legacy NMS 
Stock ATSs' Forms ATS-N should not be delayed during any extended 
review period that may be necessary for the Commission to review any 
Legacy NMS Stock ATS's initial Form ATS-N that raises novel or complex 
issues and therefore requires additional time for review.\568\ 
Additionally, some NMS Stock ATSs may not wish to delay public 
disclosure once their Forms ATS-N become effective, and it is neither 
in the public interest nor in the interest of those NMS Stock ATSs to 
withhold effective Forms ATS-N from the public.
---------------------------------------------------------------------------

    \565\ See Liquidnet Letter at 3; SSGA Letter at 2; Fidelity 
Letter at 7-8; STANY Letter at 3; UBS Letter at 6-8; Luminex Letter 
at 2,4; PDQ Letter at 2; SIFMA Letter at 4.
    \566\ See Liquidnet Letter at 3.
    \567\ See, e.g., MFA/AIMA Letter at 2; Schneiderman Letter at 2; 
ICI Letter at 1; CFA Institute Letter at 3; Consumer Federation of 
America Letter at 6.
    \568\ See Rule 304(a)(1)(ii).
---------------------------------------------------------------------------

    Several commenters suggest that the Commission should make certain 
information required by Form ATS-N available only to the 
Commission.\569\ Some commenters state that the scope of items required 
for public disclosure, particularly those related to the administration 
of the ATS, is too detailed and may not be helpful to market 
participants in making routing decisions.\570\ We believe that Form 
ATS-N, as adopted, solicits the appropriate level of information about 
NMS Stock ATSs that would be useful to subscribers and market 
participants.\571\ In response to commenters, we have revised proposed 
Form ATS-N to remove certain requests that commenters believe are not 
relevant to subscribers, limited the scope of certain requests that 
commenters believe to be too broad, and narrowed certain requests to 
only require summary information or specific information to avoid the 
disclosure of commercially sensitive information.\572\ We nevertheless 
believe that responses to Form ATS-N requests must be sufficiently 
detailed for subscribers and market participants to adequately 
understand the operations of an NMS Stock ATS and the ATS-related 
activities of the broker-dealer operator and its affiliates.
---------------------------------------------------------------------------

    \569\ See SSGA Letter at 2; Fidelity Letter at 7-8; STANY Letter 
at 3; UBS Letter at 6-8; Luminex Letter at 2,4; PDQ Letter at 2; 
SIFMA Letter at 4.
    \570\ See Luminex Letter at 2; SIFMA Letter at 4; KCG Letter at 
6.
    \571\ See infra Section V.
    \572\ See id.
---------------------------------------------------------------------------

    Other commenters express concern that publicly disclosing Form ATS-
N could result in the disclosure of an NMS Stock ATS's proprietary or 
commercially sensitive information.\573\ In particular, and as 
discussed further below, commenters express concern about disclosing 
information regarding classification of subscribers,\574\ details about 
administrative operations of broker-dealer operators,\575\ and 
contractual agreements between broker-dealer operators and their 
clients,\576\ and NMS Stock ATSs and their vendors.\577\ One commenter 
raises concern about customer confidentiality.\578\ We have determined 
not to adopt the proposed Exhibit 1 requirements \579\ and have revised 
the Form ATS-N requests to not seek disclosure of certain information 
that could be proprietary or commercially sensitive, such as routing 
tables or numerical order flow segmentation metrics.\580\ We do not 
believe that the vast majority of information responsive to adopted 
Form ATS-N would be proprietary or commercially sensitive. Furthermore, 
we do not believe that the requests of adopted Form ATS-N, as modified, 
would require NMS Stock

[[Page 38813]]

ATSs to compromise customer confidentiality when making thorough and 
accurate disclosures.
---------------------------------------------------------------------------

    \573\ See Fidelity Letter at 8; UBS Letter at 7; Luminex Letter 
at 2-4; SIFMA Letter at 16.
    \574\ See Fidelity Letter at 8; UBS Letter at 7.
    \575\ See Fidelity Letter at 4; Luminex Letter at 2-4.
    \576\ See UBS Letter at 7.
    \577\ See SIFMA Letter at 16.
    \578\ See PDQ Letter at 2.
    \579\ See infra Section V.B.2. Exhibit 1 would have required NMS 
Stock ATSs to attach 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. The determination not to 
adopt this proposed requirement renders irrelevant the comment 
regarding allowing NMS Stock ATSs to post updated marketing 
materials on their websites. See infra note 705 and accompanying 
text.
    \580\ See infra Sections V.D.5, V.D.13, V.D.16.
---------------------------------------------------------------------------

    Some commenters that believe that Form ATS-N disclosures may be too 
detailed to be helpful to market participants \581\ or that they may 
disclose proprietary or commercially sensitive information suggest that 
the Commission make only parts of Form ATS-N public, or delay public 
disclosure of certain parts of Form ATS-N.\582\ Specifically, one 
commenter suggests that the Commission require NMS Stock ATSs to submit 
a full Form ATS-N to the Commission, but only provide that a selected 
sub-set of fields be publicly disclosed.\583\ We are not adopting the 
commenters' suggestions to limit public disclosures because the vast 
majority of adopted Form ATS-N will not require the disclosure of 
proprietary or commercially sensitive information.\584\ In addition, 
not making certain items public would undercut the transparency that is 
the primary purpose of this rulemaking.\585\ Another commenter suggests 
that the Commission should consider ``tiering'' proprietary information 
by first making it only available to the Commission and subscribers, 
and after a ``reasonable'' time lag, further disseminating such 
information to the general public.\586\ In response to commenter 
concerns, the cover page of the filed material amendment will be made 
public by the Commission upon filing and, unless the Commission 
declares the material amendment ineffective, the entirety of the 
material amendment, as amended, will be made public by the Commission 
following the Commission's 30-calendar day review period.\587\
---------------------------------------------------------------------------

    \581\ See SSGA Letter at 2.
    \582\ See T. Rowe Price Letter at 2.
    \583\ See SSGA Letter at 2.
    \584\ See infra Sections V.C.6, V.D.6, V.D.13, V.D.23.
    \585\ One commenter believes that an ATS should have the ability 
to file supplemental materials with the Commission that are not part 
of the public filing as long as the ATS's public filing accurately 
responds to all questions on the Form ATS-N. See Liquidnet Letter at 
9. We have determined not to adopt a formal process through which 
broker-dealer operators can disclose supplemental information for 
Commission review alone. We believe that the primary purpose of Form 
ATS-N is to provide the public with critical information regarding 
NMS Stock ATS operations and affiliate relationships.
    \586\ See T. Rowe Price Letter at 2.
    \587\ See Section IV.E.2.c.
---------------------------------------------------------------------------

    Another commenter states that, although the Commission should not 
address commenters' concerns regarding disclosure of sensitive or 
proprietary information,\588\ by automatically making any portion of 
Form ATS-N confidential, if a ``genuine need for confidentiality 
exists,'' the broker-dealer can obtain confidential treatment under 
Commission Rule 24b-2, and suggests that the Commission provide 
guidance around the use of this limited exception.\589\ We believe that 
questions on adopted Form ATS-N, as modified, do not solicit the type 
of information that typically would constitute confidential 
information.\590\ The existing processes for obtaining confidential 
treatment will remain available to broker-dealer operators.\591\ 
Furthermore, the purpose of Form ATS-N is to create a public 
transparency regime for NMS Stock ATSs, with commensurate benefits, and 
allowing disclosures to be made only to the Commission would be 
contrary to the purposes of this rulemaking.
---------------------------------------------------------------------------

    \588\ See supra notes 574-578 and accompanying text.
    \589\ See Investor Advocate Letter at 10-11.
    \590\ See supra note 584 and accompanying text.
    \591\ See 17 CFR. 240.24b-2.
---------------------------------------------------------------------------

    In addition, FINRA requests that the Commission require NMS Stock 
ATSs to file duplicate copies of Form ATS-N submissions with FINRA so 
that FINRA has access to these filings before they become effective, or 
in the event that they are deemed ineffective and thus never made 
public.\592\ Requiring an NMS Stock ATS to provide Form ATS-N filings 
to the SRO of which the ATS is a member before the filings become 
effective or are declared ineffective would place additional 
administrative burdens on the NMS Stock ATS, particularly in the event 
the NMS Stock ATS amends its Form ATS-N during discussion with the 
Commission staff. We continue to believe that making Form ATS-N public 
will enhance the information available to market participants and 
benefit the marketplace, and therefore are adopting Rule 304(b)(2)(i), 
to provide that the Commission will make public each effective initial 
Form ATS-N, as amended.\593\
---------------------------------------------------------------------------

    \592\ See FINRA Letter at 2-3.
    \593\ See supra note 552.
---------------------------------------------------------------------------

b. Public Disclosure of Orders of an Ineffective Initial Form ATS-N
    Because the Commission will not issue orders of effective initial 
Forms ATS-N, adopted Rule 304(b)(2) does not include each ``Order of 
effectiveness of a Form ATS-N.'' We continue to believe that it is 
appropriate to make public each order of ineffective Form ATS-N, 
substantially as proposed,\594\ to provide the public with notice 
regarding the regulatory status of potential trading venues; if a Form 
ATS-N is declared ineffective, the ATS may not operate pursuant to the 
exemption from the definition of ``exchange,'' and the public should be 
aware of such regulatory status.
---------------------------------------------------------------------------

    \594\ We proposed this requirement as Rule 304(b)(2)(i) and are 
adopting this requirement as Rule 304(b)(2)(ii).
---------------------------------------------------------------------------

    Other than the comment about orders of ineffectiveness relating to 
a Legacy NMS Stock ATS's initial Form ATS-N, which is discussed 
above,\595\ we received no comments on making public orders of 
effective or ineffective Form ATS-N. We continue to believe that it is 
necessary to make public an order of ineffective Form ATS-N for market 
participants to be informed of the operating status of an NMS Stock 
ATS. Therefore, we are adopting Rule 304(a)(2)(ii) to provide that 
orders of ineffective initial Form ATS-N will be made public, with 
modifications to reduce any potential ambiguity and improve readability 
of the rule text.\596\
---------------------------------------------------------------------------

    \595\ See supra note 433 and accompanying text.
    \596\ Adopted Rule 304(b)(2)(ii) states that this provision 
applies to each ``[o]rder of ineffective initial Form ATS-N'' 
instead of the proposed language, which stated that the provision 
would apply to each ``[o]rder of ineffectiveness of a Form ATS-N.'' 
As discussed above, the Commission will, by order, declare 
ineffective an initial 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. See supra Section IV.A.3. We believe that 
the revised rule text reduces any potential ambiguity by specifying 
that the public disclosure requirement applies to orders related to 
``initial'' Form ATS-N and simplifying the rule language.
---------------------------------------------------------------------------

c. Public Disclosure of Form ATS-N Amendments
    We proposed, in Rule 304(a)(2)(iv), making all filed amendments to 
Form ATS-N public; as proposed, Form ATS-N amendments would have been 
public during the Commission review period and prior to the 
Commission's determination of whether a Form ATS-N amendment should be 
declared ineffective.
    In the Proposal, we asked whether commenters believe that the 
Commission should make public on its website upon filing a Form ATS-N 
amendment for a material change, and whether there should be a delay in 
when the Form ATS-N for a material change is made public.\597\ We 
received several comments on this aspect of the Proposal.\598\ Although 
one commenter agrees with our proposal to make Form ATS-N amendments 
public upon filing because it would keep market participants informed 
about changes to

[[Page 38814]]

potential trading venues,\599\ several other commenters express 
concerns about making Form ATS-N amendments public upon filing or argue 
that the Commission should make amendments public only once the related 
changes are operative.\600\ Some of these commenters state that public 
disclosure of changes to ATS operations at least 30 calendar days 
before such changes are implemented may burden the ability of NMS Stock 
ATSs to act competitively, or may reduce the competitive advantage 
associated with being the first to innovate.\601\ In addition, 
commenters assert that making public Form ATS-N amendments that may 
never be implemented could be confusing or misleading to market 
participants; \602\ one commenter states that publicly disclosing 
material changes in advance of implementation could cause market 
participants to not understand current operations of an NMS Stock ATS 
versus its proposed, future operations.\603\ One commenter asserts that 
immediate publication of amendments would stifle dialogue between the 
NMS Stock ATS and Commission staff.\604\ Another commenter states that 
it does not believe that making Form ATS-N amendments public upon 
filing would provide a benefit to market participants as ``existing 
documents'' should be adequate for market participants considering 
whether to use a particular NMS Stock ATS.\605\
---------------------------------------------------------------------------

    \597\ See Proposal, supra note 2, at 81028.
    \598\ See ICI Letter at 3; Liquidnet Letter at 6; SIFMA Letter 
at 31; UBS Letter at 3; BIDS Letter at 4; STA Letter at 5; STANY 
Letter at 2; CFA Institute Letter at 6; LeveL ATS Letter at 7.
    \599\ See ICI Letter at 3, n.3.
    \600\ See Liquidnet Letter at 6; SIFMA Letter at 31; UBS Letter 
at 3; BIDS Letter at 4; STA Letter at 5; STANY Letter at 2; CFA 
Institute Letter at 6; LeveL ATS Letter at 7. Some commenters state 
that an amendment to Form ATS-N should not be made public until it 
is declared effective. See, e.g., SIFMA Letter at 31; UBS Letter at 
3. We, however, did not propose, and are not adopting, a process for 
declaring amendments to Form ATS-N effective. The Commission will 
have a 30-calendar day review period to declare amendments to Form 
ATS-N ineffective. See supra Section IV.B.2.
    \601\ See LeveL ATS Letter at 7-8. See also SIFMA Letter at 31; 
STANY Letter at 2.
    \602\ See BIDS Letter at 4; UBS Letter at 3; LeveL ATS Letter at 
7.
    \603\ See UBS Letter at 3.
    \604\ See Liquidnet Letter at 6-7.
    \605\ See BIDS Letter at 4.
---------------------------------------------------------------------------

    We are modifying the proposed rules for making Form ATS-N 
amendments to an effective Form ATS-N public. In response to 
commenters' concerns, we are adding new subparagraph (b)(2)(iii)(A) to 
Rule 304 to provide that, for material amendments (as defined by Rule 
304(a)(2)(i)(A)) to an effective Form ATS-N, the cover page of the 
filed material amendment will be made public by the Commission upon 
filing and, unless the Commission declares the material amendment 
ineffective, the entirety of the material amendment, as amended, will 
be made public by the Commission following the Commission's 30-calendar 
day review period. In addition, we are adding new subparagraph 
(b)(2)(iii)(B) to Rule 304 to provide that, for updating, correcting, 
and order display and fair access amendments (as defined by Rule 
304(a)(2)(i)(B), (C), and (D), respectively) to an effective Form ATS-
N, the entirety of the updating, correcting, or order display and fair 
access amendment will be made public by the Commission upon filing. We 
are also adding to subparagraph (b)(2)(iii)(B) that an updating or 
correcting amendment filed to a material amendment will be made public 
by the Commission following the expiration of the review period for 
such material amendment pursuant to paragraph (a)(2)(ii) of Rule 304.
    We share the commenters' concerns that making public Form ATS-N 
material amendments before expiration of the Commission's 30-day 
calendar review period could be confusing or misleading to the public, 
particularly in the event the material amendment is declared 
ineffective and the related change is never implemented. One commenter 
asserts that advance disclosure of Form ATS-N amendments may burden 
market participants who feel obligated to review premature disclosures 
for possible effects on them and their underlying customers.\606\ We 
believe that publicly disclosing the cover page to a Form ATS-N 
material amendment during the review period, and disclosing the entire 
material amendment following the expiration of 30-calendar day 
Commission review period, when the related changes can be implemented, 
will reduce any potential for confusion and will not pose an undue 
burden on market participants.
---------------------------------------------------------------------------

    \606\ See SIFMA Letter at 32.
---------------------------------------------------------------------------

    In addition, we share the commenters' concerns that providing 
advance public notice of material changes to NMS Stock ATSs could 
burden ATSs, which would be required to provide at least 30-calendar 
day advance notice of material changes to all market participants, 
including their competitors. Requiring such advance public notice of 
material changes before they are implemented could reduce incentives 
for NMS Stock ATSs to innovate.
    However, we continue to believe that market participants that are 
planning routing strategies would benefit from advance notice that the 
NMS Stock ATS is planning changes to its operations or conflicts of 
interest. To minimize the potential competitive harm of advance public 
notice, while also providing the benefits of immediate public 
transparency, the Commission will make public the cover page of a 
material amendment to an effective Form ATS-N upon filing of such 
amendment. The cover page will indicate that the NMS Stock ATS has 
filed a material amendment and provide a brief narrative about the 
content of the amendment. An NMS Stock ATS is required to indicate the 
part and item number of Form ATS-N that is subject to the change, state 
whether or not such change will apply to all subscribers and the 
broker-dealer operator, and provide a brief summary of the changes. For 
example, if an NMS Stock ATS is introducing a new order type, the brief 
narrative might state: ``The ATS is amending Part III, Item 7(a) of 
Form ATS-N to include a new order type, which will be available to all 
subscribers.''
    In addition, we are adding, in new subparagraph (b)(2)(iii)(A) to 
Rule 304, that the Commission will, following the expiration of the 30-
calendar day Commission review period pursuant to Rule 304(a)(2)(ii), 
make public the entirety of the material amendment ``as amended.'' We 
are providing a process, under Rule 304(a)(2)(ii), for NMS Stock ATSs 
to file updating and correcting amendments under Rule 304(a)(2)(i)(B) 
and (C), respectively, to material amendments during the Commission 
review period. In addition, Rule 304(b)(2)(iii)(B) provides that an 
updating or correcting amendment filed to a material amendment will be 
made public by the Commission following the expiration of the review 
period for such material amendment pursuant to Rule 304(a)(2)(ii). We 
believe that disclosing updating and correcting amendments to material 
amendments before expiration of the Commission's 30-day calendar review 
period for the material amendment (and before the material amendment is 
made public) could be confusing or misleading to the public as the 
underlying material amendment would not yet be public or operative. We 
will make public material amendments ``as amended;'' material 
amendments will reflect any updating and correcting amendments filed 
during the Commission review period. Such amended disclosures could 
provide market participants with more complete and comprehensible 
information about NMS Stock ATS operations and the activities of their 
broker-dealer operators and affiliates. Accordingly, Rule 
304(b)(2)(iii)(B) provides that an updating or correcting amendment 
filed to a material amendment will be made public by the Commission 
following the

[[Page 38815]]

expiration of the review period for such material amendment pursuant to 
Rule 304(a)(2)(ii), and Rule 304(b)(2)(iii)(A) provides that a material 
amendment will be made public, as amended, which would incorporate any 
amendments that were filed to the material amendment during the 
Commission review period.
    The change to delay making the entirety of Form ATS-N material 
amendments, as amended, public until after the Commission has completed 
the review will not impact the manner in which we proposed to make 
public updating, correcting, and order display and fair access 
amendments. Form ATS-N updating amendments require NMS Stock ATSs to, 
no later than 30 calendar days after the end of a calendar quarter, 
correct information that has become inaccurate or incomplete for any 
reason and was not required to be reported to the Commission as a Form 
ATS-N amendment pursuant to Rules 304(a)(2)(i)(A), (C), or (D).\607\ 
NMS Stock ATSs are required to correct information in any previous 
disclosure on Form ATS-N through a correcting amendment after discovery 
that any material information previously filed on Form ATS-N was 
inaccurate or incomplete when filed.\608\ Order display and fair access 
amendments are required to be filed no later than seven calendar days 
after information required to be disclosed in Part III, Items 24 and 25 
on Form ATS-N has become inaccurate or incomplete.\609\ We proposed 
that all amendments, which include Form ATS-N updating and correcting 
amendments (as well as material amendments), be made public upon 
filing. Two commenters assert that publicly disclosing changes that the 
Commission could later declare ineffective could create confusion among 
market participants.\610\ Although, as adopted, the Commission would 
not make the entirety of material amendments public until after its 30-
calendar day review period expires, because correcting, updating, and 
order display and fair access amendments would be made public upon 
filing, the Commission could declare such an amendment ineffective 
after it has been made public. We continue to believe that, even with 
the risk of some confusion if updating, correcting, and order display 
and fair access amendments later were declared ineffective, it is 
appropriate to make updating, correcting, and order display and fair 
access amendments to an effective Form ATS-N public upon filing because 
the related changes, any inaccurate or incomplete disclosures about the 
operation of the NMS Stock ATS, or triggering of the order display and 
execution access and fair access thresholds, may have been implemented 
at or before the time of filing, and we believe that it is crucial that 
market participants have updated information about current NMS Stock 
ATS operations.\611\
---------------------------------------------------------------------------

    \607\ See Rule 304(a)(2)(i)(B) and supra Section IV.B.1.b.
    \608\ See Rule 304(a)(2)(i)(C).
    \609\ See Rule 304(a)(2)(i)(D).
    \610\ See LeveL ATS Letter at 7; UBS Letter at 3.
    \611\ An updating or correcting amendment to a material 
amendment during Commission review will not be made public until the 
material amendment that is amended becomes public. We believe this 
is appropriate because updating and correcting amendments to a 
material amendment during Commission review would amend a material 
amendment that is not yet public or operative.
---------------------------------------------------------------------------

    With respect to amendments declared ineffective, one commenter 
states that such amendments should be returned to the NMS Stock ATS and 
not be made publicly accessible.\612\ Under Rule 304(b)(2)(iii)(A), as 
adopted, the Commission is specifying that it will not make public the 
entirety of a material amendment that it declares ineffective. The 
Commission would, however, upon filing, make public on its website the 
cover page of the material amendment, and subsequently, any order of 
ineffectiveness related to such material amendment. In addition, 
because the Commission will make public updating, correcting, and order 
display and fair access amendments to an effective Form ATS-N upon 
filing, such amendments will be publicly available even if the 
Commission declares such amendments ineffective during its 30-calendar 
day review period. We believe that it is appropriate to make public 
updating, correcting, and order display and fair access amendments upon 
filing, even if the Commission could later declare them ineffective, 
because, unlike material amendments, the disclosures included in 
updating, correcting, and order display and fair access amendments have 
been implemented and reflect an NMS Stock ATS's current operations and 
affiliate relationships. If the Commission later declares an updating, 
correcting, or order display and fair access amendment ineffective, it 
will issue an order of ineffectiveness, which the Commission will make 
public to notify market participants that such change is no longer in 
effect.
---------------------------------------------------------------------------

    \612\ See SIFMA Letter at 31.
---------------------------------------------------------------------------

    Three commenters state that by making pending amendments public, 
the Commission may incidentally turn the process into a review, notice, 
and comment period.\613\ Under the adopted rule, the Commission will 
not make material amendments to Form ATS-N public until the Commission 
review period has expired. Further, the Commission does not believe 
that publicly disclosing the brief description of a material amendment 
on the cover page of Form ATS-N or publicly disclosing correcting, 
updating, and order display and fair access amendments upon filing will 
create a public notice, comment, and review period, as the Commission 
is not soliciting public comments on amendments.\614\ This process will 
be distinct from the proposed rule filing process for national 
securities exchanges, in which the Commission solicits comment for 
proposed rule changes and considers whether rule changes are consistent 
with the Exchange Act.
---------------------------------------------------------------------------

    \613\ See SIFMA Letter at 32; Morgan Stanley Letter at 4; KCG 
Letter at 4.
    \614\ See supra Section IV.B.2.
---------------------------------------------------------------------------

    Two commenters suggest that material amendments should be made 
public after the Commission has completed its review, but prior to 
implementation.\615\ We are not adopting this suggestion because doing 
so would require that, to provide additional time for public disclosure 
after the end of the Commission review period, either the Commission 
truncate the period for Commission review from the entire 30-calendar 
day advance notice period, which we believe is necessary for the 
review,\616\ to a shorter segment of the total 30-calendar day advance 
notice period, or require that NMS Stock ATSs disclose changes further 
in advance, which could potentially be burdensome for NMS Stock ATSs.
---------------------------------------------------------------------------

    \615\ See UBS Letter at 3; STA Letter at 5.
    \616\ See supra Section IV.A.2.
---------------------------------------------------------------------------

    In addition, we received comments asking for clarification 
regarding the process for a Legacy NMS Stock ATS to file amendments to 
its Form ATS while the Commission is reviewing the ATS's initial Form 
ATS-N.\617\ In response, we are requiring that a Legacy NMS Stock ATSs 
amend only its initial Form ATS-N, and not its Form ATS, during the 
Commission review period.\618\ Further, a Legacy NMS Stock ATS's Form 
ATS-N will not be made public until the end of the Commission review 
period under Rule 304(a)(1)(iv)(B). Rule 304(b)(2)(iii) provides that 
amendments to an effective Form ATS-N will be made public. Accordingly, 
amendments to a Form ATS-N filed by a Legacy NMS Stock ATS during the 
Commission review period will not be made public until after the 
Commission review period has ended and the Form ATS-N

[[Page 38816]]

becomes effective. We believe that making Form ATS-N amendments public 
before the initial Form ATS-N is public would provide little utility, 
and would likely only confuse market participants. At the end of the 
Commission review period, a Legacy NMS Stock ATS's initial Form ATS-N 
will be made public, along with all filed correcting, updating, and 
order display and fair access amendments, material amendments for which 
the Commission's 30-calendar day review period has expired, and the 
cover pages to any material amendments during the Commission review 
period.
---------------------------------------------------------------------------

    \617\ See supra note 438 and accompanying text.
    \618\ See supra Section IV.A.4.
---------------------------------------------------------------------------

d. Public Disclosure of Orders of Ineffective Form ATS-N Amendment
    Under Rule 304(b)(2)(iv), the Commission will make public each 
order of ineffective Form ATS-N amendment. This would provide notice to 
market participants that the Commission had declared a Form ATS-N 
amendment ineffective. We received no comments on making public orders 
of ineffective Form ATS-N amendments. We are adopting proposed Rule 
304(b)(2)(v) as adopted Rule 304(b)(2)(iv).\619\
---------------------------------------------------------------------------

    \619\ See supra note 552.
---------------------------------------------------------------------------

e. Public Disclosure of Notices of Cessation
    Under Rule 304(b)(2)(v) (which was proposed as Rule 
304(b)(2)(vi)),\620\ the Commission will make public each notice of 
cessation of a Form ATS-N filed pursuant to Rule 304(a)(3). One 
commenter states that it supports our proposal to make notices of 
cessation publicly available.\621\ No commenters express opposition to 
such requirement. We continue to believe that making public each 
properly filed Form ATS-N notice of cessation will 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 will provide market participants with the date 
that the NMS Stock ATS will cease operations, as designated by the NMS 
Stock ATS, and allow them to make arrangements to select alternative 
routing destinations for their orders. Therefore, we are adopting as 
proposed the requirement for public disclosure of notices of cessation.
---------------------------------------------------------------------------

    \620\ See id.
    \621\ See ICI Letter at 11.
---------------------------------------------------------------------------

f. Public Disclosure of Each Order Suspending, Limiting, or Revoking 
the Rule 3a1-1(a)(2) Exemption
    Under proposed Rule 304(b)(2)(vii), the Commission would make 
public each order suspending, limiting, or revoking the exemption 
provided pursuant to Rule 3a1-1(a)(2). We did not receive any comments 
on this requirement. We believe that it is important for market 
participants to be aware of whether an NMS Stock ATS is subject to an 
order suspending, limiting, or revoking the exemption from the 
definition of ``exchange'' when they are making their routing decisions 
because such an order could prevent an NMS Stock ATS from operating, or 
it could limit its functionality. Therefore, we are adopting 
substantially as proposed the requirement that the Commission make 
public each order suspending limiting, or revoking the exemption from 
the definition of ``exchange,'' as renumbered Rule 304(b)(2)(vi).\622\
---------------------------------------------------------------------------

    \622\ See supra note 552. We are making one modification to 
specify that this applies to the exemption ``for an NMS Stock ATS.''
---------------------------------------------------------------------------

3. Rule 304(b)(3): Disclosure of Form ATS-N on the NMS Stock ATS's 
Website
    Proposed Rule 304(b)(3) required each NMS Stock ATS to make public 
via posting on its website a direct URL hyperlink to the Commission's 
website that contains the documents enumerated in proposed Rule 
304(b)(2).
    We received two comments on proposed Rule 304(b)(3).\623\ One 
commenter supports adding a requirement for NMS Stock ATSs to post the 
effective Forms ATS-N on their own websites and not simply provide 
links to the Commission's website.\624\ Another commenter requests that 
rather than requiring materials to be posted centrally through the 
Commission, the Commission should allow an NMS Stock ATS to post its 
disclosure materials on its public website.\625\ We are not adopting a 
requirement that an NMS Stock ATS post its filings on its own website 
because it believes that requiring each NMS Stock ATS to provide a link 
to the Commission's website, which will link to Form ATS-N filings in 
EDGAR, will provide market participants easy and uniform access to Form 
ATS-N filings. The link to the Commission website would provide users 
with access to all new filings available in EDGAR.
---------------------------------------------------------------------------

    \623\ See CFA Institute Letter at 6; UBS Letter at 3.
    \624\ See CFA Institute Letter at 6.
    \625\ See UBS Letter at 3.
---------------------------------------------------------------------------

    We are adopting, with modifications, the requirement that each NMS 
Stock ATS make public via posting on its website a direct URL hyperlink 
to the Commission's website that contains the documents enumerated in 
proposed Rule 304(b)(2). We continue to believe that the requirement of 
posting on the NMS Stock ATS's website a direct URL hyperlink to the 
Commission's website 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 
made available through the Commission's website.\626\
---------------------------------------------------------------------------

    \626\ See Proposal, supra note 2, at 81035.
---------------------------------------------------------------------------

V. Form ATS-N Disclosures

A. Form ATS-N Disclosure Requirements and Definitions

1. Rule 304(c): Disclosure Requirements
    Proposed Rule 304(c)(1) required 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. Unlike proposed Rule 
304(c)(2), reports required under Rule 304 must be filed electronically 
on Form ATS-N, include all information as prescribed in Form ATS-N and 
the Instructions thereto, and contain an electronic signature that is 
authenticated by manual signature. Further, proposed Rule 304(c)(2) 
required that such document be executed before or at the time Form ATS-
N is electronically filed and be retained by the NMS Stock ATS in 
accordance with Rule 303.\627\ The proposed Form ATS-N required the 
signator to represent that the information and statements in the 
applicable Form ATS-N, including exhibits, schedules, or other 
documents attached to the Form ATS-N, and other information filed with 
the Form ATS-N, are current, true, and complete.\628\
---------------------------------------------------------------------------

    \627\ See id.
    \628\ See Proposed Form ATS-N, Part V.
---------------------------------------------------------------------------

    We are adopting Rule 304(c)(2), with technical and non-substantive 
modifications to reduce redundancy and reduce potential ambiguity about 
the filing requirements for Form ATS-N.\629\

[[Page 38817]]

In the Proposal, the Commission stated that Regulation ATS requires NMS 
Stock ATSs to register as broker-dealers with the Commission, which 
entails becoming a member of an SRO, such as FINRA, and fully complying 
with the broker-dealer regulatory regime.\630\ The Commission requested 
comment on whether the certification under FINRA Rule 3130 would help 
ensure an NMS Stock ATS's compliance with proposed Rule 304, including 
the requirement that disclosures on Form ATS-N be accurate, current, 
and complete.\631\ The Commission received two comment letters 
regarding the requirement that an authorized person certify that the 
form is ``current, true, and complete.'' \632\ One commenter supports 
the certification requirement.\633\ Another commenter expresses concern 
about immaterial errors being a basis for liability.\634\
---------------------------------------------------------------------------

    \629\ The Commission is deleting the word ``electronically'' and 
the language ``and contain an electronic signature'' in the first 
sentence of proposed Rule 304(c)(2). All NMS Stock ATSs are required 
to file Form ATS-N through EDGAR. Therefore, we believe that 
referencing the term ``electronic'' and ``electronic signature'' is 
redundant because all filings are electronically submitted through 
EDGAR. We are deleting the second sentence (regarding manually 
signing a signature page or document) and instead adding a reference 
to 232.302 of Regulation S-T, which includes the general rules for 
electronic filings, including rules governing electronic signatures. 
We are also modifying the third sentence of Rule 304(c)(2) to state 
that any report filed under Rule 304 shall be executed ``at, or 
prior to,'' the time the Form ATS-N is filed (instead of ``before or 
at''). We are also adding a reference to the Instructions in Form 
ATS-N, which includes the requirement for NMS Stock ATSs to maintain 
a paper copy with original manual signatures, instead of including a 
reference to retaining Form ATS-N in accordance with Sec.  242.303, 
as proposed.
    \630\ See Proposal, supra note 2, at 81005.
    \631\ See id. at 81037.
    \632\ See SIFMA Letter at 33; Better Markets Letter at 7.
    \633\ See Better Markets Letter at 7.
    \634\ See SIFMA Letter at 33.
---------------------------------------------------------------------------

    The Commission continues to believe that it is appropriate to 
require authorized persons to certify that the Form ATS-N is ``current, 
true, and complete.'' We believe that market participants will rely on 
Form ATS-N disclosures to understand the operations of an NMS Stock ATS 
and ATS-related activities of the broker-dealer operator, and decide 
whether that trading center would be a desirable venue for their 
orders. The information contained on Form ATS-N will also be available 
for Commission use, including as part of its oversight functions. 
Further, existing Form ATS also requires authorized persons to certify 
that the information and statements in the form, exhibits, schedules 
and other documents attached are ``current, true, and complete.'' \635\ 
In addition, Form 1, the application for registration or exemption from 
registration as a national securities exchange, requires a similar 
certification.\636\ Neither of these certifications includes a 
materiality qualifier, and the Commission does not believe that it 
would be appropriate to include a materiality qualifier in Form ATS-N.
---------------------------------------------------------------------------

    \635\ See Form ATS at 1.
    \636\ See Form 1 at 1.
---------------------------------------------------------------------------

    We are adopting Rule 304(c)(1) with certain modifications.\637\ 
Specifically, adopted Rule 304(c)(1) requires that ``[a]n NMS Stock ATS 
must file a Form ATS-N in accordance with the Instructions therein.'' 
\638\ The adopted Instructions to Form ATS-N require, among other 
things, that ``[a]n NMS Stock ATS must provide all the information 
required by Form ATS-N, including responses to each Item, as 
applicable, and the Exhibits, and disclose information that is 
accurate, current, and complete.'' \639\ Similar to the Instructions of 
proposed Form ATS-N, the Instructions to adopted Form ATS-N asks an NMS 
Stock ATS to respond to each item ``in detail.'' In response to 
comments, we revised some of the requests on Form ATS-N to solicit ``a 
summary of information'' to tailor further, as appropriate, the 
required disclosure or avoid requiring the disclosure of personal or 
commercially sensitive information.\640\ Accordingly, we are revising 
the Instructions to require that ``unless otherwise provided'' (i.e., 
where the request indicates that the ATS is required to disclose 
``summary'' information), the NMS Stock ATS respond to each request in 
detail.\641\
---------------------------------------------------------------------------

    \637\ We changed the heading of proposed Rule 304(c) from ``Form 
ATS-N filing requirements'' to ``Form ATS-N disclosure 
requirements,'' which we believe more accurately describes the 
purpose and content of the paragraph.
    \638\ See Rule 304(c)(1).
    \639\ See Instructions to Form ATS-N.
    \640\ See, e.g., Form ATS-N Part III, Item 13(a) (instructing 
NMS Stock ATS to provide a summary of the parameters for each 
segmented order category).
    \641\ In addition, to avoid potential confusion, we are removing 
``in detail'' from Rule 304(c)(1) and instead, specifying that the 
Form ATS-N must be filed ``in accordance with the instructions 
therein.'' See Rule 304(c)(1).
---------------------------------------------------------------------------

    One commenter suggests that an NMS Stock ATS should be permitted to 
disclose additional information to its subscribers and potential 
customers, outside of the Form ATS-N process, or respond to requests 
for information from market participants.\642\ Similarly, one commenter 
states that NMS Stock ATSs should be allowed to separately disclose 
information, upon request, regarding order segmentation to subscribers 
who require such information from a ``due diligence perspective'' and 
who, due to the nature of their trading, would not present gaming 
concerns.\643\ We believe that it would be inconsistent with the goals 
of this rulemaking were its adoption to chill communication between 
broker-dealer operators and subscribers about the NMS Stock ATS. The 
adopted enhanced disclosure requirements do not prohibit broker-dealer 
operators from communicating with subscribers and other market 
participants about information not otherwise required by Form ATS-N in 
a manner that is consistent with federal securities laws and the rules 
or regulations thereunder. A broker-dealer operator responding to a 
request for information from a subscriber or market participant 
generally should evaluate whether the information provided in response 
to these requests must be disclosed on Form ATS-N if the information 
does not already appear in its Form ATS-N.
---------------------------------------------------------------------------

    \642\ See T. Rowe Price Letter at 2.
    \643\ See Fidelity Letter at 8.
---------------------------------------------------------------------------

    The Commission received several comments on the general format of 
the Form ATS-N. Several commenters suggest that the Commission modify 
Form ATS-N so that the requests for information result in disclosures 
that are more standardized and allow market participants to more easily 
compare Form ATS-N filings.\644\ Some commenters express concern that 
requesting what they characterize as ``extraneous'' information could 
obscure the information that market participants would find the most 
relevant.\645\ Some of these commenters also express concern that the 
volume of data that NMS Stock ATSs would provide in response to 
questions that require narrative responses would make it difficult for 
participants to understand ATS operations \646\ or conduct due 
diligence.\647\
---------------------------------------------------------------------------

    \644\ See SSGA Letter at 2-3; BIDS Letter at 4-5; Fidelity 
Letter at 5; STANY Letter at 5; UBS Letter at 2-3; KCG Letter at 8-
9, 11; Morgan Stanley Letter at 1; STA Letter at 2; SIFMA Letter at 
9; LeveL ATS Letter at 6-7.
    \645\ See STANY Letter at 3; Luminex Letter at 4; KCG Letter at 
4; SSGA Letter at 2; SIFMA Letter at 7.
    \646\ See STA Letter at 2; KCG Letter at 3-4; SIFMA Letter at 9.
    \647\ See SSGA Letter at 2.
---------------------------------------------------------------------------

    Although one commenter expressly agrees with the Commission's 
approach of requiring summaries of amendments,\648\ several commenters 
state that narrative responses on Form ATS-N are likely to vary widely, 
and could make comparing multiple platforms difficult.\649\ Multiple 
commenters advocate for replacing some of the proposed narrative 
responses to Form ATS-N with ``yes'' or ``no'' responses.\650\ One 
commenter states that requiring ATSs to respond in a ``yes'' or ``no'' 
format would support

[[Page 38818]]

more fulsome disclosure and create a universal standard of review, as 
allowing narrative responses may allow ATSs to disclose only the 
information that they deem appropriate.\651\ Some commenters recognize 
that ``yes'' or ``no'' information may need to be supplemented by short 
narrative responses.\652\ One commenter suggests introducing a tabular 
format, where reasonable, to capture the disclosures required by Forms 
ATS-N would facilitate comparison of Forms ATS-N.\653\
---------------------------------------------------------------------------

    \648\ See Liquidnet Letter at 18.
    \649\ See SSGA Letter at 2; Fidelity Letter at 5; STA Letter at 
2; BIDS Letter at 4-5; KCG Letter at 8-9; Morgan Stanley Letter at 
1.
    \650\ See SSGA Letter at 2; BIDS Letter at 4; STANY Letter at 5; 
STA Letter at 2; UBS Letter at 2-3; KCG Letter at 8-11; SIFMA Letter 
at 9; LeveL ATS Letter at 6.
    \651\ See LeveL ATS Letter at 7.
    \652\ See BIDS Letter at 4; SIFMA Letter at 12; LeveL ATS Letter 
at 7.
    \653\ See BIDS Letter at 5.
---------------------------------------------------------------------------

    The Commission has revised the format of proposed Form ATS-N to 
further standardize the form's requests, better organize questions by 
subject matter, reduce redundancy, reduce ambiguity, make more explicit 
requests on Form ATS-N to facilitate complete responses, and achieve 
the appropriate balance between yes/no and narrative responses. For 
instance, the adopted format of Form ATS-N changes several questions 
from proposed Form ATS-N for certain subject matters (e.g., order 
display, co-location services, and segmentation) to require ``yes'' or 
``no'' responses with further narrative disclosure required in 
connection with ``yes'' responses. We believe that adding more ``yes'' 
or ``no'' questioning in Form ATS-N will help standardize responses and 
address commenters' concerns about facilitating market participants' 
review and comparisons of Form ATS-N disclosures. We continue to 
believe, however, that narrative responses enable market participants 
to understand the operations of the NMS Stock ATS and the ATS-related 
activities of the broker-dealer operator, particularly in light of the 
different trading functionalities, options, and procedures that are 
offered across NMS Stock ATSs, and provide NMS Stock ATSs with the 
flexibility to communicate required information to the public that is 
required by the form.
    Also, certain requests have been amended to only require summary 
information. We believe that requiring summaries for certain 
disclosures could help reduce potential extraneous information.
2. Terminology
a. Definitions for Form ATS-N
(i) Proposed Defined Terms
    As proposed, Form ATS-N would have set forth definitions of the 
following terms: (1) Affiliate; (2) alternative trading system; (3) 
broker-dealer operator; (4) control; (5) NMS security; (6) NMS Stock; 
(7) NMS Stock ATS; (8) order; (9) person; and (10) subscriber.
    The Commission received several comments regarding the proposed 
definitions of ``affiliate.'' The Commission is adopting the definition 
of the term ``affiliate,'' with a technical change,\654\ 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.'' One commenter states that the proposed definition 
of ``affiliate'' would include, among others, owners of the ATS 
operator, without regard for whether the affiliate is separately 
registered as a broker-dealer and therefore subject to the Commission's 
jurisdiction.\655\ The commenter notes that the definition of 
``affiliate'' would include persons ``under common control with'' the 
NMS Stock ATS operator, with control meaning at least 25% ownership, 
such that the threshold would capture entities that operate 
independently from one another.\656\ Similarly, another commenter 
points out that although the Proposal contains a customary definition 
of the term ``affiliate,'' the definition is not limited in any way 
that focuses on direct interactions or relationships with the NMS Stock 
ATS.\657\
---------------------------------------------------------------------------

    \654\ The Commission is making one technical change to the 
proposed term ``affiliate'' by capitalizing the defined term 
``Person.'' This change is meant to identify the term Person as a 
defined term for purposes of the Form ATS-N.
    \655\ See LeveL ATS Letter at 3, n.5.
    \656\ See id. at 4, n.7.
    \657\ See UBS Letter at 4. This commenter states that the 
broker-dealer operator of its ATS has well over 300 global 
affiliates under the definition set forth in the Proposal, and that 
not all such affiliates are users of the ATS; only orders routed by 
a small number of affiliates end up in its ATS. See id. The 
commenter also points out that as proposed, it would need to 
disclose every affiliate regardless of whether it has any 
interactions with the ATS. See id.
---------------------------------------------------------------------------

    We do not believe that the status of an affiliate's registration 
with the Commission should limit the scope of the disclosures about 
that affiliate in Form ATS-N. However, the adopted Form ATS-N 
conflicts-of-interest disclosures are tailored to inform market 
participants about how affiliates of the broker-dealer operator trade 
on the NMS Stock ATS and how the use of the ATS by affiliates may 
affect the handling and execution of orders from unaffiliated parties. 
While the definition of ``affiliate'' in Form ATS-N may encompass a 
large number of entities for some ATSs, Form ATS-N is designed to 
solicit information that is relevant to a market participant's 
evaluation of an NMS Stock ATS as a potential trading venue. Therefore, 
while we have not amended the proposed definition of ``affiliate,'' the 
disclosures about affiliate activity on an NMS Stock ATS are not 
designed to require information about affiliates that the Commission 
and commenters believe would be extraneous to a market participant's 
evaluation of conflicts of interest and information leakage on the ATS.
    We received two comments regarding the proposed definition of 
``control.'' After carefully considering these comments, we are 
adopting the definition of ``control,'' as proposed, to 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.

    One commenter expresses support for the Commission's proposal that 
the definition of control contain a 25% ownership threshold that the 
commenter states currently serves as a presumption of control and is 
consistent with that used in other areas of the securities laws.\658\ 
Another commenter states, however, that the proposed definition of 
``control'' provides that certain persons are presumed to control the 
broker-dealer operator of an NMS Stock ATS, but that there is no 
corresponding safe harbor whereby persons are presumed not to control 
an NMS Stock ATS.\659\ Accordingly, the commenter opines that an NMS 
Stock ATS operator may feel obligated to provide overly broad 
disclosures, which could confuse subscribers regarding potential 
conflicts.\660\
---------------------------------------------------------------------------

    \658\ See HMA Letter at 15.
    \659\ See LeveL ATS Letter at 3, n.6.
    \660\ See id.
---------------------------------------------------------------------------

    Disclosures related to affiliates extend to persons that control, 
are controlled by, or are under common control with the broker-dealer 
operator, and, as a result, parallel the disclosures related to 
``control affiliates'' that broker-dealer

[[Page 38819]]

operators must make on Form BD.\661\ The Commission disagrees that an 
NMS Stock ATS operator may feel obligated to provide unnecessarily 
broad disclosures regarding potential conflicts of interest due to the 
proposed definition of ``control.'' The presumed control tests set 
forth in the adopted definition of ``control'' are meant to provide 
clarity to NMS Stock ATSs as to when an entity and the broker-dealer 
operator are defined as ``affiliated,'' which would trigger the NMS 
Stock ATSs' disclosure duties under Part II of adopted Form ATS-N. We 
believe that the enumerated circumstances under which there is presumed 
control involve factors (such as a shared executive or 25% ownership) 
that would likely result in one entity or person having the power, 
directly or indirectly, to direct the management or policies of the 
broker-dealer operator of an ATS. Therefore, in such situations, a 
presumption of control is appropriate. On the other hand, because 
control can manifest itself in several ways under the adopted 
definition, the Commission does not feel that there are certain facts 
that would warrant a presumption of no control. For example, the unique 
facts and circumstances of several different ownership structures could 
result in different conclusions regarding control, even though the 
various structures contain some similarities. Accordingly, the 
Commission has not added provisions setting forth circumstances under 
which there would be a presumption of no control.
---------------------------------------------------------------------------

    \661\ See Form BD at 2 (defining ``control affiliate'').
---------------------------------------------------------------------------

    The Commission is adopting as proposed the changes to the 
definition of ``control'' under Rule 300(f) in Regulation ATS. The 
definition of the term control being adopted herein contains the 
additional 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.\662\ As discussed in the Proposal, the purpose of this 
difference 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 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.\663\
---------------------------------------------------------------------------

    \662\ 17 CFR 242.300(f).
    \663\ See Proposal, supra note 1, at 81044.
---------------------------------------------------------------------------

    The disclosures of ATS-related activities of the broker-dealer 
operator's affiliates in Part II of adopted Form ATS-N are designed to 
provide subscribers and market participants with a comprehensive 
understanding of the 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 adopted definitions of ``affiliate'' and 
``control,'' any affiliate of the broker-dealer operator of the NMS 
Stock ATS would be an affiliate of the NMS Stock ATS. These definitions 
are designed to cover entities that have a close relationship with the 
broker-dealer operator and whose activities could raise conflicts of 
interest concerns, or could otherwise be relevant to market 
participants when evaluating an NMS Stock ATS.
    Furthermore, in Part III, Item 1 of proposed Form ATS-N, the 
Commission used the term ``non-ATS trading center.'' A commenter 
requests that the Commission define the term ``non-ATS trading center'' 
so that broker-dealer operators can better focus on making proper 
disclosures.\664\ As further explained below, in response to comments, 
the Commission is reorganizing and changing Part III, Item 1 of 
proposed Form ATS-N to request information about the trading activities 
of the broker-dealer operator and its affiliates, irrespective of 
whether the broker-dealer operator's business units and/or affiliates 
are non-ATS trading centers.\665\ Given the revisions the Commission is 
making to Part III, Item 1, we believe that the defined term is no 
longer necessary, and the Commission is, therefore, eliminating the 
term from adopted Form ATS-N.
---------------------------------------------------------------------------

    \664\ See SIFMA Letter at 10.
    \665\ See infra Section V.C.1.
---------------------------------------------------------------------------

    Another commenter agrees with the goal of highlighting potential 
conflicts of interest faced by broker-dealer operators of NMS Stock 
ATSs and their affiliates in connection with the ATS.\666\ The 
commenter endorses the proposed requirement to identify non-ATS trading 
centers managed by the ATS operator or its affiliates that interact 
with the ATS. The commenter also states that disclosures related to 
non-ATS trading centers should be limited to non-ATS trading centers 
that interact with or exchange information with the ATS.\667\ The 
Commission also believes that public disclosure of non-ATS trading 
centers managed by the broker-dealer operator or its affiliates that 
interact with the ATS furthers the stated goal of helping market 
participants evaluate potential conflicts of interest on an NMS Stock 
ATS. The requests in Part II of adopted Form ATS-N are tailored to 
elicit such information without burdening NMS Stock ATSs with a 
requirement to list the non-ATS trading centers of the broker-dealer 
operator or its affiliates that do not interact with the NMS Stock ATS.
---------------------------------------------------------------------------

    \666\ See KCG Letter at 8.
    \667\ See id. at 8-9. This commenter also asserts that it is 
imperative for the Commission to clarify that the interaction 
between the NMS Stock ATS and any non[hyphen]ATS trading center may 
be subject to change and the ATS operator does not need file and 
receive Commission approval before implementation. See id. We note 
that the materiality of any changes to the interaction and 
coordination between non-ATS trading centers and the NMS Stock ATS 
that would require disclosure on Form ATS-N should be evaluated 
based on the facts and circumstances related to each change.
---------------------------------------------------------------------------

(ii) New Defined Terms
    The Commission is adding the term ``trading center'' to the 
definitions set forth in the Instructions to adopted Form ATS-N to 
define that term for purposes of its use in Part II and Part III of 
adopted Form ATS-N. The term ``trading center'' was used in proposed 
Form ATS-N with regard to arrangements with other trading centers--Part 
III, Item 4 of proposed Form ATS-N--and is used in adopted Form ATS-N's 
requests regarding the routing of orders from the NMS Stock ATS to 
business units or affiliates of the broker-dealer operator (adopted 
Part II, Items 1 and 2) and the NMS Stock ATS's arrangements with other 
trading centers (adopted Part II, Item 4).
    The definition of the term ``trading center'' used for purposes of 
adopted Form ATS-N is the same as that currently set forth in 
Regulation NMS Rule 600(b)(78).\668\ The adopted definition is ``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.'' While we believe that the scope of the term 
``trading center'' in Form ATS-N would likely be understood by NMS 
Stock ATSs, we believe that adding a definition to the Form ATS-N will 
reduce any potential ambiguity with regard to those requests in Part 
II, Items 1, 2, and 4 of adopted Form ATS-N.
---------------------------------------------------------------------------

    \668\ See 17 CFR 242.600(b)(78).
---------------------------------------------------------------------------

    One commenter states that the Commission should add additional 
definitions for certain terms to promote consistency throughout Forms 
ATS-N, which the commenter believes could ultimately facilitate 
comparison among

[[Page 38820]]

Forms ATS-N.\669\ Another commenter emphasizes that the Commission 
should establish fundamental uniformity in the way information is 
defined and disclosed.\670\ We have structured adopted Form ATS-N to 
allow market participants to better compare disclosures among NMS Stock 
ATSs. We do not, however, believe that it should establish standardized 
terms to be used by NMS Stock ATSs when completing their disclosures on 
Form ATS-N. We do not desire to impose substantive standards for how 
disclosures should be written by adopting and defining terms to be used 
by all NMS Stock ATSs to describe the functionalities, operations, or 
procedures of their systems. The operations of NMS Stock ATSs vary, 
and, apart from some common terms, many NMS Stock ATSs use different 
terminology to describe their operations and functionalities. Based on 
our review of Form ATS filings, we believe that NMS Stock ATSs may use 
differing terms and definitions to describe functionalities, 
operations, or procedures, even if a particular function, operation, or 
procedure on one ATS may resemble that on another. We do not believe 
that it would be very helpful to define terms for functionalities, 
operations, or procedures across NMS Stock ATSs because doing so may 
not result in complete or comprehensible disclosures due to these 
substantive and semantical differences in the operations of NMS Stock 
ATSs. We believe that adopting standardized, substantive terms for Form 
ATS-N disclosures may limit the ability of an NMS Stock ATS to 
completely and clearly describe its system, which we believe could 
reduce the utility of Form ATS-N disclosures for market participants. 
We also believe that such defined terminology would limit the 
flexibility of NMS Stock ATSs to name or market new services of the 
ATS.
---------------------------------------------------------------------------

    \669\ See BIDS Letter at 5.
    \670\ See UBS Letter at 2.
---------------------------------------------------------------------------

b. Comments on the Definition of ``Subscriber''
    When seeking disclosures regarding how an NMS Stock ATS operates 
and the ATS-related activities of the broker-dealer operator and its 
affiliates, proposed Form ATS-N used the terms ``subscriber'' and 
``person(s).'' One commenter believes that Form ATS-N should instead 
focus on the term ``user'' rather than ``subscriber.'' \671\ This 
commenter states that the term ``subscriber'' can be disparately 
interpreted and applied by broker-dealer operators of ATSs and would 
inhibit uniform application across ATSs in terms of disclosure, access, 
priority, and other purposes. This commenter further states that the 
current definition in Regulation ATS fails to adequately define 
``subscriber'' in the case of an ATS that is part of a larger broker-
dealer operation, leading to inconsistencies in the application of the 
requirements applicable to subscribers across ATSs. The commenter 
believes that disclosures in Form ATS-N should not depend on whether a 
broker-dealer operator has a contractual agreement with a user for 
accessing the ATS, but should be consistent for all users that access 
an ATS whether such users are internal or external and whether such 
users access the ATS directly or indirectly.
---------------------------------------------------------------------------

    \671\ See Morgan Stanley Letter at 4.
---------------------------------------------------------------------------

    Similarly, another commenter believes the phrase ``subscriber 
orders or other trading interest'' as used in proposed Part III, Item 
1--which would have required the NMS Stock ATS to disclose information 
about the interaction and coordination between non-ATS trading centers 
operated by the broker-dealer operator or its affiliates and the NMS 
Stock ATS--should be read as ``subscriber orders or subscriber trading 
interest.'' \672\ This commenter believes that the alternative reading 
would potentially capture all trading interest sent to the broker-
dealer operator of the NMS Stock ATS.
---------------------------------------------------------------------------

    \672\ See UBS Letter at 5.
---------------------------------------------------------------------------

    We agree that responses to questions in Form ATS-N should be 
uniformly applied by NMS Stock ATSs regardless of the source of orders 
(e.g., principal trading desks of the broker-dealer operator, third 
parties using direct connectivity, affiliates of the broker-dealer 
operator, customers of the broker-dealer operator whose orders are 
submitted to the ATS through a functionality of the broker-dealer 
operator, such as a smart order router (``SOR'')). We have revised 
several requests on proposed Form ATS-N to help facilitate a uniform 
application of responses by NMS Stock ATSs and, in response to 
commenters' concerns, are providing guidance regarding the definition 
of ``subscriber'' under Regulation ATS and in the context of Form ATS-N 
disclosures.
    First, we believe that the term ``subscriber'' sufficiently 
captures the vast majority of market participants whose orders or 
trading interest are submitted to and executed in an NMS Stock ATS. 
Regulation ATS defines subscriber ``[a]s any person that has entered 
into a contractual agreement with an ATS to access such ATS for the 
purpose of effecting transactions in securities or submitting, 
disseminating, or displaying orders on such ATS, including a customer, 
member, user, or participant in an ATS.'' \673\ In the Proposal, as the 
Commission discussed, the broker-dealer operator of an NMS Stock ATS is 
legally responsible for, and controls all aspects of, the ATS 
operation, including, among other things, providing access to the 
ATS.\674\ Based on our experience, persons seeking to use an ATS's 
services enter into agreements with the broker-dealer operator, and 
these agreements could cover services in addition to the ATS services. 
These agreements may take a variety of forms, and may or may not be 
written.\675\ If a market participant has an agreement--written or 
unwritten--with a broker-dealer that allows the market participant to 
enter orders directly into an ATS operated by the broker-dealer, that 
market participant is a subscriber of the ATS for purposes of 
Regulation ATS and Form ATS-N.
---------------------------------------------------------------------------

    \673\ 17 CFR 242.300(b) (emphasis added). Additionally, the 
definition of the term ``subscriber'' under Regulation ATS states 
that a subscriber shall not include a national securities exchange 
or national securities association. See id.
    \674\ See Proposal, supra note 2, at 81041 (discussing the 
relationship between the broker-dealer operator's operation of the 
NMS Stock ATS and its other operations).
    \675\ For example, third-party market participants--including, 
potentially, affiliates and non-affiliates of the broker-dealer 
operator--may enter into subscriber agreements or some other form of 
contract with the broker-dealer operator to connect directly to the 
ATS to submit or display orders. We note that a determination as to 
who may be a ``subscriber'' to the ATS would depend upon the facts 
and circumstances of the relationship between the ATS and the 
broker-dealer operator, so the preceding examples are not 
exhaustive.
---------------------------------------------------------------------------

    Another example of a subscriber would include a customer of the 
broker-dealer operator whose orders are submitted to the ATS by the 
broker-dealer operator. Many NMS Stock ATSs are operated by broker-
dealers that offer their customers a wide range of order handling and 
execution services in addition to the execution services of their NMS 
Stock ATSs.\676\ These services typically involve functionality such as 
an SOR or other types of trading algorithms. In cases where a customer 
uses this wider range of services of the broker-dealer, the customer 
would not

[[Page 38821]]

send its orders directly to the ATS, but rather, send its orders to 
some functionality external to the ATS, which could be the SOR or 
algorithm itself or a client service desk that submits the customer 
orders into the broker-dealer's SOR or trading algorithms. A SOR or 
trading algorithm typically has the capability to route customer orders 
to a number of execution venues, including the broker-dealer operator's 
own ATS. We note that such commercial relationships may be governed by 
formal or informal agreements. To the extent a person enters into a 
contract, written or unwritten, to use the broker-dealer operator's 
order routing and execution services, and those services could include 
routing to and executing in the broker-dealer operator's own ATS, that 
agreement would fall within the contractual agreements under the 
definition of ``subscriber'' under Regulation ATS and the person would 
be a subscriber to the ATS. On the other hand, a customer's order 
routed by the broker-dealer operator's SOR or trading algorithm to an 
external market for execution would not be a subscriber order because 
the order was not destined or entered into the ATS.\677\
---------------------------------------------------------------------------

    \676\ See UBS Letter at 5 (noting that market participants may 
maintain a commercial relationship with the broker-dealer operator 
for purposes other than accessing the broker-dealer operator's ATS, 
such as to use the broker-dealer's high touch block trading desk or 
to use the broker-dealer's trading algorithms); Morgan Stanley 
Letter at 1-2 (explaining that full service broker-dealers may 
provide clients with a broad, integrated electronic offering of 
trading services, which might include ATS services).
    \677\ We do not intend for Form ATS-N to require disclosures 
about aspects of a market participant's other commercial 
relationships with a broker-dealer operator that do not pertain to 
the NMS Stock ATS. We believe that the adopted Form ATS-N disclosure 
requests are tailored so that operations of the broker-dealer 
operator not housed within the NMS Stock ATS--and that do not 
otherwise pertain to the functions of the ATS--would not be subject 
to disclosure on Form ATS-N.
---------------------------------------------------------------------------

    Second, as noted above, a commenter believes that Regulation ATS 
does not adequately define the term ``subscriber'' in the case of an 
ATS that is part of a larger broker-dealer operation, which the 
commenter believes could lead to inconsistencies in the application of 
the requirements applicable to subscribers across ATSs.\678\ While we 
believe that the term ``subscriber'' sufficiently captures the vast 
majority of market participants whose orders or trading interest are 
submitted to and executed in an NMS Stock ATS, we also acknowledge that 
business units of multi-service broker-dealer operators, in many cases, 
participate in the ATS of that broker-dealer operator and submit 
principal orders to the ATS. Despite participating in the ATS, these 
business units might not always meet the definition of ``subscriber'' 
because an ATS may not have a contractual agreement with a business 
unit that is part of the same entity.
---------------------------------------------------------------------------

    \678\ See Morgan Stanley Letter at 4.
---------------------------------------------------------------------------

    Adopted Form ATS-N uses the term ``subscriber'' throughout, and, in 
certain Items, specifically states the type of ATS-related activities 
of, or information about, the broker-dealer operator that must be 
disclosed. For example, Part III, Item 5(b) of adopted Form ATS-N 
requires the NMS Stock ATS to state whether the terms and conditions to 
directly enter orders and trading interest into the NMS Stock ATS are 
the same for all subscribers and the broker-dealer operator. We believe 
that drafting the Form ATS-N requests in this manner will help ensure 
that the scope of information solicited encompasses all relevant users 
of the ATS services (i.e., subscribers, and to the extent such users do 
not meet the definition of ``subscriber,'' the business units of the 
broker-dealer operator). We believe that adopted Form ATS-N is not 
designed to solicit disparate disclosures among NMS Stock ATS due to 
varying interpretations of the term ``subscriber'' by individual ATSs.

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

1. Cover Page
    In response to concerns from commenters that the public may be led 
to believe that the Commission is conducting a merit-based review of 
Form ATS-N disclosures filed with the Commission, we are including on 
the cover page of Form ATS-N a legend stating that the Commission has 
not passed upon the merits or accuracy of the disclosures in the 
filing.
    On the cover page of adopted Form ATS-N, the responding entity is 
required to identify the type of filing \679\ by marking the 
appropriate checkbox.\680\ We are also adopting, as proposed, a 
requirement that NMS Stock ATSs file a notice of cessation of 
operations on Form ATS-N and provide the date that the NMS Stock ATS 
will cease to operate. We are also adopting a check box that allows a 
Form ATS-N filer to withdraw a previously filed Form ATS-N filing.\681\ 
The Instructions to Form ATS-N state that an NMS Stock ATS may withdraw 
an initial Form ATS-N or an amendment before the end of the applicable 
Commission review period. Because its initial Form ATS-N supersedes and 
replaces a Legacy NMS Stock ATS's Form ATS for purposes of the 
exemption and the initial Form ATS-N can be amended, a Legacy NMS Stock 
ATS may not withdraw its initial Form ATS-N at any time. Once the 
Commission review period has expired or a Legacy NMS Stock ATS has 
filed its initial Form ATS-N, the Legacy NMS Stock ATS cannot withdraw 
the filing and must file a notice of cessation pursuant to Rule 
304(a)(3) if it intends to cease to operate or file an amendment to its 
Form ATS-N, as appropriate. In addition, an NMS Stock ATS may withdraw 
a notice of cessation of operations at any time before the date that 
the NMS Stock ATS had indicated it intended to cease operating.
---------------------------------------------------------------------------

    \679\ Proposed Form ATS-N would have required NMS Stock ATSs to 
check the ``Submission Type.'' Adopted Form ATS-N requires NMS Stock 
ATSs to check the ``Type of Filing.'' This is a non-substantive 
change.
    \680\ Adopted Form ATS-N's cover page provides that a filing may 
be an initial Form ATS-N, or a Form ATS-N material amendment, 
updating amendment, correcting amendment, or order display and fair 
access amendment. Proposed Form ATS-N included a check box above the 
``Submission Type'' menu, where an NMS Stock ATS could indicate if 
the filing was an ``Initial Form Filing.'' In addition, in the 
proposed Form ATS-N ``Submission Type'' menu, an NMS Stock ATS could 
check whether its submission was a ``Form ATS-N.'' Adopted Form ATS-
N does not include a check box to indicate whether the filing is an 
``Initial Form Filing,'' and revises the proposed check box under 
the ``Type of Filing'' menu to state ``Initial Form ATS-N'' 
(emphasis added).
    \681\ Proposed Form ATS-N included a check box, above the 
``Submission Type'' menu, where an NMS Stock ATS could indicate that 
a filing was a ``Withdrawal of Initial Form Filing.'' Adopted Form 
ATS-N relocates this check box to the ``Type of Filing'' menu and 
revises it to say ``Withdrawal of Form ATS-N filing'' so that such 
check box can accommodate withdrawals of different types of filings, 
and not just a withdrawal of an initial Form ATS-N. Adopted Form 
ATS-N provides a space for the EDGAR accession number for the Form 
ATS-N filing to be withdrawn, which will enable market participants 
to identify the prior filing that is being withdrawn.
---------------------------------------------------------------------------

    In the cover page of proposed Form ATS-N, the Commission sought a 
brief narrative description for Form ATS-N amendments so market 
participants could quickly understand the nature of the amendment.\682\ 
We are modifying this requirement to be more specific as to what 
information is required in this narrative. Adopted Form ATS-N requires 
the NMS Stock ATS to indicate

[[Page 38822]]

the part and item number of the Form ATS-N that is the subject of the 
change, provide a brief summary of the changes, and state whether or 
not the changes apply to all subscribers and the broker-dealer 
operator.\683\ In addition, the NMS Stock ATS is required to provide 
the EDGAR accession number for the Form ATS-N filing to be amended, 
which will allow market participants to identify the filing that is 
being amended.
---------------------------------------------------------------------------

    \682\ An NMS Stock ATS is required to attach a document marked 
to indicate changes for a Form ATS-N amendment to Form ATS-N Part, 
I, Part II, and Part III, as applicable, and to highlight changes to 
``yes'' or ``no'' answers or additions or deletions from its prior 
Form ATS-N filing. We believe that marked documents will help market 
participants and the Commission review Form ATS-N amendments in an 
efficient manner. We have changed the marked document requirement 
that was proposed. In the proposal the marked document was referred 
to a redline. We proposed for an NMS Stock ATS to submit two 
redlines--Exhibit 3A to show changes to Part III of proposed Form 
ATS-N and Exhibit 4A to show changes to Part IV of proposed Form 
ATS-N. We are adopting a requirement that ATSs provide a single 
exhibit, Exhibit 3, that contains a marked document to indicate 
changes to Parts I, II, and III. We believe that only requiring a 
single document may reduce the filing burden on ATSs. We believe 
that the marked documents will be helpful for market participants to 
review changes to Part I. In addition, to reflect the use of ``yes'' 
or ``no'' questions in adopted Form ATS-N, we are specifying that 
the marked document would be required to indicate changes in ``yes'' 
or ``no'' answers.
    \683\ Accordingly, the adopted Instructions have been enhanced 
from the proposed Instructions so that they provide more guidance to 
an NMS Stock ATS drafting the narrative. The proposed Instructions 
would have asked an NMS Stock ATS to ``[p]rovide a brief narrative 
description of the Amendment.'' See Proposal, supra note 2, at 
81138.
---------------------------------------------------------------------------

    Furthermore, in response to comments, we are adopting Rule 
304(b)(2)(iii), which provides that it will make public the cover page 
of a filed Form ATS-N material amendment upon filing and then make 
public the entirety of the material amendment following the expiration 
of the review period pursuant to Rule 304(a)(2)(ii).\684\ In connection 
with this change, we are adopting Instructions that we believe will 
better solicit information that will notify market participants of the 
general subject matter of a Form ATS-N amendment, as well as the 
subscribers that would be affected by the amendment. For updating and 
correcting amendments, which will be made public upon filing, we 
believe that the information in the narrative can assist market 
participants in understanding the general nature of the change that the 
NMS Stock ATS is implementing.
---------------------------------------------------------------------------

    \684\ See supra Section IV.E.2.c.
---------------------------------------------------------------------------

    In addition, we are making a technical change to relocate the check 
box indicating whether an initial Form ATS-N is being filed by a Legacy 
NMS Stock ATS operating pursuant to a Form ATS.\685\
---------------------------------------------------------------------------

    \685\ Proposed Form ATS-N set forth this check box in Part I, 
Item 4, whereas adopted Form ATS-N sets forth this check box on the 
cover page.
---------------------------------------------------------------------------

2. Part I of Form ATS-N: Identifying Information
a. Part I: Identifying Information
    Part I of adopted Form ATS-N combines the requests set forth in 
Parts I and II of proposed Form ATS-N, which covered, among other 
things, the name of the NMS Stock ATS and the NMS Stock ATS's broker-
dealer operator's registration and contact information.\686\ We are 
adding to Part I, Item 1 of adopted Form ATS-N, a new requirement, 
which was not proposed, that the filer check a box indicating whether 
the filer is a registered broker-dealer with the Commission to readily 
notify the Commission whether the filer is eligible to operate as an 
NMS Stock ATS pursuant to Regulation ATS.
---------------------------------------------------------------------------

    \686\ The subsequent sections of adopted Form ATS-N have been 
renumbered accordingly. The disclosures regarding the ATS-related 
activities of the broker-dealer operator and its affiliates on the 
NMS Stock ATS are contained in Part II, the manner of operations 
disclosures are contained in Part III, and the contact information, 
signature block, and consent to service are contained in Part IV of 
adopted Form ATS-N.
---------------------------------------------------------------------------

    To assist the Commission in more easily assessing whether the NMS 
Stock ATS has registered as a broker-dealer pursuant to Rule 301(b)(1) 
of Regulation ATS, we are adopting the proposed requirement that the 
NMS Stock ATS provide 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 2 of adopted Form ATS-N. To the extent that a 
commercial or ``DBA'' (doing business as) name or names \687\ are used 
to identify the NMS Stock ATS to the public, the Commission, or its 
SRO, or if a registered broker-dealer operates multiple NMS Stock ATSs, 
adopted Form ATS-N would require the full name(s) of the NMS Stock ATS 
under which business is conducted, if different,\688\ in Part I, Item 3 
of adopted Form ATS-N. We are also adopting Part II, Items 2 and 3 of 
proposed Form ATS-N as Part I, Item 4 \689\ of adopted Form ATS-N to 
require the NMS Stock ATS to provide the broker-dealer operator's SEC 
File Number and Central Registration Depository (``CRD'') Number.
---------------------------------------------------------------------------

    \687\ In some instances, an NMS Stock ATS may have several 
commercial or doing-business-as names, such as a name the ATS uses 
in its filings to the Commission, or to FINRA pursuant to FINRA Rule 
6110. Adopted Form ATS-N requires the ATS to list all names under 
which it conducts business in Part I, Item 2.
    \688\ Part I, Item 2 of proposed Form ATS-N would have required 
an NMS Stock ATS to disclose the full name of the NMS Stock ATS 
under which its business is conducted, ``if any.'' Part I, Item 3 of 
adopted Form ATS-N only requires this disclosure ``if different.''
    \689\ The requirements of Part II, Items 2 and 3 of proposed 
Form ATS-N are consolidated into Part I, Item 4 of adopted Form ATS-
N, and divided into two subparts.
---------------------------------------------------------------------------

    We are not, however, including in adopted Part I the proposed 
requests that the NMS Stock ATS provide the effective date of its 
broker-dealer operator's registration with the Commission, the broker-
dealer operator's legal status (e.g., sole proprietorship, 
corporation), information about its date and place of formation if the 
broker-dealer operator is other than a sole proprietor, and the mailing 
address of the NMS Stock ATS (if not the same as the physical address). 
This identifying information is disclosed on Form BD or otherwise made 
available to the public and the Commission.\690\ We do not believe that 
it is necessary to require the NMS Stock ATS to provide this 
information on Form ATS-N because other information requests about the 
registration status of the broker-dealer operator will inform the 
Commission about whether the NMS Stock ATS has met the condition of 
Rule 301(b)(1) of Regulation ATS.
---------------------------------------------------------------------------

    \690\ The mailing address for registered broker-dealers is 
available to the Commission via EDGAR. The mailing address, type of 
entity, and date when established for each broker-dealer is 
available to the public through FINRA.
---------------------------------------------------------------------------

    We are adopting Part II, Item 4 of proposed Form ATS-N as Part I, 
Item 5 of adopted Form ATS-N to require the NMS Stock ATS to provide 
the full name of the national securities association of the broker-
dealer operator and the effective date of the broker-dealer operator's 
membership with the national securities association. We are adding to 
Part I, Item 4 of adopted Form ATS-N the proposed requirement for an 
NMS Stock ATS to provide its Market Participant Identifier 
(``MPID'').\691\ Providing the name of the NMS Stock ATS or DBAs and 
its MPID would identify the ATS to the public and Commission. One 
commenter states that the name, identity of the broker-dealer operator, 
any ``doing business as'' name, and the ATS's MPID are basic 
information critical to market participants and should be 
disclosed.\692\
---------------------------------------------------------------------------

    \691\ This requirement was previously a stand-alone request and 
has been moved to Part I, Item 5 of adopted Form ATS-N, which asks 
the NMS Stock ATS to disclose its national securities association, 
which would issue the MPID to the ATS. 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 when reporting trade information to 
FINRA. See FINRA ATS Reporting Approval, supra note 15.
    \692\ See HMA Letter at 10.
---------------------------------------------------------------------------

    Also, as was proposed, adopted Form ATS-N requires the NMS Stock 
ATS to provide a URL address for the website of the ATS, and in the 
signature block in Part IV of adopted Form ATS-N, the representative of 
the broker-dealer operator will also be required to provide his or her 
business contact information, including the person's name and title, 
telephone number, email address, and primary street address and mailing 
address (if different) of the NMS Stock ATS.\693\ This information will 
facilitate

[[Page 38823]]

communication with the broker-dealer operator during the Commission 
review period of a Form ATS-N and later as necessary as part of the 
Commission's ongoing monitoring of the NMS Stock ATS.
---------------------------------------------------------------------------

    \693\ Contact information of the broker-dealer operator's 
representative in Part IV of Form ATS-N will not be made public. In 
addition, consistent with the requirements of proposed Form ATS-N, 
the signature block in Part IV of adopted Form ATS-N requires 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 to the contact employee at the primary street address 
or mailing address, if different, of the NMS Stock ATS, or via 
email, at the addresses provided on this Form ATS-N.
---------------------------------------------------------------------------

    We are modifying the proposed request for the physical street 
address of the NMS Stock ATS to also require the ATS to provide the 
physical street address, if any, of a secondary location for the ATS 
that may be used in the event that the primary physical location is not 
available. The location of an NMS Stock ATS, including its matching 
system, may differ from the main physical or mailing address of the 
broker-dealer operator. We believe that it is important for both the 
Commission and market participants to know where the NMS Stock ATS is 
located in the event of, for instance, a natural disaster that could 
impact market participants' ability to trade on the ATS and potential 
latency that could be experienced due to the location of the secondary 
site of the NMS Stock ATS. Also, we are concerned that market 
participants could be harmed from systems problems that necessitate a 
suspension or halt to trading at an NMS Stock ATS. Thus, we believe it 
is important to fully understand what, if any, trading procedures an 
NMS Stock ATS would follow if trading is suspended or stopped, which 
would be disclosed under Part III, Item 20 of adopted Form ATS-N. We 
believe that knowing any secondary location(s) for the NMS Stock ATS 
would be relevant to both the Commission's and market participants' 
understanding of how the ATS handles certain contingencies.
    The main physical address and mailing address of the broker-dealer 
operator are provided on Form BD, so we do not believe it is necessary 
to publicly disclose this information on Form ATS-N.\694\ Part II, Item 
6 of proposed Form ATS-N provided that the NMS Stock ATS could indicate 
by check box that the broker-dealer operator is a sole proprietor and 
that the physical street address is a private residence, and that in 
such case, the private residential address would not be included in the 
publicly available version of the form.\695\ One commenter asserts that 
Form ATS-N should require disclosure of all relevant addresses, and 
states its view that we should eliminate the proposed exception for NMS 
Stock ATSs out of a personal residence.\696\ In light of this comment, 
we are not including in adopted Form ATS-N the proposed check box 
noting that the physical address of the matching system is at a sole 
proprietor's private residence. We agree that market participants 
should be aware of the physical addresses of the matching systems for 
all NMS Stock ATSs, regardless of whether they are at a sole 
proprietor's private residence. In addition, based on Commission 
experience, NMS Stock ATSs generally do not operate out of a sole 
proprietor's residence, and the Commission does not believe that the 
exception is necessary. We will therefore make the physical address of 
the matching system available for every Form ATS-N.\697\
---------------------------------------------------------------------------

    \694\ Part IV of adopted Form ATS-N, which will not be made 
public, requires the primary street address and mailing address of 
the NMS Stock ATS in order to facilitate the Commission contacting 
the NMS Stock ATS. See supra note 693.
    \695\ See Part II, Item 6 of proposed Form ATS-N.
    \696\ See HMA Letter at 11.
    \697\ Part I, Item 7 of adopted Form ATS-N.
---------------------------------------------------------------------------

    Also, as was proposed, the Part I, Items 8 and 9 require an NMS 
Stock ATS to attach its 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 its most recently filed or 
amended Schedule B of the broker-dealer operator's Form BD disclosing 
information related to indirect owners as Exhibits 1 and 2, 
respectively. In lieu of attaching those schedules, the NMS Stock ATS 
can indicate, via a checkbox, that the information under those 
schedules is available on its website and is accurate as of the date of 
the filing of the Form ATS-N. We continue to believe that these 
exhibits will help market participants identify the persons and 
entities that directly and indirectly own the broker-dealer operator 
and any potential associated conflicts of interest. We are requiring 
the NMS Stock ATS to provide this information on Form ATS-N, even 
though the same information is provided on Form BD, because information 
about ownership of the broker-dealer operator will enable market 
participants to better understand conflicts of interest that may arise 
therefrom, which is one of the central purposes of the form. As such, 
an NMS Stock ATS must file this information on Form ATS-N. We also 
continue to believe that it is appropriate for an NMS Stock ATS to 
provide this information using a URL address for these documents in 
lieu of attaching the actual documents to their Form ATS-N filings 
because the ATS's disclosures on Form ATS-N will provide the public 
with the required information. Part I, Item 10 of adopted Form ATS-N 
requires the NMS Stock ATS, for filings made pursuant to Rule 
304(a)(2)(i) (i.e., Form ATS-N amendments), to attach as Exhibit 3 a 
marked document to indicate changes to ``yes'' or ``no'' answers or 
additions or deletions from any item in Part I, Part II, Part III, as 
applicable.
b. Comments on Proposed Exhibit 1
    We proposed to require that NMS Stock ATSs provide, in Exhibit 1 to 
Form ATS-N, a copy of any materials currently provided to subscribers 
or other person related to the operations of the NMS Stock ATS or the 
disclosures on Form ATS-N (e.g., FIX protocol procedures, rules of 
engagement/manuals, frequently asked questions, marketing materials). 
We received several comments regarding Exhibit 1.\698\ We are not 
adopting the proposed Exhibit 1 requirements to Form ATS-N.
---------------------------------------------------------------------------

    \698\ See SIFMA Letter at 7; Liquidnet Letter at 8; KCG Letter 
at 6; HMA Letter at 11; STANY Letter at 3; UBS Letter at 3; Level 
ATS Letter at 5.
---------------------------------------------------------------------------

    Commenters express concerns that the requirements of Exhibit 1 are 
broad,\699\ not relevant for purposes of facilitating ATS comparisons 
by market participants,\700\ and would require unnecessarily cumbersome 
amount of disclosure.\701\ Three commenters express concern about the 
requirement to make subscriber materials attached to Form ATS-N as 
exhibits public on the grounds that such documents may include 
confidential information.\702\ Commenters propose that as an 
alternatives to the Exhibit 1 requirements, the Commission could make 
exhibits public only when they are responsive to certain categories of 
documents made available to users (such as FIX protocol procedures, 
rules of engagement, user manuals, frequently asked questions, and 
marketing materials) or are required to accurately respond to the 
questions on Form ATS-N,\703\ or not make public certain

[[Page 38824]]

information (such as electronic trading protocols or other customer 
agreements) and provide other ``proprietary'' information only to 
regulators upon request.\704\ Another commenter suggests that rather 
than requiring formal amendments to Form ATS-N every time an ATS wishes 
to change or enhance marketing materials and similar disclosures, the 
Commission should allow an NMS Stock ATS to post the most recent 
versions of its marketing materials on its website.\705\
---------------------------------------------------------------------------

    \699\ See SIFMA Letter at 7; Liquidnet Letter at 8; KCG Letter 
at 6.
    \700\ See KCG Letter at 6.
    \701\ See SIFMA Letter at 7.
    \702\ See Liquidnet Letter at 8; KCG Letter at 6; Level ATS 
Letter at 5. One of these commenters also expresses concern that the 
proposed requirement would require disclosure of subscriber 
agreements, which are individually negotiated and confidential. See 
Level ATS Letter at 5-6. Another one of these commenters is 
concerned that NMS Stock ATS operators would limit the amount of 
information shared with subscribers in order to avoid sharing that 
information with the public and its competitors. See Liquidnet 
Letter at 8.
    \703\ See Liquidnet Letter at 8.
    \704\ See SIFMA Letter at 7-8.
    \705\ See UBS Letter at 3.
---------------------------------------------------------------------------

    We are not adopting the proposed requirement that NMS Stock ATSs 
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. We recognize that some of such materials 
could contain proprietary or other information that NMS Stock ATSs 
would not wish to make public due to confidentiality or competitive 
concerns. With respect to the comments in support of requiring 
subscriber materials to be made public,\706\ or in support of a limited 
version of the Exhibit 1 requirements,\707\ we believe that Form ATS-N 
is designed to elicit meaningful disclosures about how the NMS Stock 
ATS operates and the ATS-related activities of the broker-dealer 
operator and its affiliate. We believe that the vast amount of 
information that would have been contained in the Exhibit 1 materials 
will be disclosed in response to the request in Form ATS-N and that no 
longer requiring NMS Stock ATSs to produce these materials will reduce 
their burden and the potential disclosure of redundant information to 
the public.
---------------------------------------------------------------------------

    \706\ See HMA Letter at 12 (supporting the adoption of a revised 
Exhibit 1 because it would enhance consistency of information to 
subscribers and the public and would be valuable to those seeking to 
evaluate NMS Stock ATSs). See infra note 709.
    \707\ See KCG Letter at 5-6 (supporting a requirement that 
information be made available to all market participants, and not 
selectively disclosed, but asserting that as drafted, Exhibit 1 is 
overly broad).
---------------------------------------------------------------------------

    One commenter states that while it does not support a requirement 
for public filing of exhibits, it supports requiring these exhibits to 
be filed with the Commission.\708\ We are not adopting this suggestion. 
As discussed above, the purpose of this rulemaking is to expand the 
public transparency of NMS Stock ATSs; providing the proposed Exhibit 1 
information to only the Commission would not serve this purpose.
---------------------------------------------------------------------------

    \708\ See Liquidnet Letter at 9.
---------------------------------------------------------------------------

    Another commenter states that to the extent that ATSs would 
disclose statistics or data that had been requested by firms to help 
with their cost and best execution analysis, such an approach would be 
less helpful than a greatly enhanced, comprehensive disclosure for this 
information.\709\ The commenter states that this information is 
essential. However, this commenter expresses concern that as a 
consequence of the Exhibit 1 requirements, NMS Stock ATSs may cease to 
provide subscribers with information and statistics to avoid having to 
make such information public. This commenter suggests that Exhibit 1 be 
revised to include all marketing materials, manuals, and fee 
information, but not customized statistics and information, provided 
that such statistics and information are otherwise publicly disclosed. 
We are not expanding market statistics that NMS Stock ATSs are 
currently required to disclose as part of this rulemaking.
---------------------------------------------------------------------------

    \709\ See HMA Letter at 12.
---------------------------------------------------------------------------

c. ATS Governance Structure and Compliance Programs and Controls
    In the Proposal, we asked if NMS Stock ATSs should be required to 
provide disclosure about their governance structure and compliance 
programs and controls to comply with Regulation ATS.\710\ In response, 
we received one comment, which states that governance structures are 
likely to vary materially among ATSs, and that the Commission's goals 
in this area would best be served through the Commission's Office of 
Compliance Inspections and Examination's regular examination 
efforts.\711\ We did not receive comments supporting a request for such 
information. We believe that it is appropriate to take an incremental 
approach to this topic and intends to monitor the effectiveness of the 
disclosures on adopted Form ATS-N. Should the Commission decide to take 
further action with regard to Form ATS-N's disclosure requirements, 
including adding requests about NMS Stock ATS governance structure and 
compliance programs and controls, the Commission would do so in a 
separate rulemaking in the future.
---------------------------------------------------------------------------

    \710\ See Proposal, supra note 2, at 81041.
    \711\ See UBS Letter at 4.
---------------------------------------------------------------------------

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

    We believe that the interests of the broker-dealer operator or its 
affiliates sometimes compete against the interest of those that use the 
ATS's services. These competing interests, at times, may give rise to 
conflicts of interests for the broker-dealer operator and its 
affiliates or the potential for information leakage of subscribers' 
confidential trading information. As such, Part II of Form ATS-N is 
designed to provide subscribers and market participants with 
information about these competing interests, and in doing so, inform 
them about: (1) The operation of the NMS Stock ATS--regardless of the 
corporate structure of the NMS Stock ATS--and 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) ATS-related activities of the broker-dealer 
operator and its affiliates that may give rise to conflicts of interest 
for the broker-dealer operator and its affiliates or the potential for 
information leakage of subscribers' confidential trading information.
    Commenters generally support disclosing information about potential 
conflicts of interest and information leakage, and we did not receive 
any comments opposing the principle that information related to 
conflicts of interest or information leakage on an NMS Stock ATS should 
be publicly disclosed.\712\ Several commenters, however, state general 
concerns that the scope of the requests in Part III of proposed Form 
ATS-N is too broad.\713\ A number of commenters believe that the 
requests regarding affiliates should be limited to descriptions of how 
the broker-dealer operator and its affiliates or business units 
directly interact with or affect the operations of the NMS Stock 
ATS.\714\ For example, one commenter argues that proposed Form ATS-N 
would have required disclosures that are not meaningful to market 
participants and could possibly inhibit useful comparison of NMS Stock 
ATSs.\715\
---------------------------------------------------------------------------

    \712\ As discussed further below, several commenters suggest how 
to refine the specific requests proposed for Part III of Form ATS-N.
    \713\ See, e.g., STA Letter at 4; KCG Letter at 8-9; SIFMA 
Letter at 4-8; Luminex Letter at 2-3; Fidelity Letter at 5; STANY 
Letter at 5; UBS Letter at 6; Morgan Stanley Letter at 5.
    \714\ See Fidelity Letter at 2 and 4; UBS Letter at 2-4; SIFMA 
Letter at 4, 8; Luminex Letter at 3; Markit Letter at 7-8.
    \715\ See Morgan Stanley Letter at 5.
---------------------------------------------------------------------------

    Furthermore, a commenter argues that the proposed conflicts of 
interest requests regarding affiliates of the broker-dealer operator 
would have placed a significant burden on multi-service broker-dealers 
with a large number of affiliates, sometimes numbering in the 
hundreds.\716\ Similarly, another commenter states that an NMS Stock 
ATS's broker-dealer operator may not be privy to certain

[[Page 38825]]

information about its affiliates for valid compliance reasons.\717\
---------------------------------------------------------------------------

    \716\ See UBS Letter at 2-5.
    \717\ See Fidelity Letter at 4.
---------------------------------------------------------------------------

    As outlined below in more detail--and in response to both these 
general commenter concerns and commenter concerns that are more 
specific to particular disclosure requests, which are explained below--
we are modifying the conflicts of interest requests to focus on: (1) 
The ability of business units or affiliates of the broker-dealer 
operator to enter, or direct the entry of, orders into the NMS Stock 
ATS and whether such business units or affiliates actually trade on the 
NMS Stock ATS; and (2) whether those business units and affiliates that 
do trade on the NMS Stock ATS receive any preferential treatment with 
respect to the services offered by the NMS Stock ATS.
    We continue to believe that disclosures regarding the ATS-related 
activities of the broker-dealer operator and its affiliates will help 
enable market participants to assess potential conflicts of interest 
that may impact their trading on the ATS and assess the potential for 
information leakage. At the same time, we also believe that Form ATS-N 
should not require public disclosure of activities or affiliate 
relationships of the broker-dealer operator that do not relate to the 
NMS Stock ATS and thus, do not present a potential conflict of 
interest. We believe that the revisions to the proposed disclosure 
requests are responsive to commenters' concerns about the scope of the 
form's affiliate disclosures.
    Furthermore, the burden of responding to the affiliate requests has 
been reduced from that which was proposed. First, the adopted affiliate 
disclosure requests focus on substantive information about how 
affiliated entities interact with the ATS and differences in how the 
ATS treats affiliates' orders. As such, frequent updates to Part II for 
ministerial or minor administrative changes by the ATS would not 
normally be necessary.\718\ To the extent a ministerial or 
administrative change affects a disclosure on Form ATS-N in a non-
material way, the NMS Stock ATS would, in most instances, only be 
required to file a quarterly updating amendment. Additionally, an NMS 
Stock ATS likely already has the necessary information about the 
services that it offers affiliates that trade on the ATS because of its 
current recordkeeping requirements,\719\ and we believe that 
maintaining up-to-date Part II disclosures is justified by the benefit 
to market participants from public disclosure of conflicts of interest 
information.
---------------------------------------------------------------------------

    \718\ Updating amendments for non-material changes may be 
required, as appropriate.
    \719\ See 17 CFR 242.302.
---------------------------------------------------------------------------

    Another commenter expresses concern that the proposed conflicts of 
interest requests would seek public disclosure of proprietary or 
confidential information that would pose unintended consequences or 
security risks to ATS operators.\720\ We are sensitive to concerns 
about the burden of providing disclosures of potentially commercially 
sensitive information. In response to these commenter concerns, we have 
revised the wording of relevant requests to mitigate such concerns or 
provided guidance regarding the scope of certain disclosure requests, 
as further explained below.\721\ We believe that in the vast majority 
of cases, the level of detail required by Form ATS-N should not require 
the public disclosure of commercially sensitive information. In the 
Proposal, we did not intend to require NMS Stock ATSs to publicly 
disclose such information.
---------------------------------------------------------------------------

    \720\ See SIFMA Letter at 6, 9.
    \721\ For example, in the request under Part II, Item 5 of 
adopted Form ATS-N, an NMS Stock ATS is only required to provide a 
summary of the terms and conditions for the use of products or 
services offered by the ATS.
---------------------------------------------------------------------------

    We also note that the disclosure requests on Form ATS-N seek 
information that the Commission and some commenters believe to be 
important to market participants when evaluating an NMS Stock ATS as a 
potential trading venue. We believe that the disclosures on adopted 
Form ATS-N will provide market participants with information necessary 
to evaluate potential conflicts of interest and information leakage 
while not requiring NMS Stock ATSs to provide granular details about 
aspects of the ATS that it might consider to be commercially sensitive. 
Accordingly, to the extent an NMS Stock ATS believes that Form ATS-N 
requires the disclosure of what it believes to be commercially 
sensitive information, we believe that such disclosure is justified by 
the public benefit of the information required on Form ATS-N becoming 
publicly available.
    On the other hand, one commenter expresses a specific concern that 
narrowing the universe of affiliates subject to disclosure could result 
in less relevant information being provided to the Commission and the 
public, as NMS Stock ATSs could structure their legal affiliations and 
operations to take advantage of unanticipated gaps in the rule.\722\ 
This commenter states that the Commission should draw exemptions for 
certain affiliate relationships very narrowly and provide ``bright 
lines'' to help ensure that the requirements are clear and unambiguous, 
so that ATSs would not be permitted to determine whether to disclose an 
affiliate. This commenter also states that it recognizes that 
information on certain affiliates required by Form ATS-N may have 
little relevance to the Commission's review of the broker-dealer 
operator's Form ATS-N.\723\ This commenter believes that rather than 
modifying the Proposal, this issue could be addressed by an NMS Stock 
ATS seeking relief tailored to its unique facts and circumstances 
pursuant to Section 36(a)(1) of the Exchange Act,\724\ which permits 
the Commission to grant exemptions from any provision of a rule, to the 
extent such exemption is necessary or appropriate in the public 
interest and consistent with the protection of investors.\725\
---------------------------------------------------------------------------

    \722\ See Investor Advocate Letter at 8.
    \723\ See id. at 9.
    \724\ See 15 U.S.C. 78mm(a)(1).
    \725\ See Investor Advocate Letter at 9.
---------------------------------------------------------------------------

    We agree with this commenter that Form ATS-N requests regarding the 
ATS-related activities of the broker-dealer operator and its affiliates 
should provide clear and unambiguous requirements for NMS Stock ATSs. 
We also agree that Form ATS-N should be comprehensive enough to 
preclude an NMS Stock ATS from finding ``unanticipated gaps'' in the 
language to avoid disclosing critical aspects of its operations. We 
believe that the refinements to adopted Form ATS-N, as outlined above 
and further explained below, strike the appropriate balance between 
providing market participants with relevant information about potential 
conflicts of interest information and information leakage and the 
burden that Form ATS-N will place on NMS Stock ATSs. We do not believe 
that it is necessary to adopt all of the conflicts of interest requests 
as proposed and require NMS Stock ATSs to seek exemptive relief from 
certain disclosure requirements. Furthermore, the adopted definitions 
of ``affiliate'' and ``control'' are intended to encompass all relevant 
affiliate relationships between the broker-dealer operator and other 
entities that we believe would help market participants' evaluation of 
potential conflicts of interest.
1. Broker-Dealer Operator and its Affiliate Trading Activities on the 
NMS Stock ATS
a. Proposed Requests and Response to Comments
    Part III, Item 1 of proposed Form ATS-N would have required 
disclosures

[[Page 38826]]

regarding non-ATS trading centers operated or controlled by the NMS 
Stock ATS's broker-dealer operator or any of its affiliates. Part III, 
Item 2 of proposed Form ATS-N would have required disclosures about the 
operation of any other NMS Stock ATSs operated by the broker-dealer 
operator or any of its affiliates. Part III, Item 5 of proposed Form 
ATS-N would have required disclosures regarding the broker-dealer 
operator's and its affiliates' trading activity on the NMS Stock ATS.
    As discussed above, we received general comments on Part III of 
proposed Form ATS-N.\726\ Additionally, we received comments 
specifically addressing the requests in Part III, Items 1, 2, and 5, of 
proposed Form ATS-N. In this section, we outline and address these more 
specific comments not previously outlined above. In Section V.C.1.b., 
we outline how we have consolidated much of the subject matter set 
forth in in Part III, Items 1, 2, and 5 of proposed Form ATS-N into 
Part II, Items 1 and 2 of adopted Form ATS-N.\727\
---------------------------------------------------------------------------

    \726\ See supra notes 712-715 and accompanying text.
    \727\ We also note that because Parts I and II of proposed Form 
ATS-N have been consolidated into a single section of adopted Form 
ATS-N, the disclosure requests about the ATS-related activities of 
the broker-dealer operator and its affiliates on the NMS Stock ATS 
are set forth in Part II of adopted Form ATS-N.
---------------------------------------------------------------------------

    First, in addition to the general comments regarding the scope of 
the affiliate disclosure requests that are explained above, some 
commenters provide comments specific to proposed Part III, Item 1 and 
Part III, Item 5.\728\ One of these commenters states that the scope of 
the proposed requests in Part III, Item 1 with regard to non-ATS 
trading centers of the broker-dealer operator or its affiliates could 
have prejudiced commercial strategy.\729\ We believe that a list 
containing business units or affiliates of the broker-dealer operator 
that do not use the trading services of the NMS Stock ATS would not be 
as helpful to market participants as would a list of only those that 
trade on, or otherwise use the trading services of, the ATS.\730\ 
Accordingly, we have revised these disclosures so that Part II, Items 
1(a) and 2(a) of adopted Form ATS-N ask whether business units of the 
broker-dealer operator or its affiliates, respectively, are permitted 
to enter or direct the entry of orders into the ATS. This disclosure is 
designed to inform market participants about whether the ATS permits 
the broker-dealer operator or its affiliates to trade on the NMS Stock 
ATS. If the ATS permits the broker-dealer operator or its affiliates to 
trade on the ATS, the NMS Stock ATS will be required to only list the 
business units or affiliates that actually enter or direct the entry of 
orders into the NMS Stock ATS.
---------------------------------------------------------------------------

    \728\ See STA Letter at 4-5; UBS Letter at 5; SIFMA Letter at 
10; LeveL ATS Letter at 4.
    \729\ See UBS Letter at 5.
    \730\ In the Proposal, the term ``non-ATS trading center'' was a 
defined term, but as explained above, adopted Form ATS-N will not 
use the term ``non-ATS trading center.'' See supra Section V.A.2.a.
---------------------------------------------------------------------------

    Furthermore, with regard to Part III, Item 5 of proposed Form ATS-
N, one commenter states that affiliates or business units that 
indirectly send orders to an NMS Stock ATS through another entity or 
through services provided by another entity are not `enter[ing]' orders 
``on the NMS Stock ATS.'' \731\ We believe that if a business unit or 
affiliate of the broker-dealer operator enters or directs the entry of 
orders into the ATS, market participants would find it useful to know 
that they may be trading against those business units, affiliates, or 
client orders entered by those entities. For example, if a principal 
trading desk of the broker-dealer operator or an affiliate uses a 
direct connection to the NMS Stock ATS or the broker-dealer operator's 
SOR to submit orders or trading interest into the ATS, the NMS Stock 
ATS must list that desk or affiliate on adopted Form ATS-N under Part 
II, Item 1(a) or 2(a), respectively. Likewise, if an affiliated asset 
manager of the broker-dealer operator uses the services of a third-
party broker-dealer to route directed orders to the NMS Stock ATS 
(i.e., the asset manager instructs the third-party broker-dealer to 
send its orders to the NMS Stock ATS), the NMS Stock ATS would be 
required to list that affiliated asset manager under Item 2(a). 
However, if that affiliated asset manager submits orders to a third-
party broker-dealer, and that third-party broker-dealer using its own 
discretion, routes the orders of the asset manager into the affiliated 
NMS Stock ATS (e.g., the third-party broker-dealer's SOR decides where 
to route the affiliated asset manager's orders using its routing 
table), the NMS Stock ATS would not be required to list the affiliated 
asset manager under Item 2(a); under such circumstances, the affiliate 
would not be ``directing'' orders to the ATS because the third-party 
broker-dealer is using its discretion to route the affiliate's orders 
and thus, not required to be listed under Item 2(a).
---------------------------------------------------------------------------

    \731\ See UBS Letter at 6.
---------------------------------------------------------------------------

    The adopted requests also specify the type of information that must 
be provided with regard to business units or affiliates of the broker-
dealer operator. Specifically, Item 1(a) requires the NMS Stock ATS to 
name and describe each type of business unit of the broker-dealer 
operator that enters or directs the entry of orders and trading 
interest into the ATS (e.g., NMS Stock ATS, type of trading desks, 
market maker, sales or client desk) and, for each business unit, to 
provide the applicable MPID and list the capacity of its orders and 
trading interest (e.g., principal, agency, riskless principal). Item 
2(a) requires the NMS Stock ATS to name and describe each type of 
affiliate that enters or directs the entry of orders and trading 
interest into the ATS (e.g., broker-dealers, NMS Stock ATS, investment 
company, hedge fund, market maker, principal trading firm) and, for 
each of those affiliates, provide the applicable MPID and list the 
capacity of its orders and trading interest (e.g., principal, agency, 
riskless principal). We believe that market participants will find it 
more relevant to know both the types of broker-dealer operator business 
units and affiliates that can trade in the NMS Stock ATS, and their 
trading activities, rather than, as proposed, having a potentially 
voluminous list of entities that might include some that cannot send or 
direct orders or trading interest to the ATS.
    We also believe that the revised requests will reduce the burden on 
NMS Stock ATSs when completing the form because they will only require 
the NMS Stock ATS to list entities that trade on the ATS. The narrative 
responses to Items 1(a) and 2(a) could typically be kept up-to-date via 
Updating Amendments to Form ATS-N, which the ATS could file on a 
quarterly basis. However, we also note that in most cases, if the 
``yes'' or ``no'' response to Items 1(a) or 2(a) changes (e.g., the NMS 
Stock ATS changes its operations to allow affiliates to trade whereas 
they could not do so prior, or vice versa), the NMS Stock ATS would be 
required to file a material amendment. Accordingly, we believe that the 
scope of the requests in Part II, Items 1(a) and 2(a) of adopted Form 
ATS-N present a reasonable disclosure requirement for NMS Stock ATSs, 
particularly multi-service broker-dealers with many affiliates, without 
eliminating the requirements for the NMS Stock ATS to provide 
information about the NMS Stock ATS-related trading activities of 
broker-dealer operator and its affiliates, which we believe will be 
helpful for market participants.
    Another commenter recommends that the Commission take a progressive 
approach of ``yes'' or ``no'' questioning for disclosures concerning 
affiliates of the broker-dealer operators that initially targets 
whether the affiliate directly

[[Page 38827]]

routes orders to the NMS Stock ATS.\732\ The commenter recommends that 
the Commission require NMS Stock ATSs to state whether the ATS directly 
receives any order flow from an affiliated party, and if so, if the 
affiliated party is treated exactly the same as every other party with 
access to the ATS.\733\ If the ATS answers in the affirmative, the 
commenter suggests that the ATS be required to identify the affiliated 
parties with access and the procedure for treatment of their orders, 
and if the ATS answers in the negative, the ATS would be required to 
identify parties with access and specifically articulate differences in 
treatment. The disclosure requests in Part II of adopted Form ATS-N are 
all structured in a ``yes'' or ``no'' format with follow-on narrative 
(as necessary), and we believe that the information this commenter 
recommends to be included in Form ATS-N is presented in a format that 
resembles that recommendation.\734\
---------------------------------------------------------------------------

    \732\ See Fidelity Letter at 5.
    \733\ See id. at 5-6.
    \734\ Specifically, Item 2(a) requires the NMS Stock ATS to 
answer ``yes'' or ``no'' as to whether affiliates of the broker-
dealer operator are permitted to enter or direct the entry of orders 
and trading interest into the NMS Stock ATS, and if the answer is 
``yes'', the ATS must provide specific information about those 
affiliates and the capacity of the orders and trading interest that 
the affiliates enter onto the ATS. Item 2(b) then requires the NMS 
Stock ATS to answer ``yes'' or ``no'' as to whether the services 
that the NMS Stock ATS offers and provides to the affiliates 
identified in Item 2(a) are the same for all subscribers, and if the 
NMS Stock ATS answers no, it must explain any differences. We also 
note that the requests in Item 1(a) of adopted Form ATS-N with 
regard to trading activity of the broker-dealer operator on the NMS 
Stock ATS follow the same format as that in Item 2 of adopted Form 
ATS-N.
---------------------------------------------------------------------------

    Several commenters also opine that terms such as ``describe,'' 
``any interaction or coordination,'' ``circumstances,'' and ``otherwise 
made known'' in the conflicts of interest requests might result in 
overbroad or lengthy responses that contain information which would not 
be helpful for market participants.\735\ Another commenter cites Part 
III, Item 5 of proposed Form ATS-N as an example of a request that 
should be tailored to elicit information based on which ATS users can 
make informed decisions.\736\ This commenter states that full-service 
broker-dealers often have hundreds of affiliates and business units 
that meet the definition of entities that may trade on the subject ATS, 
and that keeping such information current and accurate on an ongoing 
basis would bring additional burden with very little, if any, benefit 
to ATS users; the commenter believes that the request regarding trading 
on the ATS by the broker-dealer operator or its affiliates should be 
focused on whether they receive any preferential or differentiated 
treatment.
---------------------------------------------------------------------------

    \735\ See KCG Letter at 8-9; STA Letter at 4; SIFMA Letter at 
10-11; 14. See also SIFMA Letter at 4, 8.
    \736\ See Morgan Stanley Letter at 5.
---------------------------------------------------------------------------

    In response to these comments, we are eliminating the terms 
``interaction and coordination,'' ``circumstances,'' and ``otherwise 
made known'' from these requests to reduce any potential 
ambiguity.\737\ The adopted requests are closely tailored to solicit 
information that market participants find relevant to evaluating 
potential conflicts of interest on an NMS Stock ATS.\738\ Further, both 
Part II, Items 1(a) and 2(a) of adopted Form ATS-N enumerate the type 
of information that an NMS Stock ATS must provide if it answers in the 
affirmative that the broker-dealer operator or its affiliates, 
respectively, is permitted to trade on the NMS Stock ATS.\739\
---------------------------------------------------------------------------

    \737\ While the terms ``interaction and coordination'' are no 
longer used in this disclosure request, many, if not all, Form ATS-N 
requests are designed to provide insight into how the broker-dealer 
operator, its affiliates, or third-parties interact or coordinate 
their activities with the NMS Stock ATS. Two examples of this 
include Part II, Items 3 and 5 of adopted Form ATS-N. Part II, Item 
3 of adopted Form ATS-N requests specific information about how 
subscribers can opt out from interacting with orders of the broker-
dealer operator or its affiliates. Likewise, Item 5 of adopted Form 
ATS-N requests specific information about how the ATS interacts with 
affiliates by requiring certain disclosures about products and 
services offered by the broker-dealer operator.
    \738\ Because we are replacing the term ``interaction and 
coordination'' with these enumerated points of information, aspects 
of the requests set forth in Part III, Items 1(b)(ii)-(iii) and 
2(b)(i), (iii) of proposed Form ATS-N--which addressed the 
transmission of subscriber orders to other trading centers operated 
by the broker-dealer operator or its affiliates--are being either 
narrowed or eliminated from adopted Part II, Items 1 and 2. As 
explained further below, to the extent information that would have 
been required by Part III, Items 1(b)(ii)-(iii) and 2(b)(i), (iii) 
of proposed Form ATS-N is responsive to Part II, Item 4 of adopted 
Form ATS-N--which requests information about the NMS Stock ATS's 
arrangements with unaffiliated or affiliated trading centers--the 
NMS Stock ATS is required to provide that information in response to 
Item 4. See infra Section V.C.3.
    \739\ Another commenter suggests that the Commission's goals 
would be served more simply by requiring ATSs to categorize and 
disclose to their subscribers the nature of a counterparty (i.e., 
agent, principal (including affiliates of the broker-dealer 
operator)) rather than using the term ``proprietary'' in the 
disclosures regarding trading activities of the broker-dealer 
operator and its affiliates. See UBS Letter at 6. The commenter 
believes that this type of disclosure would succinctly inform a 
subscriber about what type of counterparty was on the other side of 
a trade. See id. This commenter also notes that in the Proposal, the 
Commission discussed disclosures and potential additional 
regulations related to ``proprietary trading.'' See id. The 
commenter states that federal regulators have encountered challenges 
in defining this term as part of the ``Volcker Rule'' under the Dodd 
Frank Act. See id. In response to this comment, the Commission has, 
in the language of Part II, Items 1 and 2, listed several examples 
of the capacity in which the broker-dealer operator and its 
affiliates enter or direct the entry of orders (principal, agency, 
or riskless principal) to provide more guidance about the type of 
information sought by Form ATS-N. The Commission has also removed 
references to ``proprietary trading'' from Form ATS-N, and the 
adopted form's disclosure requirements refer to, when applicable, 
``principal trading'' of the broker-dealer operator and its 
affiliates.
---------------------------------------------------------------------------

    Furthermore, while the term ``describe'' is still used in Items 
1(a) and 2(a), we are adding specific examples to each respective 
request to better explain the type of description that would necessary, 
such as ``NMS Stock ATS,'' ``trading desks,'' ``market maker,'' 
``sales'' or ``client desk.'' Also, Items 1(b)-(d) and 2(b)-(d) 
specifically state that the NMS Stock ATS must explain (1) any 
differences between the treatment of those business units or affiliates 
of the broker-dealer operator and other subscribers regarding services 
offered and provided by the NMS Stock ATS; (2) whether any of those 
business units or affiliates of the broker-dealer operator have formal 
or informal arrangements with the NMS Stock ATS to provide liquidity to 
the NMS Stock ATS; and (3) how orders and trading interest in the NMS 
Stock ATS can be routed to a trading center of the broker-dealer 
operator or affiliate.\740\
---------------------------------------------------------------------------

    \740\ With regard to the latter two of these items, adopted Form 
ATS-N requests that the description be provided in the applicable 
Part III item to reduce redundancy on the Form ATS-N, as further 
explained below.
---------------------------------------------------------------------------

    Additionally, a commenter expresses concern that it may not be 
privy to some the information that proposed Form ATS-N would have 
required.\741\ We note that ATSs are currently obligated to make and 
keep records of, among other things, subscribers to the ATS and daily 
summaries of trading, including the identity of the parties to the 
transactions.\742\ We believe that the specific information sought in 
these requests with regard to affiliate trading activity on the ATS in 
adopted Form ATS-N should be maintained as part of the ATS's 
recordkeeping obligation without the ATS having to breach any 
information barriers or other compliance protections. To the extent 
that a business unit or affiliate of the broker-dealer operator 
triggers a disclosure obligation on Form ATS-N by directing the entry 
of orders into the NMS Stock ATS through a third-party broker-dealer, 
we believe that the broker-dealer operator should have--or be able to 
obtain--such information through appropriate internal compliance 
procedures to be responsive to Form ATS-N.
---------------------------------------------------------------------------

    \741\ See supra note 717 and accompanying text.
    \742\ See 17 CFR 242.302.

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

[[Page 38828]]

    We have also revised the requests in proposed Form ATS-N to reduce 
redundant disclosure requirements. First, Part II, Items 1 and 2 of 
adopted Form ATS-N now require the NMS Stock ATS to provide any 
narratives about differences in treatment between the broker-dealer 
operator, its affiliates, and other subscribers in Part III of the 
adopted form, and only cross reference those narratives in Part II (as 
opposed to providing a separate, likely redundant narrative in Part 
II). Second, Part II, Items 1 and 2 of adopted Form ATS do not require 
the NMS Stock ATS to disclose whether subscriber orders or other 
trading interest sent to the NMS Stock ATS are displayed or otherwise 
made known to a non-ATS trading center or another NMS Stock ATS 
operated by the broker-dealer operator or an affiliate.\743\ Rather, 
any narrative with regard to order display (including a description 
about differences in services) is only required to be set forth in Part 
III, Item 15 of adopted Form ATS-N, which contains the order display 
requests of adopted Form ATS-N.
---------------------------------------------------------------------------

    \743\ This information would have been required under Part III, 
Item 1(b)(i) and 2(b)(ii) of proposed Form ATS-N.
---------------------------------------------------------------------------

    Finally, Part II, Items 1 and 2 of adopted Form ATS-N do not 
require the NMS Stock ATS to disclose how the business units and 
affiliates of the broker-dealer operator connect to the ATS, such as 
through a Financial Information Exchange (``FIX'') protocol.\744\ 
Rather, any narrative about order entry in the NMS Stock ATS (including 
a description about differences in services) is only required by Part 
III, Item 5 of adopted Form ATS-N (Means of Entry). Accordingly, Part 
II of adopted Form ATS-N is designed to provide market participants 
with information about how the NMS Stock ATS interacts with the 
business units and affiliates of the broker-dealer operator so they can 
assess potential conflicts of interest, while minimizing disclosure 
requests that would be redundant with those contained in Part III.\745\
---------------------------------------------------------------------------

    \744\ This information would have been required under Part III, 
Item 5(c) of proposed Form ATS-N.
    \745\ One commenter also recommends limiting the requests 
related to order routing from proposed Part III, Item 2 (Multiple 
NMS Stock ATS Operations) to the functions of ATS operation, as 
distinguished from other algorithmic or routing functions housed 
within the broker-dealer operator or an affiliate, which the 
commenter states appear to be addressed in Part III, Item 3 of 
proposed Form ATS-N, as well as asking what it means to ``remove'' 
an order. See SIFMA Letter at 11. See infra Section V.D.7. for a 
discussion of the required disclosures related to the removal of 
trading interest. Furthermore, this commenter recommends that 
Commission state whether the ATS operator should distinguish between 
parent and child orders for the disclosures related to Part III, 
Item 2 of proposed Form ATS-N. See id. Adopted Part III, Item 16(b) 
requires the NMS Stock ATS to either describe the affirmative 
instructions from a subscriber that must be obtained to route 
outside of the NMS Stock ATS or, if no instructions are required, 
the ATS must explain when orders in the ATS can be routed from the 
NMS Stock ATS. If the NMS Stock ATS breaks up a parent order into 
child orders or otherwise uses the fact that an order is a parent 
order or child order to make routing decisions, such information 
must be disclosed under Item 16(b).
---------------------------------------------------------------------------

    Another commenter believes that the information requested under 
proposed Part III, Item 5 of proposed Form ATS-N was too granular, 
duplicative of information required by Form BD, and that some of the 
prompts (e.g., ``business unit,'' ``describe the circumstances'') were 
too open-ended, which could lead to non-standardized responses that 
would not be helpful to market participants.\746\ This commenter 
recommends: (i) Eliminating proposed Item 5 and replacing the proposed 
disclosure requirements with yes/no prompts or short-answer responses 
that are more focused or narrowly tailored and (ii) eliminating or 
further clarifying and limiting the request for information of 
affiliates and business units.
---------------------------------------------------------------------------

    \746\ See SIFMA Letter at 14.
---------------------------------------------------------------------------

    As explained above, Part II, Items 1(a) and 2(a) of adopted Form 
ATS-N provide more specificity about the information requested about 
the ATS-related activities of business units and affiliates of the 
broker-dealer operator by providing examples of what we intend to 
solicit from these requests. To the degree that some information 
solicited by adopted Form ATS-N is duplicative of information sought on 
Form BD, the duplicative information is straightforward for the broker-
dealer to reproduce on Form ATS-N, and we believe that market 
participants will derive greater benefit from this information being 
disclosed on a single form (Form ATS-N) as opposed to being spread 
across multiple forms filed with the Commission.
    Similarly, another commenter cites the proposed requirement to 
provide the names of specific business units and algorithms that trade 
in NMS Stock ATS as an example of requested information that it 
believes is unnecessary to risk assessment.\747\ We believe that some 
market participants may find it very helpful to know the identities and 
number of the broker-dealer operator's business units or affiliates 
that trade on the NMS Stock ATS. As indicated by commenters, some 
market participants may, for example, view trading on an ATS by a 
principal trading desk of the broker-dealer operator as presenting a 
potential conflict of interest for the broker-dealer operator, even if 
the ATS does not give any preference to the orders from that desk.\748\
---------------------------------------------------------------------------

    \747\ See STANY Letter at 5.
    \748\ See Consumer Federation of America Letter at 7-8; HMA 
Letter at 13.
---------------------------------------------------------------------------

    We also received comments supporting the original requests under 
Part III, Items 1, 2, and 5 of proposed Form ATS-N. One commenter 
believes that these proposed disclosure requests are essential to 
alerting market participants about potentially significant advantages 
of the broker-dealer operator and its affiliates and to allow market 
participants to obtain a reasonable understanding of the conflicts of 
interest posed by the broker-dealer operator's or its affiliates' 
trading activities on the ATS.\749\ In addition, a commenter states 
that the requests under Part III, Item 5 of proposed Form ATS-N would 
help investors better understand the relationship between the NMS Stock 
ATS, its broker-dealer operator, and any affiliates.\750\ One commenter 
asserts that market participants would want to know the specific 
advantages afforded to the ATS operator or its affiliate, and urges the 
Commission to adopt proposed Part III, Item 5.\751\ While we have 
refined the scope of certain subject matter in response to comment, we 
still believe that the disclosure requests in adopted Form ATS-N about 
the trading activities of the broker-dealer operator and its affiliates 
will allow for a high degree of transparency by capturing information 
that these commenters believe is important to market participants.
---------------------------------------------------------------------------

    \749\ See HMA Letter at 15-18. Another commenter states its 
support for the goal of a fulsome disclosure of circumstances where 
subscriber orders or other trading interest could leave an NMS Stock 
ATS and be made available to other areas of the broker-dealer 
operator. See UBS Letter at 5. The commenter states that market 
participants are entitled to know such information, but also states 
that the Commission's goal could be achieved through simplified 
disclosures. The commenter states that the proposed requirement to 
list the non-ATS trading centers controlled by the broker-dealer 
operator or its affiliates should only be required if orders are 
routed to the NMS Stock ATS from such trading centers or from the 
NMS Stock ATS to those trading centers.
    \750\ See MFA/AIMA Letter at 5.
    \751\ See HMA Letter at 16.
---------------------------------------------------------------------------

    In addition, one commenter states that it supports the disclosure 
of potential trading activity on the NMS Stock ATS by the broker-dealer 
operator and its affiliates, but asserts that the disclosure 
requirement should be revised to allow for a series of progressive 
``yes'' or ``no'' responses.\752\ The commenter also notes that as 
proposed, it would be difficult for NMS Stock ATSs to maintain this 
disclosure on an on-going basis. As is

[[Page 38829]]

explained above, we do not believe that maintaining up-to-date 
disclosures regarding the ATS-related trading activities of the broker-
dealer operator and its affiliates will impose an unreasonable 
administrative burden on the NMS Stock ATS.
---------------------------------------------------------------------------

    \752\ See KCG Letter at 10.
---------------------------------------------------------------------------

b. Adopted Part II, Item 1 and 2 of Form ATS-N; ATS-Related Trading 
Activities of the Broker-Dealer Operator and its Affiliates
    As noted above, we reorganized and relocated the subject matter 
requested in Part III, Items 1, 2, and 5 of proposed Form ATS-N to Part 
II, Items 1 (``Broker-Dealer Operator ATS Trading Activities'') and 2 
(``Affiliates ATS Trading Activities'') of adopted Form ATS-N. We have 
also revised the content of the proposed disclosure requests in 
response to public comment.\753\
---------------------------------------------------------------------------

    \753\ The subject matter covered in Part III, Item 5.d of 
proposed Form ATS is now addressed in Part II Item 3 of adopted Form 
ATS-N. See infra Section V.C.2.
---------------------------------------------------------------------------

    Part II, Item 1(a) of adopted Form ATS-N requires the NMS Stock ATS 
to disclose whether business units of the Broker-Dealer Operator are 
permitted to enter or direct the entry of orders and trading interest 
(e.g., quotes, conditional orders, or indications of interest) into the 
NMS Stock ATS. This request will be in the form of a ``yes'' or ``no'' 
question, and if the NMS Stock ATS answers ``yes,'' it will be required 
to name and describe each type of business unit of the Broker-Dealer 
Operator that enters or directs the entry of orders and trading 
interest into the ATS (e.g., NMS Stock ATS, type of trading desks, 
market maker, sales or client desk) and, for each type of business 
unit, it must provide the applicable MPID and list the capacity of its 
orders or trading interest (e.g., principal, agency, riskless 
principal). This request is designed to encompass the information 
request in Part III, Items 5(a) and (b) of proposed Form ATS-N and 
capture elements of Part III Items 1(a) and (b) and Items 2(a) and (b) 
of proposed Form ATS-N.
    The subject matter covered by Part III, Item 1(b)(i) and (ii) is no 
longer included in the disclosure request contained in Part II, Item 1 
of adopted Form ATS-N.\754\ Likewise, the subject matter covered by 
Part III, Item 2(b)(i) and (ii) is no longer included in the disclosure 
request contained in Part II, Item 1 of adopted Form ATS-N.\755\ Part 
II, Item 1 of adopted Form ATS-N focuses on the trading activity of the 
broker-dealer operator in the NMS Stock ATS, so those proposed 
disclosure requests are outside the scope of adopted Part II, Item 1. 
However, to the extent that information about the subjects in those 
proposed disclosure requests are responsive to other disclosure 
requests in adopted Form ATS-N--such as Part II, Item 3 (``Arrangements 
With Trading Centers) and Part III, Item 15 (``Display'')--the NMS 
Stock ATS must respond to those items accordingly.
---------------------------------------------------------------------------

    \754\ These proposed requests would have required disclosures 
regarding the display of subscriber orders to a non-ATS trading 
center operated by the broker-dealer operator (proposed Part III, 
Item 1(b)(i)) and the execution of subscriber orders in a non-ATS 
trading center operated by the broker-dealer operator (proposed Part 
III, Item 1(b)(ii)), respectively.
    \755\ These proposed requests would have required disclosures 
about sending subscriber orders to another NMS Stock ATS operated by 
the broker-dealer operator in lieu of the NMS Stock ATS filing the 
form (proposed Part III, Item 2(b)(i)) and the display of subscriber 
orders to another NMS Stock ATS operated by the broker-dealer 
operator (proposed Part III, Item 2(b)(ii)), respectively.
---------------------------------------------------------------------------

    Next, Part II, Item 1(b) of adopted Form ATS-N requires an NMS 
Stock ATS to disclose whether the services that the NMS Stock ATS 
offers and provides to the business units required to be identified in 
Item 1(a) are the same for all subscribers. This request will be in the 
form of a ``yes'' or ``no'' question, and if the NMS Stock ATS answers 
``no,'' it will be required to explain any differences in response to 
the applicable Item number(s) in Part III of adopted Form ATS-N and 
list the applicable Item number(s). If there are differences that are 
not applicable to Part III of adopted Form ATS-N, the NMS Stock ATS 
must explain those differences in detail under Part II, Item 1.
    Next, Part II, Item 1(c) of adopted Form ATS-N requires NMS Stock 
ATSs to disclose the broker-dealer operator's role as a liquidity 
provider on the NMS Stock ATS, if applicable.\756\ This item requires 
the NMS Stock ATS to disclose--in the form of a ``yes'' or ``no'' 
question--whether there are any formal or informal arrangements with 
any of the sources of orders or trading interest of the broker-dealer 
operator identified in Item 1(a) to provide orders or other trading 
interest to the NMS Stock ATS (e.g., undertaking to buy or sell 
continuously, or to meet specified thresholds of trading or quoting 
activity). If the NMS Stock ATS answers ``yes,'' it must identify the 
business unit(s) and respond to the request in Part III, Item 12, which 
sets forth the requests for liquidity providers on the NMS Stock 
ATS.\757\ We believe that highlighting, in Part II of adopted Form ATS-
N, whether the broker-dealer operator acts as a liquidity provider on 
the NMS Stock ATS will be helpful to market participants when 
evaluating the potential for conflicts of interest or information 
leakage on the trading platform. However, to reduce duplicative 
requests on adopted Form ATS-N, we are not requiring the NMS Stock ATS 
to provide a narrative in Part II of adopted Form ATS-N regarding the 
broker-dealer operator's liquidity provider activities because that 
information will be disclosed under Part III, Item 12 of adopted Form 
ATS-N.
---------------------------------------------------------------------------

    \756\ The requirement to disclose liquidity providers and the 
terms and condition of any arrangements with liquidity providers was 
set forth under Part IV, Item 1(d) of proposed Form ATS-N.
    \757\ See infra Section V.D.12.
---------------------------------------------------------------------------

    Finally, Part II, Item 1(d) of adopted Form ATS-N requires the NMS 
Stock ATSs to disclose information about the routing of orders and 
trading interest to trading centers operated or controlled by the 
broker-dealer operator. This Item will require the NMS Stock ATS to 
disclose--in the form of a ``yes'' or ``no'' question--whether orders 
and trading interest in the NMS Stock ATS can be routed to a trading 
center of the broker-dealer operator. If the NMS Stock ATS answers 
``yes,'' it must respond to the requests in Part III, Item 16 of 
adopted Form ATS-N, which sets forth the requests for disclosures about 
routing orders and trading interest out of the NMS Stock ATS. We 
continue to believe that disclosures regarding the routing of orders 
will provide subscribers with information about how their orders would 
be handled if they are not executed on the ATS and allow them to assess 
whether such routing could result in the leakage of confidential 
information, particularly if those orders are being routed to a trading 
center of the broker-dealer operator. Similar to Part II, Item 1(c) of 
adopted Form ATS-N, the request in Part II, Item 1(d) will not require 
a narrative because Part IV, Item 16 of adopted Form ATS-N requires 
disclosures about routing.\758\
---------------------------------------------------------------------------

    \758\ See id.
---------------------------------------------------------------------------

    Part II, Item 2(a) of adopted Form ATS-N requires an NMS Stock ATS 
to disclose whether affiliates of the broker-dealer operator are 
permitted to enter or direct the entry of orders and trading interest 
into the NMS Stock ATS. This request will be in the form of a ``yes'' 
or ``no'' question, and if the NMS Stock ATS answers ``yes,'' it must 
name and describe each type of affiliate that enters or directs the 
entry of orders and trading interest in the ATS (e.g., broker-dealers, 
NMS Stock ATS, mutual fund, hedge fund, market maker) and, for each 
affiliate that trades on the NMS Stock ATS, the NMS Stock ATS must 
provide the applicable MPID and list the capacity(ies) of its orders 
and trading interest (e.g., principal, agency, riskless

[[Page 38830]]

principal). As with Item 1, these requests are designed to encompass 
the information that would have been required under Part III, Items 
5(a) and (b) of proposed Form ATS-N and is designed to capture elements 
of Part III Item 1(a) and Item 2(a) of proposed Form ATS-N.\759\
---------------------------------------------------------------------------

    \759\ Also like Part II, Item 1(a) of adopted Form ATS-N, Item 
2(a) does not contain the subject matter covered by Part III, Item 
1(b)(i) and (ii) and Part III, Item 2(b)(i) and (ii) of proposed 
Form ATS-N, but to the extent that information about the subjects in 
those proposed requests are responsive to other requests in adopted 
Form ATS-N, the NMS Stock ATS must respond to those items 
accordingly.
---------------------------------------------------------------------------

    Next, Part II, Item 2(b) of adopted Form ATS-N requires an NMS 
Stock ATS to disclose whether the services that the NMS Stock ATS 
offers and provides to the affiliates required to be identified in Item 
2(a) are the same for all subscribers. This request is in the form of a 
``yes'' or ``no'' question, and if the NMS Stock ATS answers ``no,'' it 
will be required to explain any differences in response to the 
applicable Item number(s) in Part III of adopted Form ATS-N, as 
required, and list the applicable Item number(s). If there are 
differences that are not applicable to Part III of adopted Form ATS-N, 
the NMS Stock ATS must explain those differences in detail under Part 
II, Item 2.\760\
---------------------------------------------------------------------------

    \760\ We have incorporated the requests of proposed Part III, 
Item 9 of proposed Form ATS-N into individual Part II requests in 
adopted Form ATS-N, and thus, there is no longer a stand-alone 
question addressing differences among the services provided to the 
broker-dealer operator or its affiliates and other subscribers. See 
supra Section V.C.7.
---------------------------------------------------------------------------

    Part II, Item 2(c) of adopted Form ATS-N requests information about 
the role of the broker-dealer operator's affiliates as liquidity 
providers on the NMS Stock ATS, if applicable. This item requires the 
NMS Stock ATS to disclose--in the form of a ``yes'' or ``no'' 
question--whether there are there any formal or informal arrangements 
with affiliates of the broker-dealer operator identified in Item 2(a) 
to provide orders or other trading interest to the NMS Stock ATS (e.g., 
undertaking to buy or sell continuously, or to meet specified 
thresholds of trading or quoting activity). If the NMS Stock ATS 
answers ``yes,'' it must identify the affiliates and respond to the 
request in Part III, Item 12, which sets forth the required disclosures 
for liquidity providers on the NMS Stock ATS.
    Finally, Part II, Item 2(d) of adopted Form ATS-N requires an NMS 
Stock ATS to disclose information about routing orders and trading 
interest out of the NMS Stock ATS to a trading center operated and 
controlled by affiliates of the broker-dealer operator. This item will 
require the NMS Stock ATS to disclose--in the form of a ``yes'' or 
``no'' question--whether orders and trading interest in the NMS Stock 
ATS can be routed to a trading center operated or controlled by an 
affiliate of the broker-dealer operator. If the NMS Stock ATS answers 
``yes,'' it must respond to request in Part III, Item 16, which sets 
forth the required disclosures for routing orders and trading interest 
out of the NMS Stock ATS.
2. Order Interaction With Broker-Dealer Operator; Affiliates
    Part II, Item 3 of adopted Form ATS-N requests information about 
the interaction of orders of between unaffiliated subscribers to the 
ATS and orders of the broker-dealer operator and its affiliates in the 
NMS Stock ATS. Part II, Item 3(a) of adopted Form ATS-N requires an NMS 
Stock ATS to disclose whether a subscriber can opt out of interacting 
with orders and trading interest of the broker-dealer operator in the 
NMS Stock ATS, and Part II, Item 3(b) requires an NMS Stock ATS to 
disclose whether a subscriber can opt out of interacting with the 
orders and trading interest of an affiliate of the broker-dealer 
operator in the NMS Stock ATS.\761\ Part II, Item 3(c) of adopted Form 
ATS-N requires the NMS Stock ATS to disclose whether the terms and 
conditions of the opt-out processes for the broker-dealer operator and 
affiliates required to be identified in Items 3(a) and (b) are the same 
for all subscribers. The content of these requests are intended to 
cover the subject matter contained in Part III, Item 5(d) of proposed 
Form ATS-N.\762\
---------------------------------------------------------------------------

    \761\ For example, if a broker-dealer operator uses its SOR or 
algorithms to submit subscriber orders into the ATS, any steps that 
either the broker-dealer operator or the subscriber would have to 
take so that those orders are opted-out of trading with the broker-
dealer operator or its affiliates would be required disclosures 
under Items 3(a) and 3(b), respectively.
    \762\ Part III, Item 5(d) of proposed Form ATS-N would have 
required the NMS Stock ATS to 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.
---------------------------------------------------------------------------

    We believe that is helpful to market participants for the subject 
matter covered by proposed Part III, Item 5(d) to be a stand-alone 
question in adopted Form ATS-N. Such information is important to 
unaffiliated market participants trading on an ATS because some 
unaffiliated subscribers may not wish to interact with the order flow 
of the broker-dealer operator or its affiliates. This disclosure will 
help market participants understand whether and how they may avoid 
trading with the broker-dealer operator and its affiliates should they 
elect to use the services of the NMS Stock ATS.
    As explained above, we received several comments about the proposed 
requests addressing ATS-related activities of the broker-dealer 
operator and its affiliates, including the request set forth in Part 
III, Item 5. In addition to these comments, one commenter opines that 
if a subscriber desires to opt out of trading with the broker-dealer 
operator's principal orders, the broker-dealer operator should be 
obliged to follow and implement the stated instruction.\763\ This 
rulemaking addresses enhanced disclosure requirements for NMS Stock 
ATSs, and not regulations to require certain actions by NMS Stock ATSs 
outside of the disclosures and other requirements specifically 
enumerated herein.
---------------------------------------------------------------------------

    \763\ See UBS Letter at 6.
---------------------------------------------------------------------------

3. Arrangements With Trading Centers
    Part III, Item 4 of proposed Form ATS-N requested disclosures about 
arrangements the broker-dealer operator, or any of its affiliates, has 
with unaffiliated trading centers. The subject matter covered in Part 
III, Item 4 of proposed Form ATS-N is under Part II, Item 4 of adopted 
Form ATS-N.
    The Commission received several comments regarding disclosure 
requests about arrangements with unaffiliated trading centers. Three 
commenters support the public disclosure of preferential arrangements 
with third parties.\764\ One of these commenters, while supporting the 
disclosure of preferential arrangements in principle, believes the 
requests in Part III, Item 4 of proposed Form ATS-N could be too 
exhaustive and should be narrowed to focus on preferential 
arrangements.\765\ Similarly, another commenter believes the central 
concern around affiliate relationships should focus on whether a third-
party entity has differentiated or unique access to an ATS.\766\ 
Another commenter believes that the broker-dealer operators of NMS 
Stock ATSs should not be required to provide proprietary information to 
the public under this disclosure, stating that in instances where SORs 
operate outside of the NMS Stock ATS and make routing decisions 
independent of the NMS Stock ATS, the appropriate source of information 
sought by the Commission

[[Page 38831]]

is the operator of the SOR, not the operator of the NMS Stock ATS.\767\
---------------------------------------------------------------------------

    \764\ See HMA Letter at 16; UBS Letter at 5; SIFMA Letter at 13.
    \765\ See SIFMA Letter at 13.
    \766\ See UBS Letter at 5.
    \767\ See STANY Letter at 4.
---------------------------------------------------------------------------

    We have not limited the disclosures required under adopted Part II, 
Item 4 of adopted Form ATS-N to preferential arrangements or other 
unique access given to unaffiliated third parties, as suggested by 
these commenters. We believe that some market participants may consider 
other arrangements with third parties relevant to their evaluations of 
an NMS Stock ATS as a potential trading venue. For example, if an NMS 
Stock ATS has a mutual access agreement with another ATS, a market 
participant may take into account the fact that its order may 
eventually route to another ATS, even if orders from the other ATS do 
not receive preferential treatment on the ATS.
    The disclosure requests in Part II, Item 4 of adopted Form ATS-N 
will provide market participants with information necessary to evaluate 
potential conflicts of interest or sources of information leakage. For 
example, Part II, Item 4 of adopted Form ATS-N requires the disclosure 
of an arrangement between the NMS Stock ATS and an unaffiliated NMS 
Stock ATS under which the NMS Stock ATS would route orders or other 
trading interest to the unaffiliated NMS Stock ATS for possible 
execution before routing to any other destination. By way of further 
example, Item 4 also requires 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; it also requires a summary of the terms and conditions of the 
arrangement such as, for example, whether the NMS Stock ATS is 
providing monetary compensation or some other brokerage service to the 
unaffiliated NMS Stock ATS.
    In response to the above commenter concerns, however, Part II, Item 
4 of adopted Form ATS-N includes some modifications. First, the adopted 
disclosure request in Part II, Item 4 replaces the proposed phrase 
``describe the terms of the arrangement'' with the phrase ``provide a 
summary of the terms and conditions of the arrangement.'' We believe 
that replacing the term ``describe'' with a requirement to ``provide a 
summary'' will make it clear that the scope of the adopted request 
should not typically require the NMS Stock ATS to provide granular 
details about its arrangements that the ATS might consider to be 
commercially sensitive.
    Second, Part II, Item 4 of adopted Form ATS-N does not use the 
phrase ``person(s), or affiliate(s) of such person(s) that operates a 
trading center'' when establishing the scope of the request, as was 
proposed. Rather, the adopted request focuses on arrangements with 
trading centers themselves. One commenter argues that to the extent a 
third-party entity solely has access to functionality disclosed 
elsewhere in proposed Form ATS-N, proposed Part III, Item 4 would not 
be necessary.\768\ We did not intend for the proposed request to 
encompass, for example, a subscriber agreement between a third-party 
broker-dealer, who happens to also operate a trading center, and the 
NMS Stock ATS under which the third-party broker-dealer submits orders 
to the ATS in the same manner as all other subscribers. Rather, the 
purpose of the request in Part II, Item 4 is to publicly disclose any 
arrangement with another trading center that may be relevant to a 
conflicts of interest analysis, such as one under which the NMS Stock 
ATS and a third-party NMS Stock ATS send their respective subscriber 
orders to one another.
---------------------------------------------------------------------------

    \768\ See UBS Letter at 5.
---------------------------------------------------------------------------

    Additionally, we are including in Part II, Item 4 of adopted Form 
ATS-N examples of the types of arrangements that would be responsive to 
the disclosure request, such as mutual or reciprocal access 
arrangements \769\ and preferential access arrangements \770\ to 
clarify that the disclosures required by Part II, Item 4 of adopted 
Form ATS are not so broad as to require the NMS Stock ATS to list each 
unaffiliated subscriber that accesses its system. We are also revising 
the request in Part III, Item 4 of proposed Form ATS-N to only require 
disclosures about arrangements with trading centers to access the NMS 
Stock ATS's services in adopted Form ATS-N. For example, an NMS Stock 
ATS must provide details about how it disseminates orders or trading 
interest submitted by a trading center under a unique arrangement with 
that trading center such a reciprocal access agreement; these types of 
arrangements would typically be different than the ATS's standard 
contract with subscribers to access the services of the ATS. We believe 
that this change will better define the scope of information responsive 
to the Part II, Item 4 of adopted Form ATS-N while not removing any 
proposed disclosure requirements.
---------------------------------------------------------------------------

    \769\ Mutual or reciprocal access arrangements may be, for 
example, an NMS Stock ATS that allows another broker-dealer operator 
to access its ATS for liquidity in return for the ability to access 
the liquidity of the other broker-dealer's ATS.
    \770\ Preferential routing arrangements may be, for example, an 
NMS Stock ATS being the first routing destination on the routing 
table of a third party's algorithm.
---------------------------------------------------------------------------

    Likewise, the Commission is modifying the wording of the proposed 
disclosure requests to require the NMS Stock ATS to disclose formal or 
informal arrangements for a trading center ``to access the NMS Stock 
ATS services.'' Adding the word ``services'' clarifies that the 
disclosure must explain the services provided to the unaffiliated 
trading center after it connects to the ATS. An NMS Stock ATS can 
provide various types of services to subscribers and the request, as 
revised, is tailored for those ATSs services that a subscriber may use.
    Next, the scope of Part III, Item 4 of proposed Form ATS-N only 
encompassed arrangements with unaffiliated trading centers, but Part 
II, Item 4 of adopted Form ATS-N encompasses arrangements with both 
unaffiliated and affiliated trading centers. As explained above, the 
requests set forth in Part III, Items 1(b)(ii)-(iii) and 2(b)(i), (iii) 
of proposed Form ATS-N--which addressed the transmission of subscriber 
orders to other trading centers operator by the broker-dealer operator 
or its affiliates--have either been narrowed or eliminated from Part 
II, Items 1 and 2 of adopted Form ATS-N. However, to the extent that an 
NMS Stock ATS has an arrangement with a trading center operated by the 
broker-dealer operator or an affiliate, we believe that market 
participants are still likely to consider information about such 
arrangements relevant to their evaluation of an NMS Stock ATS as a 
potential trading venue and such an arrangement may raise concerns 
about conflicts of interest or information leakage.\771\
---------------------------------------------------------------------------

    \771\ For example, a potential conflict of interest could arise 
where an NMS Stock ATS has a preferred routing arrangement with an 
affiliated, non-ATS trading center wherein all orders sent to the 
NMS Stock ATS would first be routed to the affiliated, 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 because the non-ATS trading center would know 
that any unexecuted orders would then be routed to the NMS Stock 
ATS. Alternatively, if an arrangement between the NMS Stock ATS and 
affiliated trading center provides that any subscriber orders routed 
out of the NMS Stock ATS would be first routed to the affiliated, 
non-ATS trading center, the NMS Stock ATS may have an incentive to 
remove subscribers' orders from the NMS Stock ATS and allow the 
affiliated non-ATS trading center the opportunity to execute those 
orders.
---------------------------------------------------------------------------

    Additionally, Part III, Item 4 of proposed Form ATS-N would also 
have required the disclosure of mutual access arrangements between an 
NMS Stock

[[Page 38832]]

ATS and other trading centers whereby, for example, a broker-dealer 
operator, or its affiliate, may offer access to the broker-dealer 
operator's NMS Stock ATS in exchange for access to another NMS Stock 
ATS of operated by another broker-dealer. Accordingly, Part II, Item 4 
of adopted Form ATS-N is designed to inform subscribers about these 
arrangements as such information may impact a subscriber's experience 
on the NMS Stock ATS and allow them to evaluate potential conflicts of 
interest of the broker-dealer operator and its affiliates.\772\
---------------------------------------------------------------------------

    \772\ See Proposal, supra note 2, at 81049. Furthermore, as 
discussed in the Proposal, 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. 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. See id. at 
81049, n.401.
---------------------------------------------------------------------------

    Finally, in Part II, Item 4 of adopted Form ATS-N, the Commission 
has divided the request into two subparts--one subpart addressing the 
broker-dealer operator's arrangements, and another subpart addressing 
its affiliates' arrangements. This is a technical edit so that the 
format of Part II, Item 4 of Form ATS-N is consistent with the format 
of Part II, Items 1-3 above.
4. Other Products and Services
    Part III, Item 3 of proposed Form ATS-N would have required 
disclosures about products and services offered to subscribers used in 
connection with trading on the NMS Stock ATS. We are adopting Part III, 
Item 3 of proposed Form ATS-N as Part II, Item 5 of adopted Form ATS-N; 
however, we are modifying the proposed disclosure request in response 
to commenter concerns.
    One commenter states that the proposed requests would have helped 
investment funds assess an NMS Stock ATS as a potential execution venue 
by improving their ability to understand all functionality offered by 
the broker-dealer operator and whether the broker-dealer operator makes 
all services available in a fair and impartial manner.\773\ Some 
commenters, while not opposing the general category of disclosure 
requested in proposed Part III, Item 3, believe the scope of the 
requests regarding products and services should be narrowed.\774\ One 
commenter agrees with the Commission's approach, but states that the 
disclosure requirement should be refined to cover products or services 
used in connection with trading NMS stocks, not just trading on the NMS 
Stock ATS.\775\ Another commenter believes that distinct products and 
services provided by an affiliate of the broker-dealer operator to a 
client--who happens to be an ATS subscriber--but which are not directly 
linked to the ATS subscription should not be captured by this 
requirement, particularly, when the client/subscriber ultimately may or 
may not use those services to trade on the ATS.\776\ Another commenter 
suggests only requiring an ATS to list or outline broad categories of 
products or services rather than requiring the NMS Stock ATS to 
``describe'' its products or services.\777\ Another commenter states 
that each relationship and customer experience is different and free-
standing in certain respects, and believes that the proposed request 
would potentially require the disclosure of a whole array of products 
or services, the enumeration of which would add little value and be 
burdensome to maintain/update.\778\
---------------------------------------------------------------------------

    \773\ See ICI Letter at 7.
    \774\ See HMA Letter at 16; KCG Letter at 9; SIFMA Letter at 11-
13; UBS Letter at 5; STANY Letter at 4.
    \775\ See HMA Letter at 16.
    \776\ See KCG Letter at 9. The commenter states that, in many 
cases, an ATS operator may be unaware of products and services 
separately provided by an affiliate to a customer that are entirely 
independent from and may pre-exist the client's ATS subscription. 
See id.
    \777\ See SIFMA Letter at 12.
    \778\ See UBS Letter at 5. The commenter also states that a 
forced public listing of a broker-dealer's products and services may 
be inconsistent with the broker-dealer's traditional approach and 
preferences for marketing. See id.
---------------------------------------------------------------------------

    Broker-dealer operators of NMS Stock ATSs may, directly or 
indirectly through an affiliate, offer products or services to 
subscribers for the purpose of, for example, submitting orders, or 
receiving information about displayed interest, in the ATS.\779\ We 
continue to believe that subscribers would want to know the products or 
services that the broker-dealer operator or its affiliates may offer 
for the purpose of effecting transactions, or submitting, 
disseminating, or displaying orders and trading interest on the NMS 
Stock ATS because such products or services may impact the subscribers' 
access to, or trading on, the ATS.
---------------------------------------------------------------------------

    \779\ See Proposal, supra note 2 at 81048. 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 its 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 to the NMS Stock ATS.
---------------------------------------------------------------------------

    We note that many broker-dealer operators are multi-service broker-
dealers and provide routing and execution services in NMS stocks 
separate from their ATS services. We further note that customers of a 
broker-dealer operator could be both subscribers to its ATS and 
customers of the broker-dealer operator that use trading products and 
services outside of the ATS. To the extent that a customer is a 
subscriber to the NMS Stock ATS and is offered use of products and 
services by the broker-dealer operator or its affiliate for the purpose 
of effecting transactions or submitting, disseminating, or displaying 
orders and trading interest in the NMS Stock ATS, Part II, Item 5 of 
adopted Form ATS-N would require disclosures about those products or 
services. However, the adopted requests in Part II, Item 5 would not 
encompass trading products or services offered by the broker-dealer 
operator to customers that are not for the purpose of effecting 
transactions or submitting, disseminating, or displaying orders and 
trading interest in the NMS Stock ATS.
    Two commenters express opinions about how the scope of the proposed 
requests relate to the scope of an NMS Stock ATS's operations. One 
commenter states that the Proposal does not draw sufficient distinction 
between the operations of the NMS Stock ATS and other products and 
services of the broker-dealer operator, including agency execution 
services, market making and algorithms.\780\ Another commenter states 
that the Commission should clarify the terminology used in this item 
because it appears to conflate the NMS Stock ATS itself with routing 
and algorithmic functions.\781\ Whether a product or service is part of 
the ATS requires a facts and circumstances analysis. Based on 
Commission experience, broker-dealers generally offer various products 
and services to customers, which include execution and routing 
services, such as a SOR. These products and services are generally 
independent of each other, and how such products and services may be 
used by a subscriber to an NMS Stock ATS varies. However, to the extent 
that a SOR (or similar functionality) or algorithm performs a function 
of the ATS by bringing together the orders for securities of multiple 
buyers and sellers using established nondiscretionary methods, the SOR 
(or similar functionality) or algorithm may be part of the NMS Stock 
ATS.\782\
---------------------------------------------------------------------------

    \780\ See STANY Letter at 4.
    \781\ See SIFMA Letter at 12-13.
    \782\ For a further discussion about when a broker-dealer 
operator's SOR (or similar functionality) or algorithm may operate 
as part of its NMS Stock ATS, see Section V.D.5 below.
---------------------------------------------------------------------------

    Another commenter states that Form ATS-N should only require 
disclosure

[[Page 38833]]

of products or services at a high level and that commercially sensitive 
or proprietary information should not be required to be publicly 
disclosed.\783\ As noted above, we are sensitive to concerns about the 
potential disclosure of commercially sensitive information. The 
proposed request stated that NMS Stock ATSs must ``[d]escribe the 
products or services.'' To address commenter concerns regarding the 
potential disclosure of commercially sensitive information in this 
disclosure request, the adopted disclosure request requires the NMS 
Stock ATS to provide only a summary of the terms and conditions for the 
products and services disclosed and to explain how the product or 
service is used with the ATS in the applicable Item number in Part III 
of adopted Form ATS-N. As explained above, we believe that requiring 
only a summary narrative would normally not require the broker-dealer 
operator to disclose commercially sensitive information.\784\
---------------------------------------------------------------------------

    \783\ See STANY Letter at 4.
    \784\ We note that, as part of our review of Form ATS-N 
responses, we intend to monitor the level of summary information 
provided on the form for completeness to help ensure that such 
information is responsive to the form and is not designed to avoid 
meaningful disclosure.
---------------------------------------------------------------------------

    To reduce redundancy and streamline disclosures, we are requiring 
NMS Stock ATSs to provide a narrative explaining the use of the product 
or service required to be disclosed in Part II, Item 5 in the relevant 
item in Part III of adopted Form ATS-N. We are also adding to Part II, 
Item 5 of adopted Form ATS-N the language ``for the purpose of'' before 
effecting transactions, or submitting, disseminating, or displaying 
orders and trading interest on the NMS Stock ATS to make clear that 
this Item requests information about those products or services offered 
by the broker-dealer operator or its affiliate that have a nexus to the 
ATS services. We believe that the disclosure requests in Part III of 
adopted Form ATS-N are limited to information that we believe is 
necessary for market participants to understand the operation of the 
ATS, without requiring a level of detail that would normally require 
the disclosure of commercially sensitive information.
    In summary, we are modifying the proposed requests being adopted as 
Part II, Item 5 of Form ATS-N to clarify that the NMS Stock ATS is only 
required to provide information about products and services offered to 
subscribers for the purpose of effecting transactions, or submitting, 
disseminating, or displaying orders and trading interest on the NMS 
Stock ATS. Specifically, we have modified the proposed language to 
state that the broker-dealer operator must disclose any products or 
services offered to subscribers for the purpose of effecting 
transactions or for submitting, disseminating, or displaying orders and 
trading interest in the NMS Stock ATS (e.g., algorithmic trading 
products that send orders to the ATS, order management or order 
execution systems and market data feeds). We believe that this language 
makes a sufficient distinction between products and services that 
relate to the functions of the ATS and those that do not; disclosures 
about the latter would not be required.\785\
---------------------------------------------------------------------------

    \785\ The revised wording for this request also provides 
examples of the types of services that would be encompassed by this 
question, such as algorithmic trading products that send orders to 
the ATS, order management or order execution systems, and market 
data feeds.
---------------------------------------------------------------------------

    In addition, we have divided the disclosure requests into four 
subparts: (i) One subpart addresses the products or services that the 
broker-dealer operator offers to subscribers for the purpose of 
effecting transactions or for submitting, disseminating, or displaying 
orders and trading interest in the NMS Stock ATS; (ii) another subpart 
addresses products or services that the broker-dealer operator's 
affiliates offer to subscribers for the purpose of effecting 
transactions or for submitting, disseminating, or displaying orders and 
trading interest in the NMS Stock ATS; and (iii) the other two subparts 
address any differences between the terms and conditions of the 
services or products required to be identified in Item 5 among the 
broker-dealer operator, affiliates, and unaffiliated subscribers.\786\ 
This is a technical edit to the proposed disclosures so that the format 
of Part II, Item 5 is consistent with the format of Part II, Items 1-4 
above.
---------------------------------------------------------------------------

    \786\ For example, if a broker-dealer operator offers 
subscribers alternative algorithms to handle orders, including 
sending such order to the NMS Stock ATS, and there is a difference 
in the speed or latency in which each of the alternatives transmits 
information, such differences in speed or latency would need to be 
disclosed in Part II, Item 5 of adopted Form ATS-N.
---------------------------------------------------------------------------

5. Activities of Service Providers
a. Shared Employees
    Part III, Item 7 of proposed Form ATS-N would have required 
disclosures about employees of the broker-dealer operator that service 
the operations of the NMS Stock ATS and also service other business 
units of the broker-dealer operator or any of its affiliates (``shared 
employees''). We received several comments on Part III, Item 7 of 
proposed Form ATS-N. We are adopting Part III, Item 7 of proposed Form 
ATS-N with modifications in response to commenters' concerns, as 
further explained below, and we are also renumbering Part III, Items 7 
of proposed Form ATS-N as Part II, Item 6(a) of adopted Form ATS-N.
    One commenter recommends eliminating the requests related to shared 
employees because the commenter believes that keeping the item up-to-
date would be too burdensome and unnecessary as employee roles and 
responsibility shift periodically.\787\ Similarly, another commenter 
believes that while accountability for the safeguarding of customer 
information is essential, the commenter is uncertain as to why the 
disclosures regarding shared employees under Part III, Item 7 of 
proposed Form ATS-N need to be public, particularly in light of the 
proposal's other reforms regarding the safeguarding of customers' 
confidential information.\788\ We continue to believe that disclosures 
about shared employees with access to confidential trading information 
from the NMS Stock ATS would help market participants evaluate 
circumstances under which a conflict of interest may arise for the NMS 
Stock ATS or when there is the potential for information leakage 
involving shared employees. For example, we believe that market 
participants would likely want to know if an employee of the broker-
dealer operator that is responsible for the operations of a system 
containing confidential subscriber trading information from the NMS 
Stock ATS is also responsible for supporting the principal trading 
activity of the broker-dealer operator. As discussed further below, 
however, we are modifying the proposed request about shared employees 
on Form ATS-N to more narrowly tailor the request in response to 
comments, which should reduce the proposed reporting burden.
---------------------------------------------------------------------------

    \787\ See SIFMA Letter at 16.
    \788\ See HMA Letter at 17.
---------------------------------------------------------------------------

    Some commenters believe that the Commission should narrow the scope 
of the shared employee request to shared employees who may have access 
to or knowledge of confidential subscriber information or orders.\789\ 
One commenter states that market participants would need to dedicate 
resources to determine which employees actually could pose risks of 
information leakage without limiting the disclosure in this 
manner.\790\ Another commenter also opines that it would be more useful 
to limit the information

[[Page 38834]]

about shared employees to those with access to confidential 
information.\791\ We acknowledge that for some broker-dealer 
operators--particularly multi-service broker-dealers for which the NMS 
Stock ATS is one of many business units--some employees provide purely 
administrative services or other support services to multiple business 
units that would not make them privy to confidential subscriber trading 
information of the NMS Stock ATS. In response to these comments, the 
adopted request requires disclosures only about shared employees with 
access to confidential trading information on the ATS.
---------------------------------------------------------------------------

    \789\ See ICI Letter at 5-6; STANY Letter at 4.
    \790\ See ICI Letter at 5-6.
    \791\ See STANY Letter at 4.
---------------------------------------------------------------------------

    Furthermore, some commenters state that information about shared 
employees should not contain certain personal information about the 
employee, such as the employees name, title, or position.\792\ Several 
of these commenters believe that such public disclosures would provide 
little benefit to market participants because, for example, titles 
change frequently, lack standard meaning across firms and businesses, 
and do not provide meaningful information about potential information 
leakage on the ATS.\793\ In response to these comments, we have 
eliminated the requirement that the NMS Stock ATS identify the name and 
position or title of shared employees because we agree that any benefit 
to providing personally identifiable information about shared employees 
would not be justified by the potential negative effects to the 
individual whose personally identifiable information has been posted. 
We also agree that such information could become stale or change 
frequently, resulting in an increased burden on NMS Stock ATSs to keep 
that information up-to-date.
---------------------------------------------------------------------------

    \792\ See ICI Letter at 5-6; STANY Letter at 4-5; Liquidnet 
Letter at 9; STANY Letter at 4-5; UBS Letter at 6.
    \793\ See ICI Letter at 5-6; STANY Letter at 4-5; UBS Letter at 
6-7.
---------------------------------------------------------------------------

    One of the above commenters also states that, while it supports 
disclosure to the Commission of relevant information concerning 
individuals responsible for ATS functions, it believes that the request 
concerning shared employees should be limited to ``categories of 
service'' as opposed to individual positions and titles.\794\ As 
explained above, we have removed the proposed requirement that the 
disclosures regarding shared employees contain the name and position or 
title of all shared employees, and Form ATS-N only requires a summary 
of the role and responsibilities of a shared employee that has access 
to confidential trading information.\795\ While these changes reduce 
the proposed burden on filers, disclosures responsive to Part II, Item 
6(a) of adopted Form ATS-N should also provide market participants with 
sufficient information to evaluate whether a shared employee's role 
with the NMS Stock ATS may create a potential for information leakage. 
We do not believe that market participants would benefit from even 
broader, or more general, disclosures, such as ``categories of 
service'' for shared employees because such information would likely 
not provide market participants with relevant information to assess the 
potential for information leakage.
---------------------------------------------------------------------------

    \794\ See UBS Letter at 6.
    \795\ As guidance for this request, the summary of the shared 
employees' role and responsibilities generally should include 
sufficient detail to provide market participants with a 
comprehensive understanding of the full range of the shared 
employee's responsibilities with the NMS Stock ATS and each relevant 
entity, including responsibilities that could enable the employee to 
view confidential trading information of the NMS Stock ATS.
---------------------------------------------------------------------------

    Two commenters express support for Part III, Item 7 of proposed 
Form ATS-N by noting that current Form ATS Exhibit E calls for the 
disclosure of other entities relevant to the operation of the ATS, 
which the commenters believe would be helpful in determining whether 
there are apparent conflicts of interest that could come into play in 
terms of how orders are executed in the ATS.\796\
---------------------------------------------------------------------------

    \796\ See Luminex Letter at 2; see also PDQ Letter at 1 
(agreeing with Luminex's letter).
---------------------------------------------------------------------------

    Another commenter recommends that the Commission ensure that the 
requests provide meaningful narrative information about the role and 
duties of each shared employee, both at the NMS Stock ATS and the other 
business unit or affiliate of the broker-dealer operator.\797\ This 
commenter states that, to better equip funds and other market 
participants to assess the roles and expertise of shared employees, an 
NMS Stock ATS should also disclose whether any shared employees are 
registered with the Commission or the Financial Industry Regulatory 
Authority and whether they hold one or more securities licenses.\798\ 
Because we have amended the proposed requests to reduce the potential 
for the public disclosure of personally identifiable information, we 
will not incorporate this commenter's recommendation to require an NMS 
Stock ATS to disclose whether any shared employees are registered with 
the Commission or FINRA and whether they hold one or more securities 
licenses. The details solicited in Part II, Item 6(a) of adopted Form 
ATS-N are designed to provide market participants with information to 
assess whether an NMS Stock ATS's use of shared employees poses a risk 
of information leakage or other conflicts of interest that could affect 
a market participant's decision of whether or not to trade on the ATS. 
Requiring an NMS Stock ATS to disclose information about a shared 
employee's credentials would be contrary to the Commission's intent to 
limit the amount of personally identifiable information that is 
required by Form ATS-N.
---------------------------------------------------------------------------

    \797\ See ICI Letter at 5-6.
    \798\ See id.
---------------------------------------------------------------------------

b. Third-Party Service Providers
    Part III, Item 8 of proposed Form ATS-N would have required 
disclosures about third-party service providers to the NMS Stock ATS. 
The Commission received several comments on Part III, Item 8 of 
proposed Form ATS-N. The Commission is adopting Part III, Item 8 of 
proposed Form ATS-N with modifications in response to commenters' 
concerns, as further explained below, and is renumbering Part III, Item 
8 of proposed Form ATS-N as Part II, Items 6(b), 6(c), and 6(d) of 
adopted Form ATS-N.
    Two commenters support the Commission's proposal to require the 
disclosure of information related to third-party service providers 
because such disclosures would provide information related to potential 
information leakage on the NMS Stock ATS.\799\ One of those commenters 
further opines that while shared employees are likely subject to 
increased oversight and it supports the proposed requests related to 
shared employees, the oversight of third-parties is significantly less 
formidable and may result in greater risk for information leakage.\800\ 
As they did for Part III, Item 7 of proposed Form ATS-N, two other 
commenters express support for Part III, Item 8 of proposed Form ATS-N 
by noting that current Form ATS Exhibit E calls for the disclosure of 
other entities relevant to the operation of the ATS, which the 
commenters believe would be helpful in determining whether there are 
apparent conflicts of interest that could come into play in terms of 
how orders are executed in the ATS.\801\
---------------------------------------------------------------------------

    \799\ See HMA Letter at 17; ICI Letter at 5.
    \800\ See HMA Letter at 17.
    \801\ See Luminex Letter at 2; see also PDQ Letter at 1 
(agreeing with Luminex's letter).
---------------------------------------------------------------------------

    Several commenters believe that aspects of the request under Part 
III, Item 8 of proposed Form ATS-N related to third-party service 
providers are unnecessary to evaluating an NMS

[[Page 38835]]

Stock ATS as a potential trading venue. Two commenters state that 
information about certain shared personnel for vendors or certain 
support functions, such as back-office or technology resources, are not 
necessary for risk assessment of an ATS.\802\ Similarly, another 
commenter believes that the disclosures could, in fact, inhibit useful 
comparison of ATSs and create unnecessary and burdensome disclosure 
obligations.\803\ Specifically, this commenter cites the proposed 
requirements to provide detailed information regarding persons, 
including natural persons, providing services for the ATS, but who are 
unaffiliated with the broker-dealer.
---------------------------------------------------------------------------

    \802\ See Luminex Letter at 4; STANY Letter at 5.
    \803\ See Morgan Stanley Letter at 5.
---------------------------------------------------------------------------

    We disagree that the proposed request regarding third party service 
providers to the NMS Stock ATS is unnecessary, would not be meaningful 
to market participants, or, when compared to the current requirements 
on Form ATS, would be overly burdensome. As noted in the Proposal,\804\ 
the request related to service providers is intended to expand on the 
current disclosure requirement of Exhibit E of 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.\805\ We continue to believe that subscribers and market 
participants would be interested in whether services performed by a 
third-party may or may not be under the control of the broker-dealer 
operator for the purposes of evaluating the potential information 
leakage.
---------------------------------------------------------------------------

    \804\ See Proposal, supra note 2, at 81055.
    \805\ See Item 7 of Form ATS (describing the requirements for 
Exhibit E of Form ATS).
---------------------------------------------------------------------------

    Some commenters recommend clarifying or more narrowly tailoring the 
scope of the requests in Part III, Item 8 of proposed Form ATS-N 
related to service providers so as not to capture information about 
vendors that only provide administrative services to the ATS or other 
overhead, such as utility companies.\806\ We believe that the scope of 
the third-party service provider requests should not encompass purely 
administrative items--such as human resources support--or basic 
overhead items--such as phone services and other utilities. The 
information solicited in this disclosure is meant to provide 
information about the extent to which a third-party may be able to 
influence or control the operations of the ATS through involvement with 
its operations (such as operating the ATS's proprietary data feeds sent 
to subscribers). As indicated by commenters, information about the 
roles and responsibilities of service providers to the ATS is important 
because it could inform market participants about the potential 
information leakage on the NMS Stock ATS.
---------------------------------------------------------------------------

    \806\ See ICI Letter at 6; UBS Letter at 6; SIFMA Letter at 16.
---------------------------------------------------------------------------

    A commenter also states that it is very difficult for a broker-
dealer to know the structure of all of its vendors, much less whether 
the vendor has an affiliate that may enter orders in the subject 
ATS.\807\ This commenter believes that requiring an ATS to disclose 
information regarding whether any such persons, or any of their 
affiliates, may enter orders or other trading interest on the NMS Stock 
ATS would be unduly burdensome. We believe that the benefit to market 
participants from the public disclosure of information concerning the 
use of ATS services by third-party service providers and their 
affiliates justifies the potential burden on the NMS Stock ATS to 
provide those disclosures in Form ATS-N. Service providers have 
business relationships outside of simple subscriber-ATS arrangements, 
which may give those service providers or their affiliates access to 
confidential trading information of other subscribers. As such, market 
participants should be aware of how those service providers utilize the 
ATS as a trading venue or for any other services.
---------------------------------------------------------------------------

    \807\ See Morgan Stanley Letter at 5.
---------------------------------------------------------------------------

    Furthermore, the adopted requests under Part II, Items 6(c)-(d) 
require the NMS Stock ATS to disclose whether any service providers or 
their affiliates use the services of the NMS Stock ATS and if they do, 
the ATS is required to identify the service providers, the service(s) 
used, and whether there is any disparate treatment between those 
service providers and other subscribers. Thus, an NMS Stock ATS would 
only be required to obtain and disclose information about third-party 
vendors and their affiliates that actively use the services of the ATS; 
the ATS should be aware of all parties the use its services under its 
current recordkeeping obligations.\808\ Additionally, because the ATS 
has already established a relationship with its service providers, we 
do not believe that it would impose a significant burden on ATSs to 
require its service providers to inform them about any affiliates that 
use the services of the ATS. Accordingly, to the extent that an 
affiliate of a service provider uses the services of the ATS, we 
believe that the burden to obtain the information required by Form ATS-
N is justified by the above-explained benefits to market participants 
from these disclosures.
---------------------------------------------------------------------------

    \808\ See supra note 742 and accompanying text.
---------------------------------------------------------------------------

    This commenter also states that if the Commission's concern is 
whether a service provider is receiving preferential treatment from an 
ATS, the Proposal should have mandated disclosure of whether there is 
any preferential and/or differentiated treatment.\809\ We believe 
market participants would find it very useful to understand whether 
potential counterparties with whom they are trading, and who also 
service the operation of the NMS Stock ATS, have access to different or 
unique ATS-related services when analyzing potential conflicts of 
interest or information leakage on the venue. We have added a request 
to Part II, Item 6 of adopted Form ATS-N to expressly require the ATS 
to identify and explain any differences in ATS services to a service 
provider and all other subscribers.
---------------------------------------------------------------------------

    \809\ See Morgan Stanley Letter at 5.
---------------------------------------------------------------------------

    One commenter questions the feasibility of providing ``a detailed 
description of information technology services, including both hardware 
and software'' in Part III, Item 8 of proposed Form ATS-N, which the 
commenter opines can be taken to the extreme of requiring an ATS 
operator to disassemble a server to enumerate the manufacturer of 
various components. The commenter believes that a general--but 
thorough--description of the information technology services would be 
more practical.\810\ We did not intend for the adopted disclosures to 
require the level of granular detail to which this commenter cites in 
its comment letter. To clarify the scope of the required disclosure 
about services provided by third parties, adopted Form ATS-N no longer 
requires the NMS Stock ATS to ``describe'' the operation, service, or 
function provided by the third party service provider. Instead, it 
requires an NMS Stock ATS to provide a ``summary'' of the service 
provider's role and responsibilities.\811\
---------------------------------------------------------------------------

    \810\ See UBS Letter at 7.
    \811\ As guidance for this request, the Commission would view, 
for example, an NMS Stock ATS simply stating that a third-party 
provides technology or hardware to the ATS as insufficient. See 
Proposal, supra note 2, at 81055. In this example, the summary 
generally should provide market participants with an understanding 
of the types of technology or hardware provided, and how that 
hardware or technology is used by the NMS Stock ATS. This 
information is meant to provide market participants with a better 
understanding about whether the service provider could access 
confidential trading information.

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

[[Page 38836]]

    As guidance for this request, we would view, for example, an NMS 
Stock ATS simply stating that a third-party provides technology or 
hardware to the ATS as not responsive to the required summary of the 
service provider's role. But we would not expect the ATS to provide 
information about the manufacturer of certain components of its 
hardware. This request for summary information is designed to provide 
market participants with a general understanding of the types of 
technology or hardware provided by the service provider as part of its 
responsibilities, and how that hardware or technology is used by the 
NMS Stock ATS. The purpose of this disclosure is to provide market 
participants with information to better understand whether the service 
provider might be able to access confidential trading information, so 
NMS Stock ATSs should draft its disclosure with the goal of conveying 
such information.
    Furthermore, to reduce redundant disclosures on Form ATS-N, adopted 
Form ATS-N will only require this in Part III, unless there are no 
disclosure requests in Part III that would encompass these types of 
services. The disclosure requests in Part III will likely require the 
NMS Stock ATS to describe the services provided by third-parties, and 
we believe that a summary narrative about the roles and 
responsibilities of third-party service providers will likely be 
included in that description of the services. We do not believe that it 
is not necessary to also provide a redundant summary narrative of the 
roles and responsibilities of service providers in Part II.
    A commenter also recommends eliminating the disclosures of third-
party service providers from the publicly available Form ATS-N and 
requiring that the information requested be made available only to the 
Commission on a confidential basis.\812\ We are not changing the nature 
of the third-party service provider request to require the disclosures 
to be filed on a confidential basis with the Commission. We have 
narrowed the scope of the request so that the information provided is 
tailored to address the concerns of market participants and NMS Stock 
ATSs clarify the level of detail required by these disclosures. We 
believe that requiring only a summary description of the roles and 
responsibilities of third-party service providers would not require the 
type of details that could be subject to confidentiality concerns or 
otherwise put either the NMS Stock ATS or the service provider at a 
competitive disadvantage.
---------------------------------------------------------------------------

    \812\ See SIFMA Letter at 16.
---------------------------------------------------------------------------

    Finally, we are replacing the proposed word ``person'' with the 
word ``entity'' in Part II, Item 6(b) of adopted Form ATS-N. The 
Commission does not believe that an NMS Stock ATS is likely to contract 
with a natural person who is not associated with a legal entity (e.g., 
a corporation or an LLC) to provide services to the ATS. Furthermore, 
the Commission does not intend for the service provider request to 
disclose details about natural persons providing services to the ATS 
when those natural persons are employees of, or independent contractors 
hired by, a third party.
6. Protection of Confidential Trading Information
    Part III, Item 10 of proposed Form ATS-N would have required an NMS 
Stock ATS to provide disclosures about its confidential treatment of 
trading information. One commenter states its belief that the proposed 
requests under Part III, Item 10 of proposed Form ATS-N seemed 
appropriate given the risk of misuse of confidential information.\813\ 
This commenter believes the requests fit well within the framework of 
the new requirement that all ATSs maintain written safeguards and 
procedures to protect confidential trading information. We are adopting 
Part III, Item 10 of proposed Form ATS-N with modifications in response 
to commenter concerns, as further explained below, and renumbering the 
proposed request as Part II, Item 7 of adopted Form ATS-N.
---------------------------------------------------------------------------

    \813\ See HMA Letter at 18.
---------------------------------------------------------------------------

    Part II, Item 7(a) of adopted Form ATS-N requires an NMS Stock ATS 
to describe its written safeguards and written procedures to protect 
the confidential trading information of subscribers to the NMS Stock 
ATS, including: (i) Written standards controlling employees of the ATS 
that trade for employees' accounts; and (ii) written oversight 
procedures to ensure that the safeguards and procedures described above 
are implemented and followed. The protection of confidential trading 
information is a bedrock component of the regulation of ATSs and is 
essential to ensuring the integrity of ATSs as an execution venue. If 
such information is not protected, 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 in large 
positions) are eliminated. 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 (e.g., persons 
who are not responsible for the operation of the ATS or compliance with 
applicable rules), such an abuse is also 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. Accordingly, 
we believe that disclosures informing market participants about broker-
dealer operators' written safeguards and procedures to protect 
confidential trading information are necessary 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.\814\
---------------------------------------------------------------------------

    \814\ If an NMS Stock ATS has disclosed information on its Form 
ATS-N about the written safeguards and procedures that it has 
established to protect the confidential trading information of 
subscribers, including oversight procedures to ensure that such 
safeguards and procedures are followed, but those disclosures 
materially differ from the actual means by which the NMS Stock ATS 
protected the confidential trading information of subscribers, the 
ATS would be required to file an amendment pursuant to Rule 
304(a)(2) to revise its Form ATS-N to accurately describe such 
safeguards and procedures.
---------------------------------------------------------------------------

    We are adopting Part II, Items 7(b) and (c) to require an NMS Stock 
ATS to disclose whether a subscriber can consent and withdraw consent, 
respectively, to the disclosure of its confidential trading information 
to any person (not including those employees of the NMS Stock ATS who 
are operating the system or responsible for its compliance with 
applicable rules). Subscribers should be able to give consent if they 
so choose to share their confidential trading information.\815\ 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 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).\816\ For 
this example, Part II, Items 7(b) and 7(c) of adopted Form ATS-N

[[Page 38837]]

would require the NMS Stock ATS to describe the means by which a 
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.\817\
---------------------------------------------------------------------------

    \815\ See Regulation ATS Adopting Release, supra note 3, at 
70879.
    \816\ See Proposal, supra note 2, at 81058.
    \817\ See id. We believe 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 
7(a). See id., n.437.
---------------------------------------------------------------------------

    Part II, Items 7(b) and 7(c) contain requests similar to those in 
Part III, Item 10(a) of proposed Form ATS-N, but we are modifying the 
format of these requests so that they are in the form of a ``yes'' or 
``no'' question, and if the NMS Stock ATS answers ``yes,'' the NMS 
Stock ATS must explain how and under what conditions consent can be 
given and withdrawn. We are also adding the phrase ``not including 
those employees of the NMS Stock ATS who are operating the system or 
responsible for its compliance with applicable rule'' to Part II, Item 
7(b) of adopted Form ATS-N. This change is to clarify that the request 
does not cover such employees that may need access to such information 
in the course of their responsibilities to service the system. As noted 
above, Regulation ATS requires that access to confidential subscriber 
information be available only to those employees of the ATS that 
operate the ATS's system or are responsible for the ATS's compliance 
with applicable rules.\818\
---------------------------------------------------------------------------

    \818\ See Regulation ATS Adopting Release, supra note 3, at 
70879; 17 CFR 242.301(b)(10)(i)(A).
---------------------------------------------------------------------------

    Finally, we are adopting Part II, Item 7(d) to require an NMS Stock 
ATS to provide a summary of the roles and responsibilities of any 
persons that have access to confidential trading information, the 
confidential trading information that is accessible by them, and the 
basis for the access. Part III, Item 10(b) of proposed Form ATS-N would 
have required the NMS Stock ATS to identify the position or title of 
any person who has access to confidential trading information, describe 
the confidential information to which the person has access, and 
describe the circumstances under which the person can access 
confidential trading information. Some commenters express concerns 
regarding the potential disclosure of personally identifiable 
information under proposed Part III, Item 10(b).\819\ We have 
eliminated the proposed requirement to publicly disclose the positions 
or titles of persons with access to confidential trading information 
and part II, Item 7(d) of adopted Form ATS-N requires only a summary of 
the roles and responsibilities of any persons that have access to 
confidential trading information, the confidential trading information 
that is accessible by them, and the basis for the access. We believe 
that any benefit of providing personally identifiable information is 
not justified by the potential negative effects of publicly posting 
personally identifiable information; a summary of the information 
required under Item 7(d) will buttress the existing obligations on ATSs 
to restrict access only to permitted personnel (e.g., those responsible 
for its operation or compliance).\820\
---------------------------------------------------------------------------

    \819\ See MFA/AIMA Letter at 6 (expressing concern that 
requiring disclosure of the positions or titles of persons who have 
access to confidential trading information would paint a target on 
such persons and could increase their security risks and risks of 
receiving phishing attacks); SIFMA Letter at 17-18 (stating that the 
public disclosure of information under Part IV, Item 10 of proposed 
Form ATS-N would have raised privacy, security, and proprietary 
information concerns).
    \820\ See Regulation ATS Adopting Release, supra note 3, at 
70879; 17 CFR 242.301(b)(10)(i)(A).
---------------------------------------------------------------------------

7. Differences in Availability of Services, Functionalities, or 
Procedures
    Part III, Item 9 of proposed Form ATS-N would have required an NMS 
Stock ATS to disclose information regarding the differences in the 
availability of services, functionalities, or procedures of the NMS 
Stock ATS that are available or apply to the broker-dealer operator or 
its affiliates that are not available or do not apply to other 
subscribers.
    In general, several commenters support requests for information 
about differences between subscribers and the broker-dealer with 
respect to their use of the NMS Stock ATS.\821\ A commenter also states 
that the proposed requests in Part III, Item 9 of proposed Form ATS-N 
are reasonable.\822\ One commenter, however, expresses concern that the 
proposed disclosures that would have been required under Part III, Item 
9 of proposed Form ATS-N were too broad and could result in the 
disclosure of either proprietary information or other information that 
could pose a cybersecurity risk.\823\
---------------------------------------------------------------------------

    \821\ See SIFMA Letter at 6; Consumer Federation of America 
Letter at 9-10. See also Fidelity Letter at 5 (stating it should be 
disclosed when subscribers are not treated the same way); UBS Letter 
at 7 (suggesting the Commission request should highlight differences 
among subscribers).
    \822\ See HMA Letter at 17-18.
    \823\ See SIFMA Letter at 17.
---------------------------------------------------------------------------

    We continue to believe that the disclosure about differences in 
treatment are important to market participants and will better allow 
them to decide whether submitting order flow to that NMS Stock ATS 
aligns with their trading or investment objectives. To more closely 
tailor the Form ATS-N disclosures about differences in treatment to the 
subject matter covered in relevant conflicts-of-interest requests, we 
are removing Part III, Item 9 of proposed Form ATS-N as a stand-alone 
question and incorporating the request into Part II, Items 1, 2, 3, and 
6 of adopted Form ATS-N. We believe that under this format, disclosures 
regarding the differences in the availability of services, 
functionalities, or procedures of the NMS Stock ATS will relate to the 
specific subject matter covered by each of the aforementioned 
disclosure requests that relate to services, functionalities, or 
procedures that may differ among subscribers or the broker-dealer 
operator and subscribers.
    The requests in Part II of adopted Form ATS-N focus on the ATS-
related activities of the broker-dealer operator and its affiliates and 
are designed to inform market participants about the competing 
interests between the broker-dealer operator or its affiliates and 
other subscribers and the potential for information leakage of 
subscribers' confidential trading information. In response to a 
commenter's concern,\824\ we note that we did not intend for these 
requests to require descriptions of technologies or other aspects of 
the NMS Stock ATS that could pose a cybersecurity risk or are otherwise 
disclose commercially sensitive information.
---------------------------------------------------------------------------

    \824\ See id.
---------------------------------------------------------------------------

8. Other Recommendations From Commenters
    The Commission received comments recommending additional regulation 
or disclosures for NMS Stock ATSs related to conflicts of interests. In 
the Proposal, the Commission considered alternatives to address 
conflicts of interests between the broker-dealer operator and the NMS 
Stock ATS. One alternative the Commission considered was to eliminate 
any potential conflicts of interest by requiring the NMS Stock ATS to 
operate with a single business function--operating the NMS Stock ATS--
and by eliminating any other function of the broker-dealer, such as 
principal trading.\825\ The Commission also considered continuing to 
allow broker-dealer operators 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 of

[[Page 38838]]

interest.\826\ In the Proposal, the Commission requested comment about 
whether certain conflicts of interest arising out of the broker-
dealer's operation of the NMS Stock ATS should be prohibited.\827\
---------------------------------------------------------------------------

    \825\ See Proposal, supra note 2, at 81043.
    \826\ See id.
    \827\ See id.
---------------------------------------------------------------------------

    Several commenters recommend that the Commission prohibit conflicts 
of interest altogether on NMS Stock ATSs, which would include a 
prohibition on trading on the NMS Stock ATS by the broker-dealer 
operator and its affiliates, rather than simply increasing the 
disclosure requirements for conflicts of interest.\828\ However, we 
continue to believe that prohibiting conflicts of interest for the 
broker-dealer operator related to its operation of an NMS Stock ATS 
would be significantly more intrusive relative to requiring additional 
disclosures about the operations of the broker-dealer operator and its 
affiliates, and therefor did not propose these alternatives.\829\ We 
also believe that such a prohibition would substantially affect or 
limit the current operations of ATSs that trade NMS stocks. Part II of 
adopted Form ATS-N is designed to provide disclosures to market 
participants about ATS-related activities of a broker-dealer operator 
and its affiliates that might give rise of potential conflicts of 
interest or information leakage, and thus, should better enable market 
participants to evaluate whether they want to use the services of that 
NMS Stock ATS.
---------------------------------------------------------------------------

    \828\ See Consumer Federation of America Letter at 7-8 
(asserting that certain conflicts of interest are so acute and 
pernicious that they cannot be mitigated or absolved merely by 
disclosing them; the commenter provides principle trading by the 
broker-dealer operator as an example); HMA Letter at 13-18 
(advocating for: (1) The Commission to prohibit what the commenter 
considers to be the deeply troubling conflicts of interest attendant 
with allowing an ATS operator or affiliate to trade in the ATS; or 
(2) alternatively if the Commission would not adopt such a 
prohibition, for the Commission to affirmatively restrict how the 
broker-dealer operator or its affiliates interact with the ATS); 
Better Markets Letter at 5-6 (advocating that the Commission ban 
material conflicts of interest rather than relying on disclosure 
alone).
    \829\ See Proposal, supra note 2, at 81043.
---------------------------------------------------------------------------

    Also, one commenter recommends that, for any conflicts of interest 
that are permitted, at a minimum Form ATS-N should include clear 
disclosures of conflicts of interest under a section titled ``conflicts 
of interest.'' \830\ We decline the commenter's request to title Part 
II ``conflicts of interest.'' We believe that it is more helpful to 
market participants for Form ATS-N to provide the information market 
participants need to individually evaluate whether there is a conflict 
of interest on a given NMS Stock ATS rather than relying on the ATS to 
determine when a conflict exits.
---------------------------------------------------------------------------

    \830\ See Better Markets Letter at 6.
---------------------------------------------------------------------------

    We also received a comment requesting the Commission to require NMS 
Stock ATSs to disclose in Part II of Form ATS-N any proceeding within 
the last 10 years against the NMS Stock ATS, the broker-dealer operator 
or officers or employees of the broker-dealer operator that relates to 
the handling of equity orders or the operation of the NMS Stock 
ATS.\831\ Form ATS-N is designed to provide market participants with 
public disclosures about the current operations of an NMS Stock ATS and 
the current ATS-related activities of the broker-dealer operator and 
its affiliates. We believe that this information will help market 
participants assess the NMS Stock ATS as potential venue for their 
orders. We believe that disclosures about past proceedings, or other 
disciplinary matters, of the NMS Stock ATS, its broker-dealer operator, 
or officers and employees of the broker-dealer operator--even those 
that relate to the handling of equity orders or the operation of the 
NMS Stock ATS--would not provide additional transparency into the 
current operations of the NMS Stock ATS. To the extent that such 
information is publicly available, a market participant may review 
details about past and pending proceedings involving the NMS Stock ATS, 
its broker-dealer operator, or the officers and employees of the 
broker-dealer operator via, for example, public databases maintained by 
the Commission or FINRA.
---------------------------------------------------------------------------

    \831\ See ICI Letter at 6, n.14.
---------------------------------------------------------------------------

D. Part III Form ATS-N: Manner of ATS Operations

    Part III of adopted Form ATS-N is designed to provide public 
disclosures to help market participants understand, among other things, 
how subscribers' orders and trading interest are handled, matched, and 
executed on the NMS Stock ATS. In response to comments, we are revising 
the format of several requests in Part IV of proposed Form ATS-N 
(renumbered as Part III in the adopted Form) to help NMS Stock ATSs 
provide disclosures that would be useful to market participants. For 
example, in response to commenters that believe the Commission's use of 
the term ``describe'' is vague and would lead to discursive disclosures 
and obscure key information, we are revising requests to be more 
explicit, adding specificity to clarify the meaning of the requests, 
and providing non-exhaustive examples for NMS Stock ATSs to better 
understand what would be responsive to the Form ATS-N.\832\ In 
addition, we have added ``yes'' or ``no'' questions, and converted 
proposed Items into ``yes'' or ``no'' questions, throughout Part III of 
Form ATS-N, which we believe will allow market participants to find 
information more efficiently and facilitate their comparisons across 
NMS Stock ATSs.\833\ Moreover, we have separated the requests for 
information in Part III of adopted Form ATS-N into more items (and 
renumbered the items) and discrete topics to help readers more easily 
find information and compare that information among NMS Stock ATSs. In 
addition, we are combining or removing certain requests to reduce 
redundancy within Part III, and between Parts II and III, and 
separating certain requests for information into new items or subparts 
that focus the information required in response to commenter 
suggestions and concerns. Finally, we are adding a requirement to 
identify and explain any differences in the treatment of subscribers 
and the broker-dealer operator to several items that did not require 
this information as proposed.\834\ We intended that these differences 
be explained for all of the subject matter covered by Form ATS-N, and 
several commenters support requests for information about differences 
between subscribers and the broker-dealer operator with respect to 
their use of the NMS Stock ATS.\835\ Differences in the treatment among 
subscribers and the broker-dealer operator and its affiliates

[[Page 38839]]

will help market participants discern any benefit or disadvantage they 
may receive in comparison to other market participants or the broker-
dealer operator.
---------------------------------------------------------------------------

    \832\ The topics and examples provided on Form ATS-N are 
designed to help NMS Stock ATS consider the scope of the request and 
information potentially responsive to the form requirements. While 
we use the term ``including'' to denote topics responsive to an Item 
and have provided examples in many of the requests, these topics or 
examples are not an exhaustive list of what may be responsive to a 
Form ATS-N request. See, e.g., Items 4, 6, 7, 9, 10, 11, 13, 19, 21, 
and 23 of Part III of adopted Form ATS-N.
    \833\ See e.g., SSGA Letter at 2; SIFMA Letter at 9; STANY 
Letter at 5; LeveL ATS Letter at 6-7; KCG Letter at 10. See also 
Section V.A.1. (discussing the format of items in Part II and III of 
Form ATS-N).
    \834\ Specifically, this requirement is being added to Items 10, 
14, 17, 18, and 23 of adopted Form ATS-N. In the Proposal, the 
Commission required a description of any differences between 
subscribers and persons in Part IV, Items 1(b), 1(e), 2(b), 3(b)-
(d), 4, 5(a), 5(b), 6(a), 7, 8, 10(b), 12(b), and 13 of proposed 
Form ATS-N. See Proposal, supra note 2, at 81146-81152.
    \835\ See, e.g., SIFMA Letter at 5-6 (stating whether all 
subscribers have access to the same suite of products and services 
is particularly appropriate and useful); Fidelity Letter at 5 
(calling for disclosure when subscribers are not treated the same 
way); UBS Letter at 7 (suggesting the Commission request should 
highlight differences in subscriber access that may impact other 
users of the ATS). See also Consumer Federation of America Letter at 
9-10 (discussing how to address potential advantages of the broker-
dealer operator and its affiliates).
---------------------------------------------------------------------------

1. Types of ATS Subscribers
    Part IV, Item 1(c) of proposed Form ATS-N would have required 
disclosures about types of subscribers to the NMS Stock ATS. We are 
adopting Part IV, Item 1(c) of proposed Form ATS-N with modifications 
as Part III Item 1 (``Types of Subscribers'') of adopted Form ATS-
N.\836\ Part III, Item 1 of adopted Form ATS-N is designed to provide 
market participants with information about the type of order flow in 
the NMS Stock ATS. NMS Stock ATSs may design their system for trading 
by retail, institutional, or any other type of market participant.
---------------------------------------------------------------------------

    \836\ As also discussed under Section V.D.2., commenters state 
with regard to the entirety of Part IV, Item 1 of proposed Form ATS-
N that the Commission should adopt a ``yes'' or ``no'' format for 
the item instead of requests for descriptions. See SIFMA Letter at 
19; KCG Letter at 11.
---------------------------------------------------------------------------

    One commenter recommends that the Commission consider eliminating 
or consolidating this request because it is redundant to the request in 
Part IV, Item 5 of proposed Form ATS-N regarding segmentation.\837\ In 
response to this comment, we are removing the requirement from Part IV, 
Item 1(c) of proposed Form ATS-N to ``describe any criteria for 
distinguishing among types of subscribers, classes of subscriber, or 
other persons.'' To the extent that an NMS Stock ATS distinguishes 
among ATS subscribers, the ATS will be required to discuss such 
information in Part III, Item 13 of adopted Form ATS-N, which relates 
to segmentation.
---------------------------------------------------------------------------

    \837\ See SIFMA Letter at 20.
---------------------------------------------------------------------------

    Another commenter believes that the phrase ``types of subscribers'' 
should be specifically defined.\838\ In response to this comment, we 
are providing a list of market participants in Part III, Item 1 of 
adopted Form ATS-N that, in the Commission's experience, are commonly 
used. The revised list includes: Retail investors, issuers, asset 
managers, brokers, dealers, NMS Stock ATSs, investment companies, hedge 
funds, market makers, principal trading firms, and banks. The list is 
non-exhaustive and an NMS Stock ATS is required to list any type of 
subscriber that can use the NMS Stock ATS services. Also, in response 
to this comment, we are revising Part IV, Item 1(c) of proposed Form 
ATS-N, by removing the request to describe the type of subscribers and 
other persons and instead, are only requesting that the NMS Stock ATS 
select the checkbox for the types of subscribers that can use the NMS 
Stock ATS services (and identify any other types of subscribers not 
listed in a checkbox). We are also revising the Item to require the 
selection of the types of subscribers that ``can'' use the NMS Stock 
ATS services, rather than solely those types of subscribers that in 
fact use the NMS Stock ATS as was proposed.
---------------------------------------------------------------------------

    \838\ See KCG Letter at 12. The proposed Item required the NMS 
Stock ATS to describe the types of subscribers and other persons 
that use the services of the NMS Stock ATS.
---------------------------------------------------------------------------

    Furthermore, in response to general comments that the Form ATS-N 
should be formatted to facilitate comparisons across NMS Stock 
ATSs,\839\ we are relocating Part IV, Item 1(c) of proposed Form ATS-N 
into a separate Item in Part III, Item 1 of adopted Form ATS-N and 
naming it ``Types of ATS Subscribers.'' \840\
---------------------------------------------------------------------------

    \839\ See e.g., SSGA Letter at 2; SIFMA Letter at 9; STANY 
Letter at 5; LeveL ATS Letter at 6-7; KCG Letter at 10.
    \840\ See Section V.D.2 for a discussion of changes to the 
requirement under Part IV, Item 1(c) of proposed Form ATS-N that NMS 
Stock ATSs state whether they accept non-broker-dealers as 
subscribers to the NMS Stock ATS.
---------------------------------------------------------------------------

2. Eligibility for ATS Services
    Part IV, Item 1(a) of proposed Form ATS-N would have required 
disclosures about eligibility requirements of the NMS Stock ATS.\841\ 
We are adopting Part IV, Item 1(a) of proposed Form ATS-N with certain 
modifications described below, naming the Item ``Eligibility for ATS 
Services,'' and relocating the request as Part III, Item 2 of adopted 
Form ATS-N.\842\
---------------------------------------------------------------------------

    \841\ As discussed in the Proposal, the eligibility process and 
requirements to access an NMS Stock ATS may vary, and the 
requirements may differ depending on whether a potential subscriber 
is a customer of the broker-dealer operator of the ATS. For 
instance, some ATSs may require that a potential subscriber be a 
broker-dealer to submit orders in the ATS, while other ATSs may 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. See 
Proposal, supra note 2, at 81060.
    \842\ One commenter supports the proposed disclosures stating 
that funds and other market participants would find this information 
valuable because it would facilitate the efficient comparison of 
eligibility processes and requirements across all NMS Stock ATSs and 
describe the types of participants that may dominate order flow on a 
particular NMS Stock ATS. See ICI Letter at 8.
---------------------------------------------------------------------------

    We also received comment seeking modifications to the proposed 
Item. One commenter suggests that the term ``eligibility requirements'' 
under Part IV, Item 1(a) of proposed Form ATS-N is unclear and suggests 
using eligibility ``standards'' as a more accurate way to capture the 
various subscriber criteria an ATS might evaluate.\843\ In response to 
this comment, we are replacing the reference to ``eligibility 
requirements'' in Part IV, Item 1(a) of proposed Form ATS-N with a 
reference to ``conditions'' the NMS Stock ATS requires a person to 
satisfy before accessing the ATS services. We believe that the term 
``conditions'' provides the NMS Stock ATS with more flexibility to 
describe the relevant criteria.
---------------------------------------------------------------------------

    \843\ See SIFMA Letter at 19.
---------------------------------------------------------------------------

    Also, commenters express confusion over the difference between Part 
IV, Item 1(a) and 1(e) (adopted as Part III, Items 2 and 3, 
respectively) of proposed Form ATS-N and whether they overlapped.\844\ 
In response to these commenters, we are clarifying the request by 
adding the phrase ``before accessing the ATS services'' in Part III, 
Item 2(b) of adopted Form ATS-N. On the other hand, Part III, Item 3 of 
adopted Form ATS-N, as discussed infra, requires disclosures about any 
conditions that would exclude a subscriber, in whole or in part, from 
using the services of the NMS Stock ATS after the person, as a 
subscriber, is permitted to use or submit orders to the NMS Stock ATS, 
such as for certain subscriber behavior while actively participating in 
the ATS.\845\
---------------------------------------------------------------------------

    \844\ Id. at 20 (stating it cannot distinguish between the 
requested information in proposed Items 1(a) and 1(e)); KCG Letter 
at 11-12 (noting an apparent overlap between the information 
requested under proposed Item 1(a) and proposed Item 1(e) and 
recommending that the Commission revisit and clarify the request).
    \845\ For example, if an NMS Stock ATS has a practice of 
excluding subscribers that do meet certain percentage thresholds for 
submitting firm-up orders in response to receiving a conditional 
order sent to them by the NMS Stock ATS, then this practice would be 
subject to disclosure under Part III, Item 3 of adopted Form ATS-N 
(``Exclusion from Services'') and not Part III, Item 2 
(``Eligibility Requirements'').
---------------------------------------------------------------------------

    We are not imposing new requirements for NMS Stock ATSs to have 
certain eligibility requirements, either by implicating the fair access 
rule under Rule 301(b)(5) (as suggested by a commenter), or 
otherwise.\846\ The ``yes'' or ``no'' questions of Part III, Item 2(b) 
of adopted Form ATS-N ask whether there are any conditions that the NMS 
Stock ATS requires a person to satisfy before accessing the ATS 
services. If an NMS Stock ATS marks ``yes,'' the ATS is indicating that 
it has such conditions and must list and provide a summary of the 
conditions. We believe that these revisions make clear that we are not 
requiring any eligibility requirements.
---------------------------------------------------------------------------

    \846\ See infra notes 855-857 and accompanying text.
---------------------------------------------------------------------------

    In Part III, Item 2(a) of adopted Form ATS-N, we are requiring the 
NMS Stock ATS to state whether it requires subscribers to be registered 
broker-dealers. This request is similar to the

[[Page 38840]]

proposed request in Part IV, Item 1(c) of proposed Form ATS-N but asked 
in a ``yes'' or ``no'' format. Part III, Items 2(c) and 2(d) of adopted 
Form ATS-N are requirements proposed in Part IV, Item 1(a) \847\ and 
1(b), respectively, of proposed Form ATS-N, that the Commission is 
formatting as ``yes'' or ``no'' questions.
---------------------------------------------------------------------------

    \847\ We are removing the reference to `subscriber' from the 
Item, as proposed, because Part III, Item 2 of adopted Form ATS-N 
relates to eligibility requirements of persons before they become 
subscribers.
---------------------------------------------------------------------------

    If the NMS Stock ATS indicates that it does have conditions that a 
person must satisfy before accessing the ATS services, the request, as 
modified, requires an NMS Stock ATS to list and provide a ``summary'' 
of those conditions. We believe a summary of those conditions would 
provide sufficient disclosure (in conjunction with Part III, Item 1 of 
adopted Form ATS-N) for market participants to discern the type of 
order flow that they are likely to interact with on the NMS Stock ATS, 
while at the same time, not impairing the ATS's ability to reasonably 
control the activities and quality of flow on its platform.\848\ One 
commenter acknowledges that it already discloses the general 
requirements for becoming a user of its ATS,\849\ which is analogous to 
the summary of conditions we are adopting in this Item. Moreover, we 
believe that requiring additional disclosures about differences in 
treatment among persons is important to market participants.\850\
---------------------------------------------------------------------------

    \848\ See UBS Letter at 7. See infra note 853 and accompanying 
text.
    \849\ See id.
    \850\ See, e.g., SIFMA Letter at 5-6 (stating whether all 
subscribers have access to the same suite of products and services 
is particularly appropriate and useful); Fidelity Letter at 5 
(stating it should be disclosed when subscribers are not treated the 
same way); UBS Letter at 7 (suggesting the Commission request should 
highlight differences in subscriber access that may impact other 
users of the ATS). See also Consumer Federation of America Letter at 
9-10 (discussing how to address potential advantages of the broker-
dealer operator and its affiliates).
---------------------------------------------------------------------------

    We also received comment unfavorable to Part IV, Item 1(b) of 
proposed Form ATS-N.\851\ The proposed Item would have required 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 and if the terms and conditions of 
any contractual agreements were not the same for all subscribers and 
persons, the NMS Stock ATS would be required to describe any 
differences.
---------------------------------------------------------------------------

    \851\ See Liquidnet Letter at 12; UBS Letter at 7; SIFMA Letter 
at 19.
---------------------------------------------------------------------------

    We are not adopting the provision requiring the disclosure of the 
terms and conditions of any contractual agreements in Part IV, Item 
1(b) of proposed Form ATS-N.\852\ We believe that the Form ATS-N, as 
adopted, requires comprehensive disclosure on the principal aspects of 
the operations of NMS Stock ATSs and any differences in the treatment 
of subscribers and the broker-dealer operator. We believe that a 
description of the terms of any contractual agreements is unlikely to 
provide much, if any, further information about the ATS's operations 
that is not already required to be disclosed in the other items of Form 
ATS-N and would likely impose a significant burden.
---------------------------------------------------------------------------

    \852\ We are moving the provision in Part IV, Item 1(b) of 
proposed Form ATS-N, which would have required that the NMS Stock 
ATS state whether the contractual agreements for granting access to 
the NMS Stock ATS were written, to Part III, Item 2(d) of adopted 
Form ATS-N. Part III, Item 2(d) asks a ``yes'' or ``no'' question on 
whether subscribers are required to enter a written agreement to use 
the services of the NMS Stock ATS.
---------------------------------------------------------------------------

3. Exclusion From ATS Services
    Part IV, Item 1(e) of proposed Form ATS-N would have required 
disclosures about limitation and denial of ATS services. We are 
adopting Part IV, Item 1(e) of proposed Form ATS-N, with certain 
modifications discussed below, including adopting a ``yes'' or ``no'' 
format to questions, as Item 3 of adopted Form ATS-N, and naming the 
request ``Exclusion from ATS Services.''
    One commenter states that requiring an NMS Stock ATS to disclose 
additional details about why the ATS would limit or deny ATS services 
could affect the ATS's ability to reasonably control the activities and 
quality of flow on its platform; the commenter suggests, therefore, 
that such disclosure remain confidential with the Commission.\853\ In 
response to this comment, we are adopting Part III, Item 3(a) of 
adopted Form ATS-N, as modified, to require the NMS Stock ATS to 
provide a list and ``summary'' of the conditions for excluding (or 
limiting) a participant from using the ATS, and are removing the 
requirement to describe the procedures or standards of the NMS Stock 
ATS that are used to determine whether to exclude a subscriber. We 
believe that these changes would protect sensitive information and 
prevent participants from using the disclosures to potentially misuse 
or game its system while ensuring that participants have the 
information necessary to understand when they may be excluded.
---------------------------------------------------------------------------

    \853\ See UBS Letter at 7.
---------------------------------------------------------------------------

    Another commenter suggests that it is unclear whether Part IV, Item 
1(e) of proposed Form ATS-N requests disclosure of instances where a 
subscriber requests not to interact with certain counterparties.\854\ 
We are not requiring in Part III, Item 3 of adopted Form ATS-N that the 
NMS Stock ATS disclose instances where a subscriber requests not to 
interact with certain counterparties. Information regarding counter-
party selection procedures on the NMS Stock ATS, including where a 
subscriber requests not to interact with certain counterparties, is 
required to be disclosed, as applicable, in Part III, Item 14 of 
adopted Form ATS-N.
---------------------------------------------------------------------------

    \854\ See SIFMA Letter at 20.
---------------------------------------------------------------------------

    This commenter also expresses concern about the implications for 
fair access raised by Part IV, Item 1(e) of proposed Form ATS-N.\855\ 
The commenter assumes that the Commission intends that Part IV, Item 
1(e) should apply only to entities subject to the fair access 
threshold, and believes that entities not subject to the fair access 
rule can deny access for any reason. The commenter further believes 
that it is important to note that unless an ATS exceeds the fair access 
threshold, the ATS should be able to deny access for any reason (e.g., 
credit risk). This commenter requests clarification from the Commission 
if this interpretation is wrong to avoid later misunderstanding or 
interpretive conflicts. The commenter also suggests that Part IV, Item 
1(e) of proposed Form ATS-N goes beyond the fair access requirements 
(to keep records of all grants, denials, and limitations of access, and 
to report that information), and states that if the Commission intends 
to replace the fair access rule with a different regulatory and 
disclosure regime, the Commission should address this issue directly.
---------------------------------------------------------------------------

    \855\ Id. at 19-20.
---------------------------------------------------------------------------

    We are not implicating or changing Rule 301(b)(5) of Regulation 
ATS, the so-called fair access rule, by requiring NMS Stock ATSs to 
disclose information about when the ATS can exclude, in whole or in 
part, a subscriber from the services of the ATSs. Pursuant to Rule 
300(a)(2) of Regulation ATS, an ATS cannot set rules governing the 
conduct of subscribers other than the conduct of subscribers' trading 
on the system and cannot discipline subscribers other than by exclusion 
from trading.\856\ NMS Stock ATSs are not required to establish rules 
for excluding subscribers from

[[Page 38841]]

using the ATS. Nevertheless, based on the Commission's experience, ATSs 
that trade NMS stocks often have rules governing subscribers' 
participation on the ATS, and if a subscriber fails to comply with 
these rules, the ATS may limit or deny access to the ATS.\857\ Part 
III, Item 3 of adopted Form ATS-N is designed to provide subscribers 
with information about when the NMS Stock ATS can exclude, in whole or 
in part, a subscriber from the services of the ATSs and help them 
reasonably expect the types of activities that may cause them to be 
excluded (or limited) from using the services of the NMS Stock ATS.
---------------------------------------------------------------------------

    \856\ See 17 CFR 242.300(a)(2).
    \857\ See Proposal, supra note 2, at 81063. These limitations 
can result in some subscribers having different levels of 
functionality or more favorable terms of access than others. For 
example, in the Commission's experience, some ATSs exclude 
subscribers that have a high percentage of not responding with firm-
up orders after receiving an IOI or conditional order.
---------------------------------------------------------------------------

    One commenter requests guidance about the ability of an ATS to deny 
access pursuant to Rule 301(b)(5) of Regulation ATS when such ATS has 
not exceeded the fair access threshold requirements under Rule 
301(b)(5)(i).\858\ This commenter expresses concern that Part IV, Item 
1(a) (``Eligibility'') and Item 1(e) (``Limitations and Denial of 
Services'') of proposed Form ATS-N raises the specter of fair access 
and that if the Commission is seeking to change regulatory expectations 
relating to fair access, the Commission should do so in a straight 
forward manner and not by way of requiring disclosures around 
``eligibility requirements.'' We did not propose and are not adopting 
any change to the fair access rule under Rule 301(b)(5) of Regulation 
ATS. The commenter appears to misconstrue the requirements and 
application of the fair access rule in the context of the proposed 
disclosure requirements of Part IV, Item 1 of proposed Form ATS-N, and 
we believe it is important, in response to the commenter's request for 
clarification if its interpretation is wrong, to further explain the 
operation of the fair access rule ``to avoid later misunderstanding or 
interpretive conflicts. ''\859\ In the Proposal, we discussed 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.\860\ Section 6(b)(2) of the Exchange Act 
generally requires national securities exchanges to allow any qualified 
and registered broker-dealer to become a member of the national 
securities exchange--a key element in assuring fair access to national 
securities exchange services.\861\ 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 Section 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.\862\ As a result, 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. Furthermore, 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.\863\
---------------------------------------------------------------------------

    \858\ See SIFMA Letter at 19-20.
    \859\ Id.
    \860\ See Proposal, supra note 2, at 81057.
    \861\ 15 U.S.C. 78f(b)(2).
    \862\ See 17 CFR 242.301(b)(5). See also supra notes 72-75 and 
accompanying text (discussing the fair access requirements of 
Regulation ATS). 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, which, among other things, require 
an ATS to establish written standards for granting access to trading 
on its system and not unreasonably prohibit or limit 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 adopted written 
standards and applied them in a fair and non-discriminatory manner.
    \863\ 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); 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 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); 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; 48718 (Oct. 30, 
2003), https://www.sec.gov/litigation/admin/34-48718.htm (all 
settling 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).
---------------------------------------------------------------------------

    In this rulemaking, we are requiring NMS Stock ATSs to identify and 
explain on Form ATS-N any instances where the ATS differs in how it 
treats subscribers and the broker-dealer operator so market 
participants can have additional information to consider when 
evaluating an ATS. More favorable service or pricing for certain ATS 
subscribers necessarily implies less favorable service or pricing for 
others.\864\ We believe that it is consistent with the goals of 
operational transparency for subscribers that receive less favorable 
service or pricing than other subscribers to know that fact. These 
subscribers will thus have better information to assess whether they 
should continue to trade on the ATS despite their different treatment 
or, if they do continue to trade on the ATS, whether they should alter 
their behavior in any way to better protect their interests. Part III, 
Items 2 and 3 of adopted Form ATS-N do not limit an NMS Stock ATS's 
ability to discriminate among different subscribers. To the extent that 
an NMS Stock ATS is subject to the fair access rule under Rule 
301(b)(5) and treats subscribers differently, the NMS Stock ATS must 
comply with the requirements of Rule 301(b)(5) with respect to its 
treatment of subscribers. If an NMS Stock ATS elects to treat 
subscribers differently by creating types or levels of eligibility and 
exclusion requirements, Part III, Items 2 and 3 of adopted Form ATS-N 
require an NMS Stock ATS to ``identify and explain any differences,'' 
which is similar to the vast majority of items on Form ATS-N.
---------------------------------------------------------------------------

    \864\ See, e.g., UBS Settlement, supra note 864 (noting that UBS 
did not disclose the existence of a sub-penny order type to all ATS 
subscribers and that ``nearly all of the subscribers'' who received 
notice of the order type ``were market makers and/or HFT firms'') 
and at 10 (noting that certain orders--those entered on behalf of 
UBS clients that paid to use UBS-developed order-routing 
algorithms--had the ability to avoid executing in the ATS against 
orders entered by subscribers that UBS had deemed ``non-natural'' 
and no other subscribers had the ability to use this natural-only 
crossing restriction) and Crossfinder Settlement supra note 96 
(noting the ATS did not permit all subscribers to receive IOIs from 
the IOI server).
---------------------------------------------------------------------------

    We are adopting Part III, Item 3 of Form ATS-N with certain 
language to reduce potential confusion with the application of Rule 
301(b)(5) of Regulation ATS. As indicated above, to meet the definition 
of an ATS, a system

[[Page 38842]]

must not discipline subscribers other than by exclusion from trading. 
\865\ The language in Part III, Item 3 of adopted Form ATS-N now uses 
``exclude, in whole or in part,'' which is similar to language used in 
the definition of ATS in Rule 300(a)(2), rather than using the term 
``limitations and denials of services,'' as used in Part IV, Item 1(e) 
of proposed Form ATS-N. We recognize that exclusions from services, in 
whole or in part, are functionally equivalent to limitations and 
denials of services; however, we believe that the elimination of these 
terms from Part III, Item 3 of adopted Form ATS-N should mitigate any 
potential confusion that we are implicating Rule 301(b)(5) in the 
request.\866\
---------------------------------------------------------------------------

    \865\ See 17 CFR 242.300(a).
    \866\ See supra note 855 and accompanying text. Part III, Item 
25 of adopted Form ATS-N (``Fair Access'') is specifically designed 
to require an NMS Stock ATS, as applicable, to provide information 
in connection with Rule 301(b)(5) of Regulation ATS. See also 
Section V.D.25.
---------------------------------------------------------------------------

4. Hours of Operations
    Part IV, Item 2 of proposed Form ATS-N would have required 
disclosures about the hours of operations. We did not receive comment 
on Part IV, Item 2 of proposed Form ATS-N. We are adopting the Item 
with modifications as Part III, Item 4 (``Hours of Operations'') of 
adopted Form ATS-N, as discussed below. We continue to believe that it 
is important for market participants and the Commission to understand 
when an NMS Stock ATS operates and when orders can be entered, 
including when an NMS Stock ATS will accept orders outside of regular 
trading hours. Making such information publicly available would enable 
market participants to more easily compare when trading interest can be 
entered on NMS stock trading centers. We are modifying the example 
provided in this Item by replacing references in the Proposal to hours 
when ``pre-opening or after-hours trading occurs'' (emphasis added) 
with ``hours of operation outside of regular trading hours.'' Our 
intent is to provide market participants with information about when 
the NMS Stock ATS is operating, whether trading or performing another 
function, such as accepting orders, and not simply when trading is 
occurring.\867\
---------------------------------------------------------------------------

    \867\ We are also modifying this request to require the times 
when trading interest can be entered on the ATS, as opposed to 
identifying the times trading interest is entered, so as to more 
precisely indicate when the ATS is available for the entry of 
trading interest. We are replacing references to pre-opening and 
after-hours with the more general reference to hours of operation 
``outside of regular trading hours.''
---------------------------------------------------------------------------

5. Means of Entry
    In Part III, Item 6 of proposed Form ATS-N we proposed a similar 
request to Part IV, Item 4(a) of proposed Form ATS-N that focused on 
the activities of the broker-dealer operator and its affiliates. Part 
III, Item 6 of proposed Form ATS-N would have required disclosures 
about the broker-dealer operator's, or any of its affiliates', use of a 
SOR(s) (or similar functionality) or an algorithm. Part IV, Item 4(a) 
of proposed Form ATS-N would have required disclosures about 
connectivity and order entry to the NMS Stock ATS. We are adopting both 
requests with modifications and combining them into Part III, Item 5 
(``Means of Entry'') of adopted Form ATS-N.
    One commenter asserts that the information sought in Part III, Item 
6 of proposed Form ATS-N is generally duplicative of the requests in 
Part III, Item 3 (``Products or Services Offered to Subscribers'') and 
Part III, Item 5 (``Trading Activities on the NMS Stock ATS'') of 
proposed Form ATS-N and that the requests in Part III, Item 6 of 
proposed Form ATS-N (``Smart Order Router (`SOR') (or Similar 
Functionality of Algorithm)'') should be either consolidated into those 
requests or eliminated altogether.\868\ To reduce redundancy, we are 
combining the proposed requests for information as explained above.
---------------------------------------------------------------------------

    \868\ See SIFMA Letter at 15.
---------------------------------------------------------------------------

    With regard to Part IV, Item 4(a) of proposed Form ATS-N, one 
commenter states that the requirement to ``describe'' the means of 
connectivity by ``other persons'' is potentially overbroad--
particularly for ATSs with affiliated broker-dealers or other business 
units that may connect directly or indirectly to the ATS.\869\ This 
commenter suggests that Part IV, Item 4(a) conflates the identities of 
market participants (subscribers and other persons) with the means of 
connectivity. The commenter submits that end users would be better 
served by a table identifying the various means of connectivity without 
respect to the identities of who connects and in which fashion.
---------------------------------------------------------------------------

    \869\ See id. at 22.
---------------------------------------------------------------------------

    In response to this comment, Part III, Item 5 of adopted Form ATS-N 
first requires an NMS Stock ATS to identify and explain the protocol 
that can be used to directly enter orders and trading interest into the 
ATS. In a separate subpart to Part III, Item 5 of adopted Form ATS-N, 
the NMS Stock ATS must identify and explain any other means for 
entering orders and trading interest into the NMS Stock ATS (e.g., 
smart order router, algorithm, order management system, sales desk) and 
indicate whether these means are provided by the broker-dealer 
operator, either by itself or through a third-party contracting with 
the broker-dealer operator, or any affiliate of the broker-dealer 
operator. Both of these subparts are followed, respectively, by a 
request to identify and explain any differences in the terms and 
conditions for these means of entry among subscribers and the broker-
dealer operator. We believe that these changes will better distinguish 
subject matter regarding means of entry from subject matter regarding 
the identity of any party offering access to such means of entry.
    We note that subscribers may submit orders or trading interest to 
the NMS Stock ATS both directly and indirectly.\870\ A direct method of 
sending orders or 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 trading interest into the ATS 
without an intermediary. An example of an indirect method of submitting 
orders or trading interest to an NMS Stock ATS would include the use of 
the broker-dealer operator's SOR (or similar functionality) or 
algorithm. SORs (or similar functionalities) and algorithms are 
discussed further below. The means of order entry into an ATS (e.g., 
direct or indirect) could impact the speed in which a subscriber's 
order is handled and potentially executed and potentially increases the 
risk of information leakage.\871\ We believe that the disclosures 
regarding the direct or indirect means of order entry would inform 
subscribers and market participants about the functionalities that its 
orders and trading interest pass through on their way to the ATS and 
help them assess any potential advantages that orders sent through the 
broker-dealer operator may have with respect to other subscribers on 
the NMS Stock ATS.
---------------------------------------------------------------------------

    \870\ See Proposal, supra note 2, at 81068.
    \871\ 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 ATS, the ATS must identify the application or 
functionality and provide a description of its purpose. In this 
example, given that the intermediate application or functionality 
has access to a subscriber's order information, the NMS Stock ATS 
must take appropriate measures to protect the confidentiality of 
such information pursuant to Rule 301(b)(10) of Regulation ATS.
---------------------------------------------------------------------------

    We also received several other comments on the request for 
information in Part III, Item 6 of proposed Form ATS-N, which as

[[Page 38843]]

explained above, have been incorporated into Part III, Item 5 of 
adopted Form ATS-N. Many commenters express general support for public 
disclosures about an NMS Stock ATS's use of the broker-dealer 
operator's or its affiliates' SORs or algorithms.\872\
---------------------------------------------------------------------------

    \872\ See Schneiderman Letter at 1; HMA Letter at 17; STA Letter 
at 5; Liquidnet Letter at 9; KCG Letter at 10.
---------------------------------------------------------------------------

    Some commenters, however, express concern that Part III, Item 6 of 
proposed Form ATS-N would require the NMS Stock ATS to publicly 
disclose proprietary information about its SOR and/or algorithms.\873\ 
Two commenters believe that disclosing the information required under 
proposed Part III, Item 6 would harm broker-dealers that operate an NMS 
Stock ATS to the benefit of broker-dealers that do not, who would not 
be required to disclose what the commenter considers to be proprietary 
information.\874\ Similarly, another commenter believes that it is not 
necessary to require disclosure of how the SOR or algorithm interacts 
with any ATS operated by third-party operators; the commenter states 
that requiring that type of disclosure would impose a disclosure 
obligation on ATS operators that is not imposed on competing broker-
dealers that do not operate an ATS.\875\
---------------------------------------------------------------------------

    \873\ See STA Letter at 5; Liquidnet Letter at 9; STANY Letter 
at 4; SIFMA Letter at 15.
    \874\ See STA Letter at 5; STANY Letter at 4.
    \875\ See Liquidnet Letter at 9.
---------------------------------------------------------------------------

    We did not intend for the proposed requests regarding SORs (or 
other functionalities) and algorithms used by the broker-dealer 
operator or its affiliates to enter orders or trading interest into an 
NMS Stock ATS to mandate the public disclosure of information that 
could place the broker-dealer operator or its affiliates at a 
competitive disadvantage with other broker-dealers. To clarify the 
scope of the adopted disclosure requirements, Part III, Item 5(c) of 
adopted Form ATS-N no longer contains the proposed language 
``[d]escribe the interaction and coordination.'' Rather, Part III, Item 
5(c) only requires the NMS Stock ATS to ``list and explain'' sources of 
order flow other than those used for direct entry into the ATS, which 
could include SORs or algorithms offered by the broker-dealer operator. 
Furthermore, the adopted disclosure requirements only require the NMS 
Stock ATS to ``list and provide a summary description of the terms and 
conditions for entering orders or trading interest into the ATS'' 
through these sources. This revised language is intended to clarify 
that the NMS Stock ATS need not provide a detailed description of the 
programming for its SOR (or other similar functionality), algorithms, 
or other non-direct means for entering order and trading interests that 
could put the ATS at a competitive disadvantage with competitors. For 
example, NMS Stock ATSs need not disclose their SORs' routing tables or 
other information about how the SOR may route orders.\876\
---------------------------------------------------------------------------

    \876\ For example, a broker-dealer operator that uses its SOR to 
both enter customer orders into its ATS and send customer orders to 
external trading venues would not be required to disclose how its 
SOR is programmed to decide how to route those orders. The NMS Stock 
ATS would be required to disclose whether the broker-dealer 
operator's SOR is a means for entering client orders and, if so, 
indicate whether these means are provided by the broker-dealer 
operator, either by itself or through a third-party contracting with 
the broker-dealer operator, or through an affiliate of the broker-
dealer operator, and list and provide a summary of the terms and 
conditions for entering orders or trading interest into the ATS 
through these means.
---------------------------------------------------------------------------

    Another commenter states that there are numerous questions in the 
proposed Form ATS-N that would require ATS operators ``to act as de 
facto agents of the SEC'' by asking the ATS operators to seek 
information relating to the operations of certain trading algorithms or 
SORs that the ATS operators have nothing to do with and may be blocked 
via firm information barriers from knowing anything about.\877\ This 
commenter opines that ATS operators should properly be asked about how 
their ATSs work, and that information should be made available to all 
market participants, but if the Commission wants ATS operators to 
disclose whether they give preferential treatment to orders from 
affiliates at the expense of other ATS customers, or if they give 
preferential treatment to anyone else that isn't an affiliate over 
other ATS customers, then the Commission should pose that specific 
question and require a specific answer.\878\ This commenter continues 
to state that anything beyond that which is of regulatory interest to 
the Commission with respect to how trading algorithms or smart order 
routers interact with ATSs generally or with other market centers 
should be asked of the firms that own or operate those algorithms or 
smart order routers.
---------------------------------------------------------------------------

    \877\ See Luminex Letter at 3.
    \878\ See id. at 4.
---------------------------------------------------------------------------

    We agree that it is outside of the scope of this rulemaking for us 
to require NMS Stock ATSs to obtain detailed information about how the 
SORs and algorithms of third parties operate when such information does 
not pertain to the operation of the ATS. However, if an affiliate of 
the broker-dealer operator provides a means of entry into the ATS for 
its customers or its principal orders, we believe that market 
participants should understand certain details about the interaction 
between that affiliate and the ATS, which are solicited in Part III, 
Item 6, to properly evaluate potential conflicts of interest and 
information leakage on the ATS.
    For example, among the advantages and disadvantages that market 
participants should be able to discern from the disclosure of Part III, 
Item 5(b) is any differences in the latency of the alternative means 
for entering orders and trading interest into the NMS Stock ATS. We 
understand that alternative means of entering orders and trading 
interest may have different latencies associated with each alternative. 
For instance, in some cases, a direct connection to the NMS Stock ATS 
may have reduced latencies as compared to indirect means where orders 
and trading interest pass through an intermediate functionality. 
Alternatively, a broker-dealer operator could, for example, configure 
the NMS Stock ATS to provide reduced latencies for certain means of 
order entry used by itself or its affiliates, such as through a SOR or 
algorithm.\879\
---------------------------------------------------------------------------

    \879\ The Commission is not requiring a reporting regime with 
precise latencies calculated for each means of entry. But see 
Healthy Markets Letter at 19-20 (requesting that the Commission 
adopt annual reporting requirements regarding the latency of certain 
data on ATSs). Rather, the response to Item 5(b) would provide 
market participants with an appreciation of relative differences in 
the speed of order entry through the alternative means offered.
---------------------------------------------------------------------------

    We also believe that it is important for subscribers and market 
participants to understand a means of entry provided by an affiliate, 
such as the use of an affiliate's SOR, even if it does not provide an 
advantage to a particular entity. Specifically, we continue to believe 
that disclosures about a broker-dealer operator's use of its or an 
affiliate's SOR (or similar functionality) or algorithms to enter 
orders into the NMS Stock ATS are important to market participants when 
evaluating NMS Stock ATSs.\880\ 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.\881\ A SOR (or similar 
functionality) can generally be understood as an automated system used 
to route orders or trading interest among trading centers, including 
trading centers other than the NMS Stock ATS operated by the broker-
dealer operator, to carry out certain trading instructions or 
strategies of a broker-dealer.\882\ SORs (or similar

[[Page 38844]]

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 
\883\ In addition to the SOR (or similar functionality), orders or 
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.\884\
---------------------------------------------------------------------------

    \880\ See Proposal, supra note 2 at 81052.
    \881\ See id.
    \882\ See id.
    \883\ See id.
    \884\ See id. See also 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.
---------------------------------------------------------------------------

    As discussed in the Proposal, we believe that market participants 
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.\885\ As also discussed in the 
Proposal, broker-dealer operators of NMS Stock ATSs or their affiliates 
may use SORs (or similar functionality) or algorithms in a variety of 
ways.\886\ For example, the broker-dealer operator may use the SOR (or 
similar functionality) to route their agency and principal orders to 
different trading venues, or the broker-dealer operator may use the SOR 
as the primary means of routing subscriber orders or trading interest 
to or from the NMS Stock ATS. We understand 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 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 principal 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 ATS or a 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 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. We continue to believe 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.
---------------------------------------------------------------------------

    \885\ See Proposal, supra note 1, at 81052.
    \886\ See id. Broker-dealer operators are likely to vary in 
their organizational structures. Accordingly, Part III, Item 5 of 
adopted Form ATS-N will include third parties that contract with the 
broker-dealer operator and affiliates of the broker-dealer operator 
that may operate a SOR(s) (or similar functionality) or algorithm to 
help ensure that SORs (or similar functionalities) or algorithms 
used with the NMS Stock ATSs are disclosed regardless of whether the 
SOR(s) (or similar functionality) or algorithm(s) is operated by a 
third-party contracting with the broker-dealer operator or an 
affiliate of the broker-dealer operator.
---------------------------------------------------------------------------

    A system may consist of various functionalities, mechanisms, or 
protocols that operate collectively to bring together the orders for 
securities of multiple buyers and sellers using non-discretionary 
methods under the criteria of Rule 3b-16(a). In some circumstances, the 
various functionalities, mechanisms, or protocols may be offered or 
performed by another business unit of the broker-dealer operator or by 
a separate entity.\887\ As discussed in the Proposal, broker-dealer 
operators that use a SOR (or similar functionality) or algorithm may 
operate the SOR (or similar functionality) or algorithm separate and 
apart from their ATS.\888\ However, to the extent that a SOR (or 
similar functionality) or algorithm 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.\889\ We believe that information provided on Form ATS-N 
about the use of a SOR (or similar functionality) or algorithm in Part 
III, Item 5 of adopted Form ATS-N will allow the Commission to better 
understand the operations and scope of the NMS Stock ATS. That is, the 
disclosures would assist the Commission in determining if a SOR (or 
similar functionality) or algorithm is performing a function of the NMS 
Stock ATS to bring together the 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.
---------------------------------------------------------------------------

    \887\ We stated in adopting Regulation ATS that we ``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 3, at 70852.
    \888\ See Proposal, supra note 2, at 81053.
    \889\ In this example, 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.
---------------------------------------------------------------------------

    Finally, some commenters suggest reducing the level of detail 
solicited in the proposed disclosures about the use of SORs (or other 
functionalities) or algorithms. One commenter suggests reframing the 
proposed requests regarding the use of SORs (or other functionality) or 
algorithms to ``yes'' or ``no'' questions or attestations of ``no 
advantage,'' and in situations where the broker-dealer operators or its 
affiliates does have an advantage, the NMS Stock ATS should disclose 
that advantage publicly and in similar detail to what was proposed in 
Part III, Item 6.\890\ Another commenter states that if the Commission 
does not eliminate or consolidate Part III, Item 6 of proposed Form 
ATS-N, the commenter

[[Page 38845]]

recommends focusing the requests on the controls within the ATS (as 
opposed to the attributes of the algorithm or SOR) and asking whether 
the algorithm or SOR possesses information about the ATS by virtue of 
its affiliation with the ATS that other algorithms or SORs do not 
possess.\891\ Likewise, a commenter states that a more granular 
requirement than progressive ``yes'' or ``no'' answers for Part III, 
Item 6 of proposed Form ATS would pose challenges to maintain up-to-
date disclosures.\892\ This commenter recommends that Form ATS-N 
disclosures about potential trading activity on the ATS should be 
formatted as progressive ``yes'' or ``no'' questions and that certain 
Form ATS-N disclosures may be subject to immediate change without 
notice.\893\
---------------------------------------------------------------------------

    \890\ See STA Letter at 5.
    \891\ See SIFMA Letter at 15. The commenter also states that it 
would like the Commission to define ``Person'' as used in proposed 
Part III, Item 6(b). See id. The term ``Person'' is defined in Form 
ATS-N. See supra Section V.A.2.
    \892\ See KCG Letter at 10.
    \893\ See id.
---------------------------------------------------------------------------

    We do not believe that the requests about the means for entering 
orders and trading interests on the NMS Stock ATS will be overly 
burdensome to keep up-to-date on Form ATS-N because the requests do not 
require a level of detail that would mandate an amendment for every 
programming change to these services, such as an update to the routing 
table. Furthermore, to the extent that an NMS Stock ATS is unable to 
use a means for entering order and trading interests due to unexpected 
circumstances, such as a power failure or act of nature, the NMS Stock 
ATS could state in its Form ATS-N information about the alternative 
procedures that the ATS would use for the entry of orders and trading 
interests into the NMS Stock ATS under such exigent circumstances; this 
would obviate the need for an amendment when such alternative 
procedures are used. Finally, as explained in detail above, we believe 
that the information solicited in adopted Form ATS-N about the use of 
SORs (or similar functionalities) or algorithms by the ATS is very 
important for market participants when evaluating potential conflicts 
of interest on the ATS, so we do not think it would be helpful to 
reduce the level of detail required by the adopted form as suggested by 
these commenters.
6. Connectivity and Co-Location
    Part IV, Item 4(b) of proposed Form ATS-N would have required 
disclosures about co-location. We are adopting Part IV, Item 4(b) of 
proposed Form ATS-N, with modifications, and renumbering the request as 
Part III, Item 6 (``Connectivity and Co-location'') of adopted Form 
ATS-N.
    A commenter recommends that the Part IV, Item 4(b) co-location 
request could be reworded as two ``yes'' or ``no'' questions, provides 
recommended questions, and states that any further information 
requested should be as simple and direct as possible without requiring 
detailed, idiosyncratic information in the form.\894\ In response to 
this comment, we have circumscribed the description of terms and 
conditions of co-location services and are requiring ``a summary'' of 
the terms and conditions for co-location and related services, 
including the speed and connection (e.g., fiber, copper) options 
offered. We believe a summary would provide market participants with 
the necessary information to consider and evaluate the co-location and 
related services the NMS Stock ATS is offering without requiring overly 
burdensome disclosure. We do not believe that solely asking ``yes'' or 
``no'' questions (with no obligation to provide additional detail) 
would provide market participants with sufficient information to 
evaluate the co-location services the NMS Stock ATS is offering. For 
example, a price-sensitive market participant may not want to 
participate on an ATS that offers co-located subscribers certain, more 
expensive, high-speed connectivity options that the market participant 
may perceive as providing an advantage to other subscribers that are 
willing to pay for the service. Such information would not be disclosed 
by ``yes'' or ``no'' questions.
---------------------------------------------------------------------------

    \894\ The commenter suggests the following two questions in 
place of proposed Item 4(b): (i) Do you offer co-location to the ATS 
matching engine, and (ii) do all clients have the same access to co-
location services? See SIFMA Letter at 22.
---------------------------------------------------------------------------

    We are reformatting the question regarding connectivity and co-
location in Part III, Item 6 of adopted Form ATS-N to provide two sub-
items that relate to speed of communication with the ATS, which were 
requested in Part IV, Item 4(b) of proposed Form ATS-N. As adopted, 
Part III, Item 6(c) of Form ATS-N requires an NMS Stock ATS to indicate 
whether it provides any other means besides co-location and related 
services described in the Item to increase the speed of communication 
with the ATS, and if so, to explain the means and offer a summary of 
the terms and conditions for its use.\895\ We separated the proposed 
request for information related to means to increase the speed of 
communication with the ATS into its own separate sub-item (i.e., Part 
III, Item 6(c)) to improve readability, make the information easier to 
locate, and facilitate comparisons across NMS Stock ATSs.\896\ We 
believe the request is necessary to account for advances in technology.
---------------------------------------------------------------------------

    \895\ Question 347 of the Proposal asks if Part IV, Item 4(b) of 
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. 
See Proposal, supra note 2, at 81069.
    \896\ See supra note 839. Part IV, Item 4(b) of proposed Form 
ATS-N would have required an NMS Stock ATS to describe ``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.'' Part III, 6(c) of adopted Form ATS-N 
would require similar information as Part IV, Item 4(b) of proposed 
Form ATS-N. The language revisions are intended to simplify and 
improve readability of the request.
---------------------------------------------------------------------------

    We also are adopting a request in Part III, Item 6(e) for the NMS 
Stock ATS to indicate whether it offers any means to reduce the speed 
of communication with the ATS and provide a summary of the terms and 
conditions for its use. As indicated by commenters,\897\ latency is an 
important feature of equity market trading, and market participants are 
interested in understanding the functionalities employed by NMS Stock 
ATSs to influence it. There have been recent developments in equity 
market structure for trading centers to employ mechanisms to increase 
the latency or the length of time for orders, trading interest, or 
other information to travel from a user to the system.\898\ Part IV, 
Item 7(a) of proposed Form ATS-N required an NMS Stock ATS to disclose 
information about the means or facilities used by the 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 on the ATS. To the extent that an NMS Stock ATS applied a 
functionality or means for the ATS or a subscriber to decrease speed of 
communications with the NMS Stock ATS, the ATS would have been required 
to disclose that functionality in response to Part IV, Item 7(a) of 
proposed Form ATS-N. In adopted

[[Page 38846]]

Form ATS-N, because of commenters' concerns regarding communication 
latencies with NMS Stock ATSs and the impact they may have on how the 
subscriber's orders and trading interest are executed on the NMS Stock 
ATS, we are making this request a separate sub-part for market 
participants to more readily find information related to how a 
subscriber communicates with the NMS Stock ATS. For Part III, Items 
6(c) and 6(e), the Item requires a summary of the terms and conditions 
of the services offered if applicable. We believe a summary would 
provide subscribers and market participants with relevant information 
about the NMS Stock ATS to consider and evaluate its services without 
requiring overly burdensome disclosure.
---------------------------------------------------------------------------

    \897\ See infra note 1037 and accompanying text.
    \898\ See In the Matter of the Application of Investors' 
Exchange, LLC for Registration as a National Securities Exchange, 81 
FR 41142, 41154 (June 23, 2016) (explaining the use of the IEX coil 
and an additional distance to the IEX trading system that results in 
an equivalent 350 microseconds of latency) (``IEX Exchange 
Registration''); Securities Exchange Act Release No. Release No. 
80700 (May 16, 2017), 82 FR 23381 (May 22, 2017) (Order Approving 
Proposed Rule Change Amending Rules 7.29E and 1.1E to Provide for a 
Delay Mechanism) (approving rule change on NYSE MKT LLC to provide 
for an intentional delay of 350 microseconds of latency to inbound 
and outbound order messages).
---------------------------------------------------------------------------

    We are also providing examples in Part III, Item 6 of adopted Form 
ATS-N to clarify the types of services and connection options related 
to co-location that an NMS Stock ATS may offer. We believe that 
providing these examples will help NMS Stock ATSs better understand the 
type of information that would be responsive to the Form ATS-N 
requests.
    We are providing further guidance as to what is required of NMS 
Stock ATSs when disclosing any differences in the terms and conditions 
among subscribers and the broker-dealer operator related to co-location 
and related services. Subscribers of co-location services can 
experience faster or slower connection speeds to an NMS Stock ATS 
depending on factors such as the distance of the customer servers from 
the matching engine, or the use or non-use of ``coiling'' to its 
matching engine to equal connection speeds among subscribers, among 
others. Such differences in connection speed or latency would be 
required to be disclosed under Part III, Item 6(a).
7. Order Types and Attributes
    Part IV, Item 3(a) of proposed Form ATS-N would have required 
disclosures about order types and modifiers.\899\ We received comments 
on Part IV, Item 3 of proposed Form ATS-N expressing general support 
for the Commission's aim to provide disclosure for order types that 
could benefit market participants' understanding how their orders may 
be handled by the NMS Stock ATS and that could help optimize order 
routing practices by market participants.\900\
---------------------------------------------------------------------------

    \899\ Part IV, Item 3(c) of proposed Form ATS-N would have 
required 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 have been required to describe 
any differences if the requirements and handling procedures for 
minimum order sizes, odd-lot orders, or mixed-lot orders were not 
the same for all subscribers and persons. As discussed further 
below, minimum order sizes, odd-lot orders, and mixed-lot orders are 
addressed in Part III, Item 8 of adopted Form ATS-N.
    \900\ See ICI Letter at 7 (stating that disclosure would end the 
practice of some ATSs of disclosing the existence of certain order 
types to only favored subscribers and provide long term benefits by 
allowing funds to optimize their order routing practices); SIFMA 
Letter at 6 (suggesting the proposed Item requires useful 
information for market participants, whose investments may be traded 
indirectly on ATSs via their third-party broker-dealers). See also 
Citadel Letter at 1; Better Markets Letter at 5; Morgan Stanley 
Letter at 1; Markit Letter at 4; KCG Letter at 7.
---------------------------------------------------------------------------

    We continue to believe that all market participants should have 
full information about the operations of order types available on an 
NMS Stock ATS for market participants to comprehensively understand how 
their orders and trading interest will be handled and executed on the 
ATS. Accordingly, we are adopting Part IV, Item 3(a) of proposed Form 
ATS-N with certain modifications described below, naming the Item 
``Order Types and Attributes,'' and relocating the request as Part III, 
Item 7 of adopted Form ATS-N. Order types are a primary means by which 
users of an NMS Stock ATS communicate their instructions for handling 
their trading interest to the NMS Stock ATS. Moreover, order types can 
be complex and operate in various ways. Given the importance of order 
types and their complex nature, we are requiring NMS Stock ATSs to 
disclose the information called for by Part III, Item 7 on adopted Form 
ATS-N.
    One commenter suggests that Part IV, Item 3 of proposed Form ATS-N 
would require excessive information that would be unnecessarily 
burdensome and duplicative, and offers several suggestions on how to 
streamline the Item, including defining a set of order type terminology 
for completing the form, allowing a table template for responses, and 
suggested ``yes'' or ``no'' questions.\901\
---------------------------------------------------------------------------

    \901\ See SIFMA Letter at 20-21.
---------------------------------------------------------------------------

    We do not believe that it would be practical to define or 
standardize order types because the operation and naming of order types 
is not consistent across NMS Stock ATSs or trading centers, and broadly 
similar order types can have many permutations.\902\ We believe that 
Part III, Item 7 of adopted Form ATS-N provides NMS Stock ATSs with 
necessary flexibility to describe the order types that the ATS offers 
subscribers while still providing the necessary information for market 
participants to understand how an order type will function.
---------------------------------------------------------------------------

    \902\ See also Consolidated Audit Trail, Final Rule, Securities 
Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722, 45742 
(August 1, 2012) (declining under Rule 613 to enumerate specific 
order types or prescribing the format or nature of how this 
information would be represented to allow flexibility for the future 
when new order types may be introduced and added).
---------------------------------------------------------------------------

    For similar reasons, we are declining to adopt the commenter's 
suggestions that Part IV, Item 3(a)(vi) of proposed Form ATS-N could be 
simplified to a ``yes'' or ``no'' question asking whether each order 
type is available to all subscribers. This Item specifically relates to 
whether every order type is available across all forms of connectivity, 
not to all subscribers.\903\ A ``yes'' or ``no'' format would not allow 
an NMS Stock ATS to explain any differences in order types available 
across all forms of connectivity, if any.
---------------------------------------------------------------------------

    \903\ See supra note 901.
---------------------------------------------------------------------------

    An NMS Stock ATS can choose a format that it finds best to provide 
market participants with complete and comprehensible information, such 
as, for instance, a table with the relevant characteristics of each 
order type.
    We have made several edits to remove duplicative requirements, 
improve readability and specificity, and remove unnecessary 
language.\904\ We are removing references to the ranking of order types 
and time in force instructions to avoid duplication. We are revising 
the language of the Item to require information on order types that 
``can be'' entered on the NMS Stock ATS, because we intended for NMS 
Stock ATSs to disclose to market participants the services that the ATS 
offers. We are also removing superfluous language that is already 
captured by the instruction to ``identify and explain.'' \905\ We are 
also removing the language from proposed Part IV, Item 3(b) requiring 
the NMS Stock ATS to describe any differences among subscribers in the 
``availability of order types'' because the request to describe any 
differences in the terms and conditions of order types among 
subscribers and the broker-dealer operator in Part III, Item 7(b) 
encompasses any differences in availability.
---------------------------------------------------------------------------

    \904\ See SIFMA Letter at 20-21.
    \905\ Specifically, we are removing language that NMS Stock ATS 
describe the ``characteristics, operations, and how [order types] 
are handled on the NMS Stock ATS.'' As indicated in the text, we do 
not view this as a substantive change, and the information requested 
using the deleted language is captured by the instruction to 
identify and explain each order type.
---------------------------------------------------------------------------

    We are adding in Part III, Item 7(a)(i) of adopted Form ATS-N that 
the NMS Stock ATS provide not only whether an order type can receive a 
new time stamp, but also, when, so that market

[[Page 38847]]

participants can better understand how their orders or trading interest 
will be handled by the NMS Stock ATS. We are also removing the prompt 
in the proposed Item that would have required information on whether an 
order type can be used with any routing services offered because these 
services are usually provided by the broker-dealer operator.
    Finally, the Commission is providing further guidance with regard 
to the prompt in Item 7(a)(vii) that the NMS Stock ATS describe the 
circumstances under which orders types may be removed from the NMS 
Stock ATS as the information required relates to the disclosures 
required under Part III, Item 16 (Routing). While we are not requiring 
broker-dealers to disclose information about their handling of customer 
orders when such orders are not routed to the NMS Stock ATS, we believe 
that market participants should be aware of how a subscriber order or 
trading interest that has been received by and rests in the NMS Stock 
ATS can be subsequently removed from the ATS. Such circumstances may be 
as simple as the broker-dealer cancelling a customer order that it is 
handling from the ATS, or such circumstances could include the broker-
dealer operator removing a third-party subscriber's order at its own 
discretion. To the extent that this information about removal of orders 
overlaps with the disclosures regarding routing of orders under Part 
III, Item 16, the NMS Stock ATS need only provide the information in 
Part III, Item 7 of adopted Form ATS-N. Additionally, the Part III, 
Item 7 requests regarding removal of orders and trading interest from 
the ATS will not require the broker-dealer operator to publicly 
disclose its routing table or other information about where the order 
is sent once it is removed from the NMS Stock ATS.
8. Order Sizes
    Part IV, Item 3(c) of proposed Form ATS-N would have required 
disclosures about order size requirements and odd-lot orders. We did 
not receive any comments directed at Part IV, Item 3(c) of proposed 
Form ATS-N; however, in response to commenters' general request for the 
Commission to use more ``yes'' or ``no'' questions to navigate 
information and facilitate comparisons, we are relocating Part IV, Item 
3(c) of proposed Form ATS-N to Part III, Item 8 (``Order Sizes'') of 
adopted Form ATS-N and adopting a ``yes'' or ``no'' format.\906\ In 
addition, we are requiring that the NMS Stock ATS identify and explain 
any differences in the treatment of subscribers and the broker-dealer 
operator, as applicable, in separate sub-items 8(b), 8(d), and 8(f), 
respectively.
---------------------------------------------------------------------------

    \906\ See supra note 839.
---------------------------------------------------------------------------

    In addition, we are adding to Part III, Item 8(a) of adopted Form 
ATS-N a request for the NMS Stock ATS to provide information about any 
maximum order or trading interest size requirements.\907\ Adding a 
request regarding a cap or maximum limit on an order size in the Part 
III, Item 8 of adopted Form ATS-N would help streamline an NMS Stock 
ATS's response to Form ATS-N and help market participants understand, 
the size requirements for trading on the ATS.
---------------------------------------------------------------------------

    \907\ As proposed, Part IV, Item 3(b) requested information 
about minimum order size requirements. Also, Part IV, Item 7(b) of 
proposed Form ATS-N would have required NMS Stock ATS to disclose 
information about the ``established, non-discretionary methods that 
dictate the terms of trading . . . on the NMS Stock ATS.'' To the 
extent that an NMS Stock ATS established a cap or a limit on the 
size of orders or trading interest that the ATS would accept from 
subscribers, this cap or limit would be a procedure governing the 
trading on the ATS and would have been responsive to proposed Form 
ATS-N (specifically, proposed Part IV, Item 7(b)).
---------------------------------------------------------------------------

    Furthermore, we are providing examples in a parenthetical 
indicating that ATSs state whether or not odd-lot and mix-lot orders 
and trading interest are treated the same as round lot orders and 
trading interest. Information regarding the treatment of odd-lot and 
mixed-lot orders and trading interest compared to round lot orders and 
trading interest could influence whether market participants submit 
odd-lot or mixed-lot orders to the NMS Stock ATS.
9. Conditional Order and Indications of Interest
    Part IV, Item 3(d) of proposed Form ATS-N would have required 
disclosures about conditional orders and indications of interest. We 
received one comment regarding Part IV, Item 3(d) of proposed Form ATS-
N contending that providing additional disclosure regarding order types 
and handling (including the use of IOIs) is useful information for 
subscribers and the investing public, whose investments may be traded 
indirectly on ATS platforms via their third-party broker-dealers.\908\
---------------------------------------------------------------------------

    \908\ See SIFMA Letter at 6.
---------------------------------------------------------------------------

    We are adopting Part IV, Item 3(d) of proposed Form ATS-N with 
modification and relocating the request to Part III, Item 9 
(``Conditional Orders and Indications of Interest'') of adopted Form 
ATS-N. Part III, Item 9 of adopted Form ATS-N is designed to provide 
specific information about the use of messages on the NMS Stock ATS, in 
particular, IOIs, actionable IOIs, conditional orders, and similar 
functionalities.\909\ As stated in the Proposal,\910\ NMS Stock ATSs 
use IOIs 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.\911\ While an 
actionable IOI may not specify the price and/or size of the trading 
interest, the practical context in which it is submitted implicitly or 
explicitly conveys information about the symbol, 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).\912\
---------------------------------------------------------------------------

    \909\ See Proposal, supra note 1, at 81067 for additional 
discussion of IOIs, actionable IOIs, conditional orders, and similar 
functionalities.
    \910\ See Proposal, supra note 2, at 81067.
    \911\ See id.
    \912\ See id.
---------------------------------------------------------------------------

    Conditional orders are also messages indicating 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.\913\ 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).\914\ As discussed in the Proposal, 
NMS Stock ATSs may only permit conditional orders to execute against 
other conditional orders, but some ATSs allow conditional orders to 
interact with other order types.\915\ Understanding the manner in which 
NMS Stock ATSs use messages that convey trading interest, such as IOIs, 
actionable IOIs, conditional orders, and similar functionalities could 
be useful to market participants in analyzing the potential execution 
of a subscriber's trading interest.
---------------------------------------------------------------------------

    \913\ See id.
    \914\ See id.
    \915\ See id.
---------------------------------------------------------------------------

    In response to comment,\916\ we are removing the word 
``circumstances''

[[Page 38848]]

from the request and adding more detail to the request to aid NMS Stock 
ATSs in responding.\917\ The Commission is adding ``price or size 
minimums'' as examples of information that could be contained in the 
messages and ``order management system, smart order router and FIX'' to 
illustrate the types of mechanisms that could transmit messages, such 
as IOIs and conditional orders. In the Commission's experience, the 
information that NMS Stock ATS include in IOIs and conditional orders 
can vary, including different combinations of symbol, size and/or 
price, and we believe that this information would be relevant to market 
participants when understanding what information about their orders are 
communicated to others and assessing potential information leakage. 
Second, we are adding a requirement that the NMS Stock ATS identify the 
type of persons that receive the message \918\ (e.g., subscriber, 
trading center), and the possible responses to conditional orders or 
IOIs (e.g., submission to firm-up conditional orders). These two 
factors could help market participants understand when a message, such 
as a conditional order or IOI, would result in an execution and provide 
market participants important information to understand how the market 
participant can use the ATS, who will see its trading interest, how its 
trading interest will be executed, and the potential for information 
leakage.\919\ Finally, we are including ``response time parameters, 
interaction and matching'' as examples of topics to discuss when 
disclosing the conditions under which the conditional order or IOI 
might result in an execution in the ATS.
---------------------------------------------------------------------------

    \916\ See, e.g., SIFMA Letter at 9; BIDS Letter at 4; STA Letter 
at 4.
    \917\ We also believe the more explicit requests address 
commenters' concerns that prompts like ``describe the 
circumstances'' would not allow NMS Stock ATSs to know whether the 
disclosure ``meets the Commission's expectation until after the Form 
ATS-N itself or an amendment is filed.'' See, e.g., SIFMA Letter at 
19.
    \918\ We are requiring the ``type of Persons'' that receives the 
message in this Item and are not requesting the names of individual 
recipients in the case of natural persons.
    \919\ The information required by the prompts to disclose the 
type of recipient and possible responses to conditional orders or 
IOIs would have been required in Part III, Item 3(d) of proposed 
Form ATS-N in response to the request for ``circumstances in which 
[the messages] may result in an execution on the NMS Stock ATS.'' 
Because commenters requested more specificity, we are making more 
explicit the information required in Part III, Item 9(a) of adopted 
Form ATS-N. See supra note 917.
---------------------------------------------------------------------------

10. Opening and Reopening
    Part IV, Item 9(a) of proposed Form ATS-N would have required 
disclosures about opening and reopening processes. We received one 
comment on Part IV, Item 9(a) of proposed Form ATS-N stating that Part 
IV of proposed Form ATS-N, including requests relating to the opening 
and reopening procedures, is essential for investors or routing brokers 
who are seeking to understand how the ATS works.\920\ We are adopting 
Part IV, Item 9(a) of proposed Form ATS-N with certain modifications, 
as described below in this section, and relocating the request as Part 
III, Item 10 (``Opening and Reopening'') of adopted Form ATS-N. The 
Commission is separating proposed Part IV, Items 9(b) (``Closing 
Process'') and 9(c) (``After-Hours Trading'') of proposed Form ATS-N, 
which were previously part of the same Item as Opening and Reopening 
Processes (Part IV, Item 9(a)), into separate items on the adopted Form 
ATS-N to facilitate locating information and making comparisons across 
NMS Stock ATSs.\921\
---------------------------------------------------------------------------

    \920\ See HMA Letter at 18.
    \921\ See supra note 839.
---------------------------------------------------------------------------

    As stated in the Proposal,\922\ Part III, Item 10 of adopted Form 
ATS-N is designed to inform market participants about whether an NMS 
Stock ATS uses any special procedures to match orders at the opening, 
or to set a single opening or reopening price to, for example, maximize 
liquidity and accurately reflect market conditions at the opening or 
reopening of trading. The disclosures under this Item would allow for 
comparisons between NMS Stock ATSs and national securities exchanges, 
which conduct opening and closing auctions and permit members to enter 
orders specially designated to execute on the opening. We continue to 
believe that market participants would likely want to know about any 
special opening or reopening processes employed by an NMS Stock ATS, 
including if any order types participate in an NMS Stock ATS's opening 
or reopening processes.
---------------------------------------------------------------------------

    \922\ See Proposal, supra note 2, at 81077.
---------------------------------------------------------------------------

    Furthermore, to provide additional guidance about what needs to be 
included in the description of the opening and reopening process, we 
are adding to Part III, Item 10 of adopted Form ATS-N that the ATS 
describe: When and how such orders and trading interest are ``priced 
[and] prioritized'' and ``any order types allowed'' during the opening 
and reopening processes. Specifically requesting information about when 
orders and trading interest will be priced and prioritized during the 
opening or reopening of the ATS will provide market participants with 
the information they need to plan and execute their trading strategies 
during these periods. The Item would also, for example, require 
disclosure of any procedures to match orders to set a single opening or 
reopening price to maximize liquidity and accurately reflect market 
conditions at the opening or reopening of trading.\923\ We believe most 
participants consider important the rules and procedures surrounding 
the pricing and priority of orders and trading interest, and the order 
types allowed because these rules and procedures can directly impact 
their execution price.
---------------------------------------------------------------------------

    \923\ See Proposal, supra note 2, at 81077 n. 485, 486 and 
accompanying text.
---------------------------------------------------------------------------

    In the Proposal, we would have required the information related to 
the pricing and priority of orders during the opening and reopening 
processes and any order types allowed during that time period under 
Part IV, Items 9(a) (``Opening and Reopening Process''), 7(b) (``Order 
Interaction Rules'') and Item 3 (``Types of Orders''). Part IV, Item 
9(a) of proposed Form ATS-N required, in part, a description of ``how 
orders or other trading interest are matched and executed'' during an 
opening or reopening. In order to fully describe the matching and 
execution of orders during an opening or reopening in response to the 
Item, the NMS Stock ATS would necessarily have needed to disclose the 
pricing, priority, and order types allowed. Moreover, Part IV, Item 
7(b) of proposed Form ATS requested information about the established 
non-discretionary methods that dictate terms of trading among multiple 
buyers and sellers, which included rules and procedures for priority 
and pricing. In addition, Part IV, Item 3 of proposed Form ATS-N would 
have required disclosure of ``any types of orders that are entered on 
the NMS Stock,'' which would have included any order types during an 
opening or reopening.
    We are adding a specific question about the rules and procedures 
for the opening and reopening process in Part III, Item 10 of adopted 
Form ATS-N to help streamline responses to Form ATS-N requests and help 
market participants locate and understand information about the opening 
and reopening process on the ATS.\924\ In Part III, Item 10, we are 
formatting the information requested, which parallels the Item in the 
Proposal, into three subparts (adopted Items 10(a), 10(c) and 10(e)) 
and adding a ``yes'' or ``no'' question to Item 10(e).
---------------------------------------------------------------------------

    \924\ See supra note 839.
---------------------------------------------------------------------------

11. Trading Services, Facilities and Rules
    Part IV, Item 7 of proposed Form ATS-N would have required 
disclosures regarding the trading services of the

[[Page 38849]]

NMS Stock ATS, including matching methodology, order interaction rules, 
and other trading procedures. We are adopting Part IV, Item 7, with 
modifications, as Part III, Item 11 of adopted Form ATS-N and renaming 
it ``Trading Services, Facilities, and Rules.'' Part III, Item 11 is 
designed to inform market participants and the Commission about the 
type of marketplace the NMS Stock ATS operates (e.g., crossing system, 
auction market, limit order matching book). In addition, Part III, Item 
11 is designed to solicit disclosures about the facilities, 
functionalities, and mechanisms that the NMS Stock ATS uses to match 
the orders and trading interest of counterparties and facilitate 
transactions on the ATS. As discussed in the Regulation ATS Adopting 
Release and restated in the Proposal,\925\ we explained that an ATS 
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.\926\ An ATS can bring together 
orders through various methods. For instance, a system brings together 
orders if it displays, or otherwise represents, trading interests 
entered on the system, such as a consolidated quote screen, to system 
users.\927\ A system 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.\928\ As explained above, to qualify for the Rule 3a1-
1(a)(2) exemption from the statutory definition of ``exchange,'' an ATS 
must, among other things, bring together the orders of multiple buyers 
and sellers.\929\
---------------------------------------------------------------------------

    \925\ See Proposal, supra note 2, at 81073.
    \926\ See Regulation ATS Adopting Release, supra note 3, at 
70849.
    \927\ See id.
    \928\ See id.
    \929\ See id. In the Regulation ATS Adopting Release, 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 Regulation ATS Adopting Release, 
supra note 3, at 70849. 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.
---------------------------------------------------------------------------

    As discussed in the Proposal, ATSs that trade NMS stocks may offer 
subscribers various types of trading mechanisms.\930\ 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.\931\ 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.
---------------------------------------------------------------------------

    \930\ See Proposal, supra note 2, at 81073.
    \931\ See Regulation ATS Adopting Release, supra note 3, at 
70849 n.37.
---------------------------------------------------------------------------

    We continue to believe that it would be useful to market 
participants to be availed information about the trading facilities, 
functionalities, and mechanisms offered by an NMS Stock ATS to evaluate 
whether the operations of the NMS Stock ATS comports with their trading 
and investment strategies. Part III, Item 11(a) of adopted Form ATS-N 
is consistent with Part IV, Item 7(a) of proposed Form ATS-N; however, 
we are limiting the request to require NMS Stock ATSs to provide only a 
summary of the structure of the NMS Stock ATS marketplace.\932\ The 
summary is designed to provide market participants with a brief 
overview of the type of market the ATS operates, such as a limit order 
book, auction market, or crossing system, in a more concise manner. 
This Item requires more detailed responses when explaining the means 
and facilities for bringing together the orders of multiple buyers and 
sellers on the NMS Stock ATS. We also separated the requested 
information on whether the means and facilities are the same for all 
subscribers and the broker-dealer operator into subpart Part III, 11(b) 
and formatted the subpart request as a ``yes'' or ``no'' question in 
response to comment.\933\
---------------------------------------------------------------------------

    \932\ In the Proposal under Part IV, Item 7(a), we proposed that 
the NMS Stock ATS 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.''
    \933\ See supra note 839.
---------------------------------------------------------------------------

    Part III, Item 11(c) is designed to inform market participants 
about the rules and procedures used to determine how orders and trading 
interest may interact on an NMS Stock ATS upon being entered into the 
system.\934\ We 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 subscribers' trading.\935\ For example, we consider 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.\936\ Similarly, the Commission 
has previously stated that rules imposing execution priorities, such as 
time and price priority rules, would be ``established, non-
discretionary methods.'' \937\
---------------------------------------------------------------------------

    \934\ One commenter states that, when discussing electronic 
trading platforms for corporate bonds, ``as the Commission knows, a 
bond trading platform that utilizes an RFQ [request for quote] 
trading protocol is not an ATS.'' See MarketAxess Letter at 2. 
Whether a platform that trades securities is an ATS depends on 
whether that platform meets the definition of an ``exchange'' 
pursuant to the criteria of Exchange Act Rule 3b-16(a) which 
requires a facts and circumstances analysis. A platform that uses an 
RFQ protocol to trade securities would be subject to the Rule 3b-
16(a) analysis, and depending on its design, activities, and rules, 
an RFQ platform may or may not meet the criteria of Rule 3b-16(a).
    \935\ See Regulation ATS Adopting Release, supra note 3, at 
70851-52.
    \936\ See id. at 70851.
    \937\ See id. at 70852.
---------------------------------------------------------------------------

    As discussed in the Proposal, NMS Stocks ATSs may employ various 
terms and conditions under which orders interact and match.\938\ 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. 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

[[Page 38850]]

different priority rules for matching conditional orders than it does 
for matching other order types. Part III, Item 11 of adopted Form ATS-N 
will allow the Commission to better evaluate whether the entity that 
filed a proposed Form ATS-N meets the criteria of Exchange Act Rule 3b-
16 and the definition of an NMS Stock ATS.
---------------------------------------------------------------------------

    \938\ See Proposal, supra note 2, at 81074.
---------------------------------------------------------------------------

    In Part III, Item 11(c) of adopted Form ATS-N, we are combining the 
requests in Part IV, Items 7(b) (``Order Interaction Rules'') and 7(c) 
(``Other Trading Procedures'') of proposed Form ATS-N. Part IV, Items 
7(b) and 7(c) of proposed Form ATS-N were intended to solicit 
information about the ATS's established non-discretionary methods that 
dictate the terms of trading among the multiple buyers and sellers 
entering orders and trading interest. In addition to a trading 
facility, non-discretionary methods include rules and procedures.\939\ 
Adopted Part III, Item 11(c) combines the requests in Part IV, Items 
7(b) and 7(c) of proposed Form ATS-N and is designed to communicate the 
rules and procedures that govern how their orders will be executed on 
the NMS Stock ATS. We are revising the language in adopted Item 11(c) 
to recognize this overlap by requiring the NMS Stock ATS to ``explain 
the established, non-discretionary rules and procedures of the NMS 
Stock ATS, including order interaction rules,'' which requires the same 
information as the proposed subparts. As another component of an NMS 
Stock ATS's non-discretionary methods, we are moving the trading 
procedures in proposed Item 7(c) into adopted Item 11(c) and including 
the examples of the trading procedures of an NMS Stock ATS (e.g., price 
protection mechanisms, shorts sales, locked-cross markets) into adopted 
Item 11(c) as well.
---------------------------------------------------------------------------

    \939\ The Commission recognized the intersection of 
``established, non-discretionary methods that dictate the terms of 
trading'' and ``trading procedures'' in the Regulation ATS Adopting 
Release when it stated that the second essential element of what 
constitutes an exchange is that trading on the exchange takes place 
according to ``established, non-discretionary rules or procedures.'' 
See Regulation ATS Adopting Release, supra note 3, at 70900. The 
Commission is adopting this formulation in Part III, Item 11(c), 
which we believe encompasses the information proposed to be required 
in Part IV, Items 7(b) and 7(c) of proposed Form ATS-N.
---------------------------------------------------------------------------

    A description of the ``established non-discretionary rules and 
procedures'' of the NMS Stock ATS is a principal requirement of Item 
11(c) and we are requiring that any differences among subscribers and 
the broker-dealer operator related to these methods be identified and 
explained. This request was moved to Part III, 11(d) and formatted as a 
``yes'' or ``no'' question in response to comment.\940\
---------------------------------------------------------------------------

    \940\ See supra note 839.
---------------------------------------------------------------------------

    We seek to provide additional guidance regarding the procedures 
that need to be discussed in this Item.\941\ Specifically, in response 
to various initiatives (e.g., pilot programs, national market system 
plans, rules and regulations), NMS Stock ATSs have designed and/or 
modified the design of their systems and trading procedures to comply 
with these initiatives, including, for example, Regulation NMS,\942\ 
and more recently, the Tick Size Pilot.\943\ To be fully informed about 
the trading procedures of the NMS Stock ATS, we believe that market 
participants would need to understand the operations and procedures 
that NMS Stock ATSs adopt in response to these initiatives as the 
responses could affect the decision of a market participant to use the 
NMS Stock ATS.\944\ To the extent an NMS Stock ATS has designed trading 
procedures to operate consistently with Commission initiatives, the NMS 
Stock ATS would need to disclose these procedures in response to this 
Item (Part III, Item 11 of adopted Form ATS-N). Furthermore, this 
information required on trading procedures resulting from Commission 
initiatives was encompassed under Part IV, Items 7(b) and 7(c) of 
proposed Form ATS-N, which proposed requiring comprehensive information 
on order interaction rules and trading procedures, including all of the 
established non-discretionary methods that dictate the terms of trading 
on the NMS Stock ATS.
---------------------------------------------------------------------------

    \941\ See SIFMA Letter at 24 (stating item as proposed could 
result in discursive disclosures of limited use to market 
participants).
    \942\ For example, Rule 611 of Regulation NMS, which requires a 
trading center to establish, maintain, and enforce written policies 
and procedures that are reasonably designed to prevent trade-
throughs on that trading center, subject to certain exceptions. See 
17 CFR 242.611.
    \943\ See Securities Exchange Act Release No. Release No. 74892 
(May 6, 2015), 80 FR 27513 (May 13, 2015) (File No. 4-657) (Order 
Approving the National Market System Plan to Implement a Tick Size 
Pilot Program [(``Tick Size Pilot'')] by BATS Exchange, Inc., BATS 
Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., 
EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., 
NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market 
LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., 
as Modified by the Commission, For a Two-Year Period) (modifying the 
definition of ``block-size'' for purposes of the Tick Size Pilot to 
an order (1) of at least 5,000 shares or (2) with a market value of 
at least $100,000).
    \944\ As discussed in the Proposal, NMS Stock ATSs apply various 
trading procedures to determine an execution price based on the 
circumstances of the match. See Proposal, supra note 2, at 81074. 
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 trading 
procedures for executing orders that include 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''), or short sales to be executed on its 
system. Thus, an NMS Stock ATS would be required to configure its 
system to comply with federal securities laws related to short 
sales, including Regulation SHO, rules and procedures governing and/
or precluding the execution of orders in a locked or crossed market, 
or procedures governing the handling of execution errors, such as 
the use of an error account by the NMS Stock ATS.
    Other trading procedures include 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, an NMS Stock ATS may have 
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. Trading procedures 
include any functionality or mechanism available on the NMS Stock 
ATS that allows for price improvement.
---------------------------------------------------------------------------

    Another commenter suggests that disclosure of certain additional 
trading services should be required, specifically whether the NMS Stock 
ATS employs technology designed to detect and deter price manipulation 
and other disruptive trading practices, i.e., anti-gaming technology, 
and if so, to include a description of this technology in the 
form.\945\ Another commenter states that anti-gaming technology and 
other subscriber-related safeguards are among the core attributes of 
ATSs that are of particular importance to buy-side institutions.\946\ 
We, however, are not adopting a request related to anti-gaming 
technology and subscriber-related safeguards because such descriptions 
made in a publicly available document could serve to undermine those 
safeguards by disclosing information that makes evading those 
safeguards easier.
---------------------------------------------------------------------------

    \945\ See ICI Letter at 9-10. See also Memorandum from the 
Office of Commissioner Kara Stein regarding a July 26, 2016 meeting 
with representatives of Morgan Stanley (including in a presentation 
that whether an ATS has anti-gaming controls is among the frequently 
asked questions by clients).
    \946\ See State Street Letter at 2-3.
---------------------------------------------------------------------------

    One commenter states that Part IV, Item 7 of proposed Form ATS-N 
had ``the potential to become quite technical and granular'' and thus 
perhaps of limited use to end-readers, and suggests the Commission 
consider ``requesting

[[Page 38851]]

high-level generalized descriptions or converting these prompts to a 
more narrow set of focused, ``yes'' or ``no'' or short-answer questions 
with more detail available to regulators as needed for surveillance or 
other purposes.'' \947\ The commenter also indicates that prompts to 
``describe'' require extensive disclosures that would be difficult to 
maintain current. Part III of adopted Form ATS-N requests information 
about common operational attributes of NMS Stock ATSs, which are 
organized by subject matter to facilitate market participants' 
understanding and evaluation of an NMS Stock ATS. The Commission 
recognizes that requests in Part III, Item 11 could be more expansive 
than other requests in Part III; however, Part III, Item 11 of adopted 
Form ATS-N is designed to solicit information about the unique rules 
and procedures that are tailored for the trading activities and 
interaction of orders of subscribers on the NMS Stock ATS. National 
securities exchanges make public similar information in their rule 
books, in detail, which are designed to provide their members with 
information about how they should expect their orders to be handled by 
the exchange. It would be impractical to posit ``yes'' or ``no'' to NMS 
Stock ATSs without allowing NMS Stock ATSs to explain how their trading 
mechanisms or trading procedures operate. We also believe that ``yes'' 
or ``no'' questions, in this case, have the potential to quickly become 
outdated as practices in the securities industry evolve and new 
developments emerge. As the industry and NMS Stock ATS operations 
change, NMS Stock ATS can better provide market participants with 
complete and comprehensive disclosures if they are able to describe how 
their system operates in their own words. We also are not discounting 
that certain items may only require a short answer depending on the 
complexity of the trading rules and procedures of the NMS Stock ATS. In 
addition, the commenter's suggestion that more detail could be given to 
regulators as needed does not address the need for market participants 
to have full information about the ATS's trading rules, procedures, and 
facilities to determine whether to route orders to the system for 
execution.
---------------------------------------------------------------------------

    \947\ See SIFMA Letter at 24.
---------------------------------------------------------------------------

    We do not believe, as suggested by a commenter, that Part III, Item 
11 of adopted Form ATS-N will require ``discursive disclosures'' \948\ 
that would make maintaining a current Form ATS-N challenging. Although 
the item requires substantial information depending on the complexity 
of the NMS Stock ATS, Rule 304(a)(2)(i)(A)-(C) of Regulation ATS 
provides a mechanism for an NMS Stock ATS to file amendments to Form 
ATS-N that allows for both material changes to the operations of an ATS 
and updating amendments. We believe that an NMS Stock ATS may keep 
current its Form ATS-N without the obligation to file continuous 
updates for non-material changes by filing an updating amendment under 
Rule 304(a)(2)(i)(B).
---------------------------------------------------------------------------

    \948\ See supra note 941 and accompanying text.
---------------------------------------------------------------------------

    Another commenter suggests that both Part IV, Item 7 and Item 8 
(relating to suspensions of trading, system disruptions or 
malfunctions) of proposed Form ATS-N would be better suited as a 
required disclosure to subscribers that could be included in 
contractual agreements or systematically available to subscribers on 
ATS operators' websites, rather than formally filed with the 
Commission.'' \949\ We, however, believe that this information could be 
useful to potential subscribers to evaluate an NMS Stock ATS as a 
potential destination for its orders.
---------------------------------------------------------------------------

    \949\ See SIFMA Letter at 24-25.
---------------------------------------------------------------------------

    One commenter suggests that the Commission require NMS Stock ATSs 
to disclose precise, mathematically analyzable specifications of their 
algorithms to enable the Commission and financial firms to leverage 
formal verification techniques to automatically analyze the 
specifications for potential violations of regulations, and allow 
market participants to automatically test their connectivity and verify 
their routing algorithms (for best execution principles).\950\ We 
believe that requiring disclosure of mathematically analyzable 
specifications, which would be used to conduct compliance checks by the 
Commission, is outside of the scope of this rulemaking.\951\ While we 
will review Form ATS-N filings, the Commission's review is not designed 
to verify the accuracy of the disclosures nor designed as an 
independent investigation of whether all aspects of the NMS Stock ATS 
operations or the ATS-related activities of the broker-dealer operator 
are disclosed on Form ATS-N.\952\ At this time, we believe that the 
Commission's compliance oversight of NMS Stock ATSs would best be 
served through the Commission's and the SRO's examination and 
inspection efforts.\953\
---------------------------------------------------------------------------

    \950\ See AI Letter at 1-3.
    \951\ We did not propose compliance checks for NMS Stock ATSs 
and the commenter's recommendation is not currently required of 
other trading centers, such as national securities exchanges.
    \952\ See Section IV.A.3.
    \953\ The commenter also suggests that we adopt a test that 
would only require NMS Stock ATSs to disclose information necessary 
to write an observationally-equivalent simulator of the venue. See 
AI Letter at 2. As we are not adopting the commenter's suggestion to 
require NMS Stock ATSs to disclose operational details in a 
mathematically-analyzable format, we do not believe that such a test 
would be appropriate.
---------------------------------------------------------------------------

12. Liquidity Providers
    Part IV, Item 1(d) of proposed Form ATS-N would have required 
disclosures regarding liquidity providers to the NMS Stock ATS. The 
Commission is adopting Part IV, Item 1(d) of proposed Form ATS-N as 
Part III, Item 12 (``Liquidity Providers'') of adopted Form ATS-N with 
certain modifications, which are discussed below. As discussed in the 
Proposal,\954\ we believe that an NMS Stock ATS may want to ensure that 
there is sufficient liquidity in a particular NMS stock to incentivize 
market participants to send order flow in that NMS stock to the ATS. 
Some ATSs that trade 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.\955\ The 
obligations required of liquidity providers and the benefits that they 
provide vary across NMS Stock ATSs. We believe 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 liquidity providers on the 
NMS Stock ATS.
---------------------------------------------------------------------------

    \954\ See Proposal, supra note 2, at 81062-63.
    \955\ These liquidity providers may quote in a particular NMS 
stock on the 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.
---------------------------------------------------------------------------

    One commenter suggests that the term ``liquidity provider'' should 
be specifically defined; however, the commenter did not suggest a 
definition.\956\ While we are not adopting a specific definition of 
liquidity provider, the Commission is providing examples of the 
functions a liquidity provider could perform on the NMS Stock ATS in 
Part III, Item 12 of adopted Form ATS-N. We believe that such 
arrangement could take many forms and the function of the liquidity 
provider on an ATS could depend on the structure and trading protocols 
of the ATS. Furthermore, as explained above,\957\ we

[[Page 38852]]

intend for this Item to cover, for example, arrangements or agreements 
between the broker-dealer operator and another party to trade on the 
NMS Stock ATS. We do not intend this to cover agreements with a 
subscriber that has no obligation to buy or sell NMS stocks on the 
system.
---------------------------------------------------------------------------

    \956\ See KCG Letter at 12.
    \957\ See supra Sections V.C.1 and V.C.2.
---------------------------------------------------------------------------

    Another commenter states that the Commission should consider 
eliminating or consolidating Part IV, Items 1(c) and 1(d) of proposed 
Form ATS-N and suggests these subparts are redundant with information 
about segmentation sought in Part III of proposed Form ATS-N.\958\ Part 
III, Item 12, however, requests information about subscribers or the 
broker-dealer operator or its affiliates that are obligated in some way 
to buy, sell, or both, NMS stocks on the ATS; while Part III, Item 13 
pertains to disclosure about categorization of orders and trading 
interest submitted to the NMS Stock ATS.\959\
---------------------------------------------------------------------------

    \958\ See SIFMA Letter at 20. See supra Section V.D.1 for 
discussion of proposed Item 1(c) and comments thereto, and comments 
applicable to Part IV, Item 1 of proposed Form ATS-N as a whole.
    \959\ See Section V.D.13 (Segmentation; Notice).
---------------------------------------------------------------------------

    After considering whether Part IV, Item 1(d) of proposed Form ATS-N 
may overlap with any other items on the form, we require ATSs in Part 
II, Items 1(c) and 2(c) of adopted Form ATS-N to indicate whether there 
are any formal or informal arrangements with the broker-dealer operator 
and affiliate of the broker-dealer operator, respectively. As discussed 
above, if the answer is ``yes'' to any of these items, the NMS Stock 
ATS must identify the broker-dealer operator (e.g., business unit) or 
the affiliate in Part II, Items 1(c) and 2(c).\960\ In addition, the 
NMS Stock ATS would be required to complete Part III, Item 12 of 
adopted Form ATS-N regarding the arrangements with the broker-dealer 
operator or affiliate.
---------------------------------------------------------------------------

    \960\ See supra Section V.C.1 (discussing the requirements of 
Part II, Items 1(c) and 2(c)).
---------------------------------------------------------------------------

13. Segmentation; Notice
    Part IV, Items 5(a) and 5(b) of proposed Form ATS-N would have 
required disclosures regarding segmentation of order flow and notice of 
segmentation. We are adopting Part IV, Item 5 with certain 
modifications. We are also renumbering the request as Part III, Item 13 
of adopted Form ATS-N and renaming it ``Segmentation; Notice.'' As 
discussed in the Proposal, some NMS Stock ATSs elect to segment order 
flow entered in the NMS Stock ATS according to various categories.\961\ 
An NMS Stock ATS could elect to segment trading interest by type of 
participant (e.g., buy-side or sell-side firms, principal trading 
firms, agency-only firms, firms above or below certain assets under 
management thresholds). In addition, buy-side or institutional 
subscribers might seek to trade only against other buy-side or 
institutional order flow, or might seek to avoid trading against 
principal trading firms or so-called high frequency trading firms. When 
segmenting order flow in the system, an NMS Stock ATS might elect to 
look to the underlying source of the trading interest 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.
---------------------------------------------------------------------------

    \961\ See Proposal, supra note 2, at 81070.
---------------------------------------------------------------------------

    Several commenters express support for the Commission requiring 
information about order segmentation.\962\
---------------------------------------------------------------------------

    \962\ See ICI Letter at 9 (stating it would inform funds of the 
possibility of order segmentation and allow funds to determine 
whether to avoid trading with certain types of market participants). 
See also UBS Letter at 7; Fidelity Letter at 8; SIFMA Letter at 23.
---------------------------------------------------------------------------

    The Commission also received comments recommending changes to 
aspects of Part IV, Item 5 of proposed Form ATS-N. One commenter 
suggests that the Item should be converted to a series of ``yes'' or 
``no'' questions and that the Item overlaps with Part IV, Item 1 of 
proposed Form ATS-N.\963\ The Commission is adding a ``yes'' or ``no'' 
question to Part III, Item 13 of adopted Form ATS-N for ATSs to convey, 
and so market participants can readily understand, whether the NMS 
Stock ATS segments orders and trading interest and whether the ATS 
discloses to any Person the designated segmented category, 
classification, tier, or level of orders and trading interest of a 
subscriber or person. We believe that a response to a request that 
includes solely ``yes'' or ``no'' questions would not provide the 
necessary detail for market participants to understand and evaluate how 
the NMS Stock ATS segments trading interest and against whose order 
flow their trading interest could match. Moreover, the Commission has 
revised Part IV, Item 1 of proposed Form ATS-N (Part III, Item 1 of 
adopted Form ATS-N) to eliminate overlap.\964\
---------------------------------------------------------------------------

    \963\ See SIFMA Letter at 22-23.
    \964\ See supra Section V.D.1.
---------------------------------------------------------------------------

    Several commenters express concern that Part IV, Item 5 of proposed 
Form ATS-N would have required the publication of precise metrics used 
to segment trading interest that could result in the gaming of those 
metrics to the detriment of order flow on the ATS.\965\ The Commission 
recognizes the concerns of commenters that believe describing the 
precise criteria used to segment trading interest could result in 
potential gaming of those criteria and thus, the reduction of the 
effectiveness of segmentation as a control. On the other hand, we 
believe that market participants are interested in understanding how 
their orders and trading interest are categorized on the ATS and the 
types of market participants that would interact with those orders and 
trading interest. We believe that Part III, Item 13 of adopted Form 
ATS-N appropriately balances these competing interests by soliciting a 
summary of the parameters for each segmented category and length of 
time each segmented category is in effect.\966\ Requiring NMS Stock 
ATSs to provide a summary of these parameters on Form ATS-N, rather 
than a detailed analysis of those parameters and how they are 
calculated, is designed to avoid responses that could allow the gaming 
of segmentation criteria, as suggested by commenters.\967\
---------------------------------------------------------------------------

    \965\ See UBS Letter at 7; Fidelity Letter at 8. See also SIFMA 
Letter at 23 (stating that disclosing proprietary or sensitive 
information as required by this item is not necessary or 
appropriate).
    \966\ In the Commission's experience, NMS Stock ATSs can vary 
the lengths of time that a segmented category is in force, such as 
one day, week, or monthly. The NMS Stock ATS must disclose in 
responding to this Item if any such time period applies to its 
segmentation parameters. We proposed requiring this information in 
Part IV, Item 5 of proposed Form ATS-N by proposing to require that 
the NMS Stock ATS disclose any procedures for evaluating and 
changing segmented categories, which may be affected by the length 
of time a subscriber is placed in a category. We are specifying here 
that the length of time that a segmented category is in force is 
responsive to facilitate responding to the Item.
    \967\ We note that, as part of our review of Form ATS-N 
responses, we intend to monitor the level of summary information 
provided on the form for completeness to help ensure that such 
information is responsive to the form and is not designed to avoid 
meaningful disclosure.
---------------------------------------------------------------------------

    Commenters suggest that the information requested by Part IV, Item 
5 of proposed Form ATS-N could be provided to the Commission 
confidentially,\968\ or the ATS be allowed to redact classification 
criteria that is based upon trading characteristics from Form ATS-N 
prior to its release.\969\ We believe that allowing NMS Stock ATSs to 
provide summary information in response to Part III, Item 13 on adopted 
Form ATS-N addresses the concerns

[[Page 38853]]

underlying the commenters' suggestions.
---------------------------------------------------------------------------

    \968\ See UBS Letter at 7 (stating that if the Commission 
continues to believe the information is necessary, then access 
should be restricted solely to the Commission); SIFMA Letter at 23.
    \969\ See Fidelity Letter at 8.
---------------------------------------------------------------------------

    Another commenter suggests that information barriers between the 
ATS and other affiliates would ``make it challenging or inappropriate 
for the ATS itself to seek some of this information.'' \970\ The ATS 
has no need to seek information from affiliates to respond to this Item 
as it relates solely to the segmentation of orders and trading interest 
in the NMS Stock ATS and how such orders and trading are segmented for 
purposes of order interaction and execution in the NMS Stock ATS.\971\
---------------------------------------------------------------------------

    \970\ See SIFMA Letter at 23.
    \971\ To the extent that orders or trading interest are 
segmented outside the NMS Stock ATS and then sent to the NMS Stock 
ATS for handling and execution, the functionality or entity 
segmenting order or trading interest could be considered part of the 
NMS Stock ATS, and information about its activity may be responsive 
to the Form ATS-N requests. See supra note 888 and accompanying 
text.
---------------------------------------------------------------------------

    Another commenter recommends that an NMS Stock ATS should be 
required to disclose whether it identifies customer orders of broker-
dealers as customer orders (which it views as a form of 
segmentation).\972\ The commenter states disclosing the origin of a 
particular order can contribute to information leakage and adverse 
selection of fund orders. We agree with the commenter's concerns and 
are adding a ``yes'' or ``no'' question to solicit information 
regarding whether the NMS Stock ATS identifies orders or trading 
interest entered by a customer of a broker-dealer on the NMS Stock ATS 
as a customer order. We agree with the commenter that disclosing the 
origin of a customer order of a broker-dealer is a form of segmentation 
because it can facilitate users restricting their trading to only 
certain types of market participants, and that it can contribute to 
information leakage and adverse selection of fund orders.\973\
---------------------------------------------------------------------------

    \972\ See ICI Letter at 9.
    \973\ Part IV, Item 5(a) of proposed Form ATS-N would have 
required an NMS Stock ATS to describe any segmentation of orders and 
other trading interest on the ATS. In the Proposal, we provided 
``classification by type of participant'' or ``source'' as examples 
of forms of segmentation. We consider identifying the orders of 
customers of broker-dealers (i.e., the source or type of 
participant) a form of segmentation and providing a separate request 
on the form would facilitate market participants' understanding of 
the ATS's segmentation categories.
---------------------------------------------------------------------------

    Another commenter states that Part IV, Item 5 of proposed Form ATS-
N would be more meaningful if there was a quantitative component, such 
as the percentage of orders and trades per segmented class.\974\ We are 
not requiring that NMS Stock ATSs provide quantitative information on 
each segmented class at this time. We believe that providing market 
participants with narrative disclosures about the operations of the NMS 
Stock ATS, which oftentimes is not publicly available, will allow 
market participants to understand the nature of order flow in the ATS. 
Nevertheless, we intend to monitor the quality of responses and 
information received through Form ATS-N and will continually assess in 
the future whether quantitative information would facilitate 
operational transparency for NMS Stock ATSs.
---------------------------------------------------------------------------

    \974\ See MFA/AIMA Letter at 5. The commenter states that a 
quantitative component would provide investors with information on 
the extent to which a broker-dealer operator or its affiliate 
transacts on the NMS Stock ATS. However, Part II, Items 1, 2, and 3 
of adopted Form ATS are designed to provide disclosures about the 
nature of trading by the broker-dealer operator and its affiliates 
in the ATS.
---------------------------------------------------------------------------

    We also are modifying certain components of Part IV, Item 5 
proposed Form ATS-N (as adopted in Part III, Item 13). First, we are 
adding the terms ``classifications, tiers, or levels'' in addition to 
``categories'' to describe the groupings into which an NMS Stock ATS 
elects to segment subscriber orders to better reflect the language used 
by commenters and in existing Form ATS disclosures. Second, we are 
providing two additional examples, order size and duration,\975\ of 
criteria whereby an NMS Stock ATS might elect to segment subscribers' 
orders and trading interest. We are providing these examples to provide 
additional guidance on some of the types of segmentation that would be 
responsive to the Item and allow NMS Stock ATSs to focus their 
responses accordingly. Third, we are providing additional specificity 
around what ``changing segmented categories'' means by requiring NMS 
Stock ATSs to provide a discussion of procedures for overriding a 
determination of segmented category. Subscribers would likely want to 
know of any such procedures, which could affect the trading interest 
against which their orders trade.\976\ Fourth, we are requiring a 
description of how segmentation affects order interaction in Part III, 
Item 13 of adopted Form ATS-N. We proposed that an NMS Stock ATS 
provide information about its order interaction rule in Part IV, Item 7 
of proposed Form ATS-N, but believe that it would be more relevant and 
efficient to request that information here.
---------------------------------------------------------------------------

    \975\ Duration can refer to segmenting trading interest 
according to how long it has rested on the book of a trading system.
    \976\ Thus, if an NMS Stock ATS has established automated and 
empirical tests for segmenting subscribers into different 
categories--which would require the ATS to respond ``yes'' to Item 
III, 13(a) of adopted Form ATS-N and to explain how the segmentation 
procedures are applied--but allows any kind of override of those 
automated and empirical tests (such as an ad hoc determination by a 
member of the ATS's staff), the NMS Stock ATS would have to respond 
``no'' to Item III, 13(b) (``Are the segmentation procedures the 
same for all subscribers and the broker-dealer operator?'') and 
explain any differences in how its segmentation procedures are 
applied.
---------------------------------------------------------------------------

    Finally, we are requiring under Part III, Item 13(d) of adopted 
Form ATS-N that the NMS Stock ATS describe ``whether and how [a 
designated segmented category] can be contested'' (if applicable). This 
request is generally consistent with Part IV, Item 5 of proposed Form 
ATS-N which would have required information on the changing or 
overriding of segmented categories, as well as notice provided to 
subscribers of their segmented category.
14. Counter-Party Selection
    Part IV, Item 5(c) of proposed Form ATS-N would have required 
disclosures regarding order preferencing. The Commission did not 
receive specific comment on Part IV, Item 5(c) of proposed Form ATS-
N.\977\ We are adopting Part IV, Item 5(c) as Part III, Item 14 
(``Counter-Party Selection'') of adopted Form ATS-N and adding examples 
of counter-party selection in a parenthetical in the Item. Market 
participants have an interest in knowing whether--and how--they may 
designate their orders or trading interest to interact or avoid 
interacting with specific orders, trading interest, or persons on an 
NMS Stock ATS. For instance, the disclosures required under this Item 
would allow a market participant to know whether it could designate an 
order submitted to the NMS Stock ATS to interact with specific orders 
resting in the NMS Stock ATS.
---------------------------------------------------------------------------

    \977\ One commenter states that it is unclear whether Part IV, 
Item 1(e) of proposed Form ATS-N requests disclosure of instances 
where a subscriber requests not to interact with certain 
counterparties. See SIFMA Letter at 20. As discussed in Part III, 
Item 3 of adopted Form ATS-N above, any procedures related to 
counter-party selection would be responsive to this item (Part III, 
Item 14 of adopted Form ATS-N).
---------------------------------------------------------------------------

15. Display
    Part IV, Item 6(a) of proposed Form ATS-N would have required 
disclosures about the display of order and trading interest, including 
recipients. We received several comments on Part IV, Item 6(a) of 
proposed Form ATS-N. We are adopting Part IV, Item 6(a) of proposed 
Form ATS-N with modifications, as discussed more fully below, and 
renumbering the request as Part III, Item 15 (``Display'') of adopted 
Form ATS-N. The display of subscriber orders and trading interest can 
occur in a number of ways. For instance, as

[[Page 38854]]

discussed in the Proposal,\978\ when an NMS Stock ATS sends electronic 
messages outside of the ATS that expose the presence of orders or other 
trading interest on the ATS, it is displaying or making known orders or 
other trading interest on the NMS Stock ATS. An NMS Stock ATS also 
might elect to display subscriber order and trading interest through a 
direct data feed from the NMS Stock ATS that contains real-time 
information about current quotes, orders, or other trading interest in 
the NMS Stock ATS. Also, it would be responsive to this adopted Item 
for the NMS Stock ATS to disclose the circumstances under which the ATS 
would send these messages, the types of market participants that 
received them, and the information contained in the messages, including 
the exact content of the information, such as symbol, price, size, 
attribution, or any other information made known.\979\ 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 subscribers being displayed on vendor 
systems, or arrangements with third parties to transmit IOIs between 
subscribers.\980\ We continue to believe that subscribers that use the 
services of the NMS Stock ATSs, including customers of the broker-
dealer operator, have limited information about the extent to which 
their orders and trading interest sent to the NMS Stock ATS could be 
displayed outside the ATS.\981\ For example, subscriber orders or 
trading interests directed to the NMS Stock ATS could pass through the 
broker-dealer operator's systems or functionality before entering the 
ATS. Such systems and functionalities, which could include a common 
gateway function, algorithm, or smart order router, could be used to 
support the broker-dealer operator's other business units, including 
any trading centers.\982\
---------------------------------------------------------------------------

    \978\ See Proposal, supra note 2, at 81072.
    \979\ See id.
    \980\ See id.
    \981\ See id.
    \982\ 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.
---------------------------------------------------------------------------

    One commenter supports this item.\983\ Other comments raise certain 
concerns about Part IV, Item 6(a) of proposed Form ATS-N. One commenter 
states that the proposed Item would cover ``order information or other 
trading interest'' rather than ``subscriber order information or other 
trading interest'' and could entangle the ordinary situation where a 
multi-service broker-dealer that operates an ATS uses a tool to manage 
child orders across multiple trading venues.\984\ Another commenter 
suggests that the Commission draw a clearer distinction between the 
actions and operations of an ATS operator and those of affiliated 
broker-dealers, technical support teams, or others external to the ATS, 
and instead emphasize disclosures relating to the ATS operator 
itself.\985\
---------------------------------------------------------------------------

    \983\ See HMA Letter at 18.
    \984\ See UBS Letter at 8.
    \985\ See SIFMA Letter at 23.
---------------------------------------------------------------------------

    In response to these commenters' suggestions, we are changing the 
request to ``subscriber orders and trading interest.'' We did not 
intend for the Proposal to, in the commenter's words, entangle the 
ordinary situation where a multi-service broker-dealer uses a tool to 
manage child orders across multiple trading venues.\986\ Consistent 
with the discussion above regarding the definition of subscriber, a 
subscriber order directed to the ATS would be a subscriber order for 
purposes of display. For a subscriber order routed out of the NMS Stock 
ATS to a third-party trading venue, for example, that order in the 
third-party venue would not be considered a subscriber order for 
purposes of display.\987\ As explained above,\988\ we do not intend for 
Form ATS-N to require disclosures about aspects of a market 
participant's commercial relationships with a broker-dealer operator 
that do not pertain to the NMS Stock ATS.
---------------------------------------------------------------------------

    \986\ See UBS Letter at 8.
    \987\ See supra Section V.A.2.b.
    \988\ See id.
---------------------------------------------------------------------------

    A commenter suggests a better way of phrasing Part IV, Item 6(a) of 
proposed Form ATS-N would be to ask whether orders or IOIs are ever 
displayed in external venues, with which venues, and what information 
is shared.\989\ However, the form of this request is broader, as just 
discussed, and limiting the request for information to orders and 
trading interest displayed in external venues would not capture all of 
the relevant locations where subscriber orders and trading interest can 
be displayed.
---------------------------------------------------------------------------

    \989\ See SIFMA Letter at 23. The commenter also states the need 
for frequent filing of amendments and the demand for specificity 
will diminish the readability, comparability and ultimately the 
usefulness of the form for subscribers and other end readers. See 
id. at 24.
---------------------------------------------------------------------------

    One commenter suggests that the Commission revise this Item to 
distinguish between orders or other trading interest displayed in 
external venues with real-time access to systems designed to take 
advantage of this information, such as liquidity providers and SORs, 
and orders or other trading interest displayed in external venues 
without real-time access to systems designed to take advantage of this 
information, such as vendors (where no further information is needed or 
possibly not required).\990\ The final disclosure requirement does not 
draw a distinction between these orders and trading interests. Market 
participants can be very sensitive to precisely how and when their 
orders and trading interest are displayed or otherwise made known, and 
the Commission remains concerned that subscribers to NMS Stock ATSs 
might not know the full extent to which their orders and trading 
interest are displayed.\991\ While the display of orders or trading 
interest at venues in real time that have systems designed to take 
advantage of such information may raise the most acute concerns, we 
believe that market participants should have a full understanding about 
how and when an ATS displays their orders or trading interest.
---------------------------------------------------------------------------

    \990\ See Fidelity Letter at 8.
    \991\ See Proposal, supra note 2, at 81072.
---------------------------------------------------------------------------

    Differences in the latencies associated with the NMS Stock ATS 
displaying subscriber orders and trading interest due to a 
functionality of the ATS would be responsive to the request in Part 
III, Item 15(c).\992\ For example, if an NMS Stock ATS transmits and 
displays its proprietary data feed to certain subscribers faster than 
other subscribers as a result of the alternative means offered by the 
ATS to connect, such information would be responsive.
---------------------------------------------------------------------------

    \992\ See supra note 850. We proposed to require an NMS Stock 
ATS to disclose differences among subscribers regarding the display 
of orders and trading interest in Part IV, Item 6(a) of proposed 
Form ATS-N.
---------------------------------------------------------------------------

    Part IV, Item 6(b) of proposed Form ATS-N, requested the identity 
of any individuals in responding to whom the order and trading interest 
would be displayed or made known. One commenter raises confidentiality 
concerns with the requirement to publicly identify the position and 
title of the natural person to whom orders or other trading interest 
are displayed, because it believes that it would be relatively easy 
through social media to reverse engineer certain identities, and such 
information would require frequent updates with little market 
utility.\993\
---------------------------------------------------------------------------

    \993\ See Fidelity Letter at 8. See also SIFMA Letter at 23 
(suggesting that identifying individuals by title or more specific 
identifying characteristics would present security and privacy 
issues, as well as client confidentiality issues).

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

[[Page 38855]]

    We have revised the request so that Part III, Item 15 of adopted 
Form ATS-N does not require the NMS Stock ATS to identify natural 
persons. We understand commenters' potential confidentiality concerns 
and had modified the request to make clear that the request does not 
seek the names of natural persons or their identity. Instead, it 
requires the NMS Stock ATS to only identify the recipient of displayed 
information, by functionality of the broker-dealer operator or the type 
of market participant, or both.\994\ For example, if orders bound for 
the NMS Stock ATS pass through the broker-dealer operator's common 
gateway, SOR, or algorithm, the NMS Stock ATS would need to disclose 
these functionalities as the order was displayed to a functionality of 
the broker-dealer operator that would likely be outside the NMS Stock 
ATS. If orders resting in the NMS Stock ATS are displayed to certain 
subscribers or one or more of the broker-dealer operator business 
units, the NMS Stock ATS would need to identify these subscribers and 
business units of the broker-dealer operator by type of market 
participant (e.g., institutional investors, principal trading firms, 
market makers, affiliates, trading desks at the broker-dealer operator, 
market data vendors, clearing entities, and potential subscribers, 
among others). We believe this modification addresses commenters' 
concerns, obviates the need for any redaction of information, and 
reduces the frequency of updates necessary as compared to responses 
identifying individual persons as proposed.
---------------------------------------------------------------------------

    \994\ See Part III, Item 1 of adopted Form ATS-N (providing 
examples of types of market participants).
---------------------------------------------------------------------------

    We are revising Part III, Item 15 of adopted Form ATS-N to address 
another commenter's concern that certain persons at the ATS in 
technical or quality assurance roles would need to be disclosed even 
though they may not be involved with trading activity.\995\ Part III, 
Item 15 now specifies that the request does not include ``employees of 
the NMS Stock ATS who are operating the system.'' so that employees of 
the NMS Stock ATS in non-trading related roles, such as technical, 
quality assurance, compliance or accounting roles, among others, that 
support the ATS's operations would not be captured under the adopted 
Item.\996\
---------------------------------------------------------------------------

    \995\ See SIFMA Letter at 23.
    \996\ The NMS Stock ATS would still be subject to the 
requirements of Rule 301(b)(10) and required to establish adequate 
safeguards and procedures to protect subscribers' confidential 
trading information, which must include: 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. See 17 CFR 242.301(b)(10).
---------------------------------------------------------------------------

    Finally, we are adding a ``yes'' or ``no'' questions in Part III, 
Item 15(a) that asks if the NMS Stock ATS operates as an ECN as defined 
in Rule 600(a)(23) of Regulation NMS. In the Proposal, the Commission 
noted that NMS Stock ATSs that are also ECNs may differ in how and 
where orders or other trading interest are displayed, and that Part IV, 
Item 6 of proposed Form ATS-N was designed inform market participants 
about how ECN display orders.\997\ We believe that adding this ``yes'' 
or ``no'' question would allow the NMS Stock ATS to identify itself to 
market participants as an ECN. An ATS that indicates ``yes'' to Part 
III, Item 15(a) would also be required to provide information in 
response to Part III, Item 15(b) and 15(c).
---------------------------------------------------------------------------

    \997\ See Proposal, supra note 2, at 81072.
---------------------------------------------------------------------------

16. Routing
    Part IV, Item 10(a) of proposed Form ATS-N would have required 
disclosures about outbound routing. We are adopting Part IV, Item 10(a) 
of proposed Form ATS-N with modifications, renaming the request as 
``Routing,'' and renumbering the request as Part III, Item 16 of 
adopted Form ATS-N.
    One commenter sought to understand whether the description of 
outbound routing required by the Item was limited to outbound routing 
performed as a functionality of the ATS itself rather than routing of 
client orders by the broker-dealer operator to third-party execution 
venues.\998\ The commenter believes that if this Item also applies to 
routing performed by the broker-dealer operator, all broker-dealers, 
whether or not they operate an ATS, should be required to publicly 
disclose routing information. Furthermore, the commenter also argues 
for ``required disclosure of routing by a broker-dealer to any 
affiliate ATS'' and of ``the method by which a broker-dealer interacts 
with the ATSs that it operates. '' \999\
---------------------------------------------------------------------------

    \998\ See Liquidnet Letter at 12.
    \999\ Id. We note that adopted Form ATS-N requires disclosure on 
both subjects. Part II, Item 1(a) of adopted Form ATS-N solicits 
information about the entry of orders and trading interest by the 
broker-dealer operator, including its business unit(s), into the NMS 
Stock ATS. Part II, Item 1(d) of adopted Form ATS-N solicits 
information about orders and trading interest in the NMS Stock ATS 
that can be routed to a trading center of the broker-dealer 
operator, which would include affiliates of the NMS Stock ATS, and 
if so, the NMS Stock ATS must provide information that is required 
in response to Part III, Item 16 of adopted Form ATS-N.
---------------------------------------------------------------------------

    As the commenter points out above, order handling and the routing 
of orders by the broker-dealer operator in its capacity as a broker-
dealer may be separate from routing of orders in the ATS to other 
execution venues. As noted above,\1000\ we did not intend to require 
broker-dealer operators to disclose information about their handling of 
customer orders when such orders are not routed to or residing in the 
NMS Stock ATS. In response to the commenter's concerns, the adopted 
Item does not request information about routing of orders and trading 
interest by the broker-dealer operator that are not routed to or 
residing in the NMS Stock ATS.
---------------------------------------------------------------------------

    \1000\ See supra Section V.D.15.
---------------------------------------------------------------------------

    We made several changes to Part IV, Item 10(a) of proposed Form 
ATS-N in response to comments (and adopted as Part III, Item 16). 
First, we are requiring an NMS Stock ATS to indicate whether orders and 
trading interest in the ATS can be routed to a destination outside the 
ATS, and if the answer to that question is ``yes,'' whether affirmative 
instructions from a subscriber must be obtained before their orders or 
trading interest is routed from the ATS. If the NMS Stock ATS indicates 
that ``yes'' instructions from a subscriber must first be obtained, the 
NMS Stock ATS will be required to describe the affirmative instruction 
and how the affirmative instruction is obtained. If instructions from a 
subscriber need not be first obtained, the NMS Stock ATS will be 
required to explain when orders in the NMS Stock ATS can be routed from 
the NMS Stock ATS (e.g., at the discretion of the broker-dealer 
operator).\1001\
---------------------------------------------------------------------------

    \1001\ We have consolidated the discussion of how orders can be 
removed from the NMS Stock ATS in Part III, Item 7(a)(vii) of 
adopted Form ATS-N.
---------------------------------------------------------------------------

    In Part III, Item 16 of adopted Form ATS-N, we are removing the 
proposed requirement to ``describe the circumstances'' of outbound 
routing more broadly, and instead, are now requiring, as applicable, 
that the NMS Stock ATS ``describe the affirmative instruction'' of the 
subscriber and ``explain how the affirmative instruction is obtained.'' 
This change is consistent with the instruction in the Proposal to 
``describe the circumstances,'' but provides more specific instruction. 
Moreover, if trading interest can be routed away from the NMS Stock ATS 
without the affirmative instruction of the subscriber, we are no longer 
limiting the alternative to be when it happens at the discretion of the 
broker-dealer, as proposed, but instead, are requiring an explanation 
of when orders can be routed from the NMS Stock ATS. We

[[Page 38856]]

believe that phrasing the request this way reflects that trading 
interest can be routed from the NMS Stock ATS in different ways and 
better accommodates potential future developments in the industry. We 
believe that the information in this Item will provide a subscriber 
with the necessary information to authorize routing and understand how 
its orders in the ATS can be routed from the ATS, and help prevent the 
subscriber from unknowingly agreeing to the routing of their trading 
interest.
    We are not adopting in Part III, Item 16 of Form ATS-N the proposed 
requirements that the NMS Stock ATS explain the means by which routing 
is performed, or that the NMS Stock ATS explain any differences among 
subscribers in the means by which trading interest is routed, as this 
could expand the scope of Form ATS-N beyond ATS activity and into the 
other broker-dealer functions of the broker-dealer operator.
17. Closing
    Part IV, Item 9(b) of proposed Form ATS-N would have required 
disclosures about the NMS Stock ATS's closing process. We did not 
receive specific comment on Part IV, Item 9(b) of proposed Form ATS-N. 
We are adopting Part IV, Item 9(b) with certain modifications discussed 
below, and renumbering the request as Part III, Item 17 (``Closing'') 
of adopted Form ATS-N. Part III, Item 17 is designed to inform market 
participants about whether an NMS Stock ATS uses any special procedures 
to match orders at the close of regular trading. The Item is designed 
to provide market participants with information about any special 
closing processes used by the NMS Stock ATS, particularly whether there 
are any order types used during the close.
    The vast majority of requests in Part III of adopted Form ATS-N 
relate to trading during regular hours. Therefore, when discussing 
differences between trading during the close and during regular hours, 
the NMS Stock ATS must discuss differences as compared to relevant 
information disclosed in Part III Items, including, among others, order 
types (Item 7), order interaction, priority, matching, and execution 
procedures (Item 11), segmentation (Item 13), and display (Item 15). We 
believe this information will be important for market participants to 
understand in evaluating whether participating in the closing process 
is consistent with their trading objectives.\1002\
---------------------------------------------------------------------------

    \1002\ As discussed in the Proposal, the Item would, for 
example, require disclosure of any procedures to match orders to set 
a single closing price to maximize liquidity and accurately reflect 
market conditions at the close of trading. See Proposal, supra note 
2, at 81077 (discussing closing auctions and orders designed to 
execute at the close of trading).
---------------------------------------------------------------------------

18. Trading Outside of Regular Trading Hours
    Part IV, Item 9(c) of proposed Form ATS-N would have required 
disclosures regarding after-hours trading. The Commission did not 
receive any comments regarding the substance of Part IV, Item 9(c) of 
proposed Form ATS-N. The Commission is adopting Part IV, Item 9(c) of 
proposed Form ATS with certain modifications, as discussed below, and 
relocating the request as Part III, Item 18 (``Trading Outside of 
Regular Trading Hours'') of adopted Form ATS-N.
    The Commission is merging requests from Part IV, Item 9(a), which 
requested information about pre-opening executions,\1003\ and Part IV, 
Item 9(c), which requested information about after-hours trading. We 
believe that the potential for redundant disclosures, as observed by 
commenters,\1004\ would be reduced by merging these two requests.
---------------------------------------------------------------------------

    \1003\ Part IV, Item 9(a) of proposed Form ATS-N requested the 
NMS Stock ATS 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.
    \1004\ See, e.g., SIFMA Letter at 20.
---------------------------------------------------------------------------

    This Item will require NMS Stock ATSs to indicate in Part III, 
Items 18(a) and 18(b) whether the ATS conducts trading outside regular 
trading hours, and indicate whether there are any differences between 
trading outside of regular trading hours and trading during regular 
hours. To the extent that there are differences, the NMS Stock ATS must 
describe those differences. Similar to Item 17 (requesting differences 
between the closing and regular trading hours), an NMS Stock ATS must 
discuss differences in trading outside of regular trading hours as 
compared to the relevant information disclosed in Part III Items, 
including, among others, order types (Item 7), order interaction, 
priority, matching, and execution procedures (Item 11), segmentation 
(Item 13), and display (Item 15). Many of the disclosures discussed 
elsewhere in Form ATS-N will relate to regular trading hours so the ATS 
can simply discuss any differences between trading during regular hours 
and trading outside regular trading hours in Part III, Item 18(b).
19. Fees
    Part IV, Item 12 of proposed Form ATS-N would have required 
disclosures about fees. We are adopting Part IV, Item 12 of proposed 
Form ATS-N with modifications, which are discussed below, and 
renumbering the request as Part III, Item 19 (``Fees'') of adopted Form 
ATS-N. Some commenters suggest that the Commission exercise restraint 
in the area of fees given that they are the product of negotiations 
between sophisticated financial institutions and leave to market 
competition the setting of appropriate fees.\1005\ Another commenter 
suggests that NMS Stock ATSs be allowed to voluntarily report their fee 
structure.\1006\
---------------------------------------------------------------------------

    \1005\ See UBS Letter at 8; LeveL ATS at 6 (stating that ATS 
subscribers are sophisticated counterparties that have a keen sense 
of the market for the services provided and are not in need of the 
fee disclosures proposed).
    \1006\ See STA Letter at 3-4.
---------------------------------------------------------------------------

    The Commission continues to believe that disclosures regarding fees 
on Form ATS-N are necessary and important, and should not be voluntary 
for NMS Stock ATSs. Fee disclosures on Form ATS-N are designed to allow 
all 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 incentives or disincentives for 
specific market participants or trading behaviors. As NMS Stock ATSs 
have become a significant source of liquidity in NMS Stocks,\1007\ we 
believe that disclosures about their fees are warranted as, in the 
Commission's experience, fees can be a primary factor for market 
participants in deciding where to route their orders and trading 
interest. Several commenters express support, on behalf of different 
types of market participants, for fee disclosures on Form ATS-N.\1008\
---------------------------------------------------------------------------

    \1007\ See supra Section II.A.1.
    \1008\ See ICI Letter at 10; HMA Letter at 18 (suggesting that 
disclosure of the details regarding fees (among other topics in part 
III) is essential for investors or routing brokers seeking to 
understand how the ATS works). See also SIFMA Letter at 25 (stating 
that a broad description of compensation mechanisms is appropriate 
and a description of the mechanisms and categories of fee structure 
would offer an appropriate level of clarity and transparency); KCG 
Letter at 7 (stating the Commission should require standard 
documents, including pricing schedules).
---------------------------------------------------------------------------

    In addition, given commenters' concerns that the use of the term 
``describe'' in Form ATS-N is vague and would lead to discursive 
disclosures and obscure key information,\1009\ the

[[Page 38857]]

Commission is providing additional specificity on the Item's 
requirements and more examples in the text of the Item. The Commission 
is adding to Part III, Item 19 requests that NMS Stock ATSs include in 
their descriptions: The structure of the fee, variables that impact the 
fee, and differentiation among types of subscribers, along with 
examples of responsive information included in a parenthetical in the 
text of each subpart.\1010\ The Item also would still require a range 
of fees as proposed.
---------------------------------------------------------------------------

    \1009\ See supra note 941 and accompanying text.
    \1010\ We are including examples of responsive information in 
parentheticals in the text of the item. For instance, for 
descriptions of the structure of the fee, the Commission is 
providing as examples a fixed fee, volume-based and transaction-
based fee structures. For the description of variables that may 
impact the fee, the Commission is providing as examples: The types 
of securities traded, block orders, and the form of connectivity to 
the ATS. For the description of the differentiation among types of 
subscribers for the fee, the Commission is providing as examples of 
the types of subscribers: Broker-dealers, institutional investors, 
and retail.
---------------------------------------------------------------------------

    One commenter recommends that the Commission require that any 
description of a differential fee structure contain enough information 
for a market participant to understand exactly which, or which level, 
of fees/rebates/charges apply to each type of subscriber or other 
person and the criteria that the NMS Stock ATS uses to sort subscribers 
into different fee categories so that market participants can assess 
eligibility requirements for different fee tiers.\1011\
---------------------------------------------------------------------------

    \1011\ See ICI Letter at 10.
---------------------------------------------------------------------------

    The Commission recognizes that the fee structures of NMS Stock ATSs 
can vary and that not all NMS Stock ATSs apply set tiers or categories 
of fees for subscribers; \1012\ however, the Commission agrees with the 
commenter that a market participant should have sufficient information 
to understand the fees for using the services of the NMS Stock ATS. 
Recognizing the various fees that can be charged by NMS Stock ATSs, the 
Commission is specifying in the fee request the types of information 
that an NMS Stock ATS must provide in response to the Commission's 
proposed request to describe its fees (e.g., the structure of the fees, 
variables that impact each fee, differentiation among types of 
subscribers, and the range of fees). These disclosures are designed to 
provide market participants with more insight regarding the fees 
charged so that they can better understand how fees may apply to them 
and assess how such fees may impact their trading strategies. This 
approach does not require NMS Stock ATSs to provide comprehensive fee 
schedules but still gives subscribers meaningful information about the 
fees the NMS Stock ATS charges.\1013\ Although the fees charged for NMS 
Stock ATS services may be individually negotiated between the broker-
dealer operator and the subscriber, the disclosures about the type of 
fees charged by the NMS Stock ATS are designed to help market 
participants discern how an NMS Stock ATS's fees are organized and 
compare that information across NMS Stock ATSs, which could reduce the 
search costs of market participants in deciding where to send their 
orders and trading interest. Relatedly, the Commission recognizes that 
a requirement to disclose the complete fee schedule for each subscriber 
may provide more information, but this would not be desirable or 
preferable given the fees for NMS Stock ATSs can be highly bespoke and 
specific to each subscriber.\1014\
---------------------------------------------------------------------------

    \1012\ See Liquidnet Letter at 12 (stating it has in place over 
1,500 subscriber agreements).
    \1013\ See SIFMA Letter at 25-26 (stating a description of the 
mechanisms and categories of fee structures would offer an 
appropriate level of clarity and transparency).
    \1014\ One commenter notes that it agrees with the Commission on 
this point, and states that the concept of a fixed fee schedule 
would not be practical or appropriate in this context. See Liquidnet 
Letter at 13.
---------------------------------------------------------------------------

    One commenter suggests that a description of the mechanisms and 
categories of fee structures would offer an appropriate level of 
clarity and transparency, and that the disclosure of the existence of 
rebates or commission relating to volume is workable, but a high/low 
range of fees or more client-specific descriptions affect registrants' 
ability to negotiate custom agreements with subscribers.\1015\ Part 
III, Item 19 of adopted Form ATS-N does not require or reveal customer-
specific information regarding the fees or terms and conditions of fee 
agreements that result in the high or low in the range of fees 
disclosed. Part III, Item 19 of adopted Form ATS-N requests the range 
of fees and does not require the NMS Stock ATS to disclose the name of 
the customer, or even the types of subscriber, who is the highest or 
lowest in the range.
---------------------------------------------------------------------------

    \1015\ See SIFMA Letter at 25-26.
---------------------------------------------------------------------------

    A commenter states that the Commission also should require an NMS 
Stock ATS to explain whether it discriminates among different types of 
subscribers in establishing fees, rebates, or other charges.\1016\ In 
Part IV, Item 12(b) of proposed Form ATS-N, we proposed that NMS Stock 
ATSs describe any differences if the fees, rebates, or other charges of 
the NMS Stock ATS were not the same ``for all subscribers and 
persons.'' We continue to believe that NMS Stock ATSs should be 
required to disclose differences in the treatment of subscribers; 
however, the Commission is changing Part III, Item 19 to require a 
description of any differentiation among ``types of subscribers'' 
because the Commission did not intend to require fee differences among 
individual subscribers. Rather, we believe that differences in fees, 
rebates and other charges among ``types of subscribers'' would be more 
informative to market participants about the fee structure of the ATS 
than disclosures of individual differences between subscribers, which 
could result from particular negotiations with individual subscribers. 
This information would allow subscribers to observe whether an NMS 
Stock ATS is offering preferential treatment among types of subscribers 
with regards to fees, and therefore, the information could aid them in 
deciding where to route their trading interest.
---------------------------------------------------------------------------

    \1016\ See ICI Letter at 10 (recommending NMS Stock ATSs explain 
whether they discriminate among different types of subscribers in 
establishing fees, rebates, or other charges).
---------------------------------------------------------------------------

    Another commenter suggests that the Commission should require NMS 
Stock ATSs to provide complete information about their sources of 
revenue, including revenue arrangements the ATS may have with other 
trading centers.\1017\ The commenter suggests funds and other market 
participants would use these disclosures to evaluate the potential for 
information leakage attendant to routing orders to a particular NMS 
Stock ATS or whether these arrangements may disadvantage subscribers of 
the ATS, including funds. We do not believe that disclosure of all of 
an ATS's sources of revenue would likely contribute more to 
subscribers' understanding of conflicts of interest than the 
combination of the disclosures in this Item and the disclosures in Part 
II of adopted the Form ATS-N, which include disclosures regarding ATS-
related activities of the broker-dealer operator and its affiliates, 
such as Part II, Item 4.\1018\
---------------------------------------------------------------------------

    \1017\ See id.
    \1018\ See supra Section V.C.4 (discussing any formal or 
informal arrangements between the Broker-Dealer Operator and a 
Trading Center to access the NMS Stock ATS services).
---------------------------------------------------------------------------

    Other commenters express various reasons for why they believe the 
Commission should not require some or all of the disclosures on fees of 
Part IV, Item 12 of proposed Form ATS-N. Commenters state that NMS 
Stock ATSs, and especially NMS Stock ATSs of multi-service broker-
dealers, may establish fees based on a number of factors, including the 
depth and breadth of a client relationship, or the full suite of 
brokerage services made available to

[[Page 38858]]

the client.\1019\ The commenters believe that because fees are set 
taking into account these other factors, any disclosures on the range 
of fees on the NMS Stock ATS would be misleading.\1020\ As discussed in 
the Proposal, the types of fees charged to use an NMS Stock ATS's 
services could influence whether a market participant subscribes to, or 
the extent to which it participates on, the NMS Stock ATS.\1021\ The 
Commission recognizes, as indicated by commenters, that fees charged 
for the use of the NMS Stock ATS services can be bundled with non-ATS 
services that the broker-dealer operator offers to subscribers of the 
ATS. While Part IV, Item 12 of proposed Form ATS-N request did not 
explicitly identify bundled service fees, the proposed request did 
require a description of any fees, rebates, or other charges of the NMS 
Stock ATS. As a type of fee for use of the services of the NMS Stock 
ATS, bundled service fees would have been responsive to Part IV, Item 
12 of proposed Form ATS-N.
---------------------------------------------------------------------------

    \1019\ See UBS Letter at 8; Morgan Stanley Letter at 4; STA 
Letter at 3-4; LeveL ATS Letter at 6.
    \1020\ See UBS Letter at 8; STA Letter at 3-4; Morgan Stanley 
Letter at 4.
    \1021\ See Proposal, supra note 2, at 81080.
---------------------------------------------------------------------------

    To avoid potential confusion about fees charged by an NMS Stock 
ATS, and to account for bundled service fees charged to a subscribers 
by multi-service broker-dealer operators of NMS Stock ATSs, the 
Commission is adding a separate and specific request to Part III, Item 
19(b) of adopted Form ATS-N. Specifically, the Commission is requiring 
that the NMS Stock ATS describe any bundled fees, including a summary 
of the bundled services and products offered by the broker-dealer 
operator or its affiliates, the structure of the fee, variables that 
impact the fee (including, for example, whether the particular broker-
dealer services selected would impact the fee), differentiation among 
types of subscribers, and range of fees. Part III, Item 19(b) is 
designed to allow market participants to better evaluate fees for 
bundled services that include access to the NMS Stock ATS. NMS Stock 
ATSs will be required to provide information, including the relevant 
services and products offered by the broker-dealer operator and its 
affiliates for each bundled fee offered, that will provide context to 
market participants with which to assess how fees could apply to them 
as subscribers.
    Another commenter states its understanding that the disclosures 
required would relate only to the fees that the ATS charges for its 
services, and not include brokerage services, because otherwise, it 
believes there would be unfair discrimination relative to broker-
dealers that do not operate an ATS.\1022\ To the extent that a broker-
dealer operator bundles its services with its NMS Stock ATS services, 
and the ATS services do not have an explicit fee, then the broker-
dealer operator would not be required to provide a range of fees 
charged for the bundled services. On the other hand, if a broker-dealer 
operator bundles its services with its NMS Stock ATS services and 
charges an explicit fee for the ATS services, then the fee for the ATS 
services should be taken into account for determining the range of fees 
under this Item. Further, if a broker-dealer operator sometimes bundles 
its services with its NMS Stock ATS services for certain subscribers, 
but charges a separate fee for ATS services, it would be required to 
provide the information responsive to this Item, including the range, 
for the separate fee for ATS services.
---------------------------------------------------------------------------

    \1022\ See Liquidnet Letter at 12.
---------------------------------------------------------------------------

    A commenter also suggests the Item be expressly limited to fees set 
by the ATS operator and not include fees from other affiliates or third 
parties (e.g., related to co-location).\1023\ Part III, Item 19(a) of 
adopted Form ATS-N covers charges to subscribers for their ``use of the 
NMS Stock ATS services.'' \1024\ The fee information disclosed in Part 
III, Item 19 of adopted Form ATS-N must include fees resulting from a 
subscriber's use of the NMS Stock ATS services that are charged by the 
broker-dealer operator, or a third party, such as a service provider to 
the NMS Stock ATS. The Item's required disclosures are not limited by 
the entity charging the fee; rather, if the fee is for use of the NMS 
Stock ATS services, then the Item's requests apply regardless of the 
entity charging the fee. Many broker-dealer operators today outsource 
some or all of the operations of the NMS Stock ATS to third parties 
(e.g., such as the matching engine). To the extent that subscribers are 
charged a fee by the third-party service provider of the NMS Stock ATS, 
the NMS Stock ATS would be required to disclose such fees in Part III, 
Item 19(a) of Form ATS-N.
---------------------------------------------------------------------------

    \1023\ See SIFMA Letter at 26.
    \1024\ The NMS Stock ATS services generally include those 
services used for the purpose of effecting transactions in NMS 
Stock, or for submitting, disseminating or displaying orders on the 
ATS. See 17 CFR 242.300(b).
---------------------------------------------------------------------------

    On the other hand, Part III, Item 19(a) of adopted Form ATS-N does 
not request information on fees charged for non-ATS services by a third 
party not in contract with the broker-dealer operator. If, for example, 
the NMS Stock ATS is located in a facility owned by a third party, and 
in order to co-locate to the NMS Stock ATS a subscriber would be 
required to lease physical space from the third-party facility owner, a 
fee for the space rental would not be required to be disclosed on Form 
ATS-N by the NMS Stock ATS. On the other hand, if an NMS Stock ATS 
provides co-location services for subscribers and charges a fee to 
those subscribers for the co-location services, such fee would be 
responsive to Part III, Item 19 of Form ATS-N. In addition, to the 
extent that a broker-dealer operator enters into an agreement or 
arrangement with a third party for that third party to provide a 
service of the NMS Stock ATS to subscribers and charge a fee that is 
passed back to the broker-dealer operator in any form, the broker-
dealer operator would be required to disclose that fee in response to 
Part III, Item 19 of Form ATS-N. In such a case, to prevent an NMS 
Stock ATS from circumventing disclosure otherwise responsive to Part 
III, Item 19(b) of adopted Form ATS-N, the pass-backed fee by the third 
party is a fee ``for the use of NMS Stock ATS services.''
    Another commenter suggests that clients are highly interested in 
understanding whether an ATS offers rebates to subscribers and would 
support the inclusion of this question.\1025\ In response to the 
commenter, the disclosure requests under Item 19 will contain a stand-
alone Item--Item 19(c)--which requests information about rebates and 
discounts of fees that are identified in subparts (a) and (b) of Item 
19. Item 19(c) requires information about rebates and discounts that is 
similar to that which is required for fees (e.g., the structure of the 
rebate or discount, variables that impact the rebate or discount, 
differentiation among types of subscribers, and range of rebate or 
discount).
---------------------------------------------------------------------------

    \1025\ See UBS Letter at 8. We proposed in Part IV, Item 12(a) 
of proposed Form ATS-N that the NMS Stock ATS describe ``any fees, 
rebates, or other charges'' of the NMS Stock ATS.
---------------------------------------------------------------------------

20. Suspension of Trading
    Part IV, Item 8 of proposed Form ATS-N would have required 
disclosures regarding any procedures governing trading during a 
suspension of trading, disruption or malfunction. The Commission is 
adopting Part IV, Item 8 with certain modifications, renaming it 
``Suspension of Trading,'' and renumbering the request to Part III, 
Item 20 in adopted Form ATS-N. Part III, Item 20 is designed to, for 
example, inform market participants of whether, among other things, an 
NMS Stock ATS

[[Page 38859]]

will continue to accept orders after a suspension, whether the NMS 
Stock ATS routes, holds, or continues to execute orders resting in the 
system prior to the suspension, and the type of notice provided to 
market participants during a suspension. Furthermore, as discussed in 
the Proposal,\1026\ one of the primary concerns of the Commission is 
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. 
Accordingly, it is important to fully understand what, if any, trading 
procedures an NMS Stock ATS would follow when trading is suspended or 
stopped. Consistent with the Proposal, we are adding the phrase 
``including the suspension of trading in individual NMS stocks'' to 
Item 20(a) to make clear that the procedures to suspend trading in an 
NMS stock by an NMS Stock ATS are required by this request.\1027\
---------------------------------------------------------------------------

    \1026\ See Proposal, supra note 2, at 81076.
    \1027\ Based on Commission experience, an NMS Stock ATS's 
procedures may include the suspension of trading in an NMS stock 
security to not trigger the requirements of Rule 301(b)(3) or Rule 
301(b)(5) of Regulation ATS. See Proposal, supra note 2, at 81104.
---------------------------------------------------------------------------

    We received two comments regarding Part IV, Item 8 of proposed Form 
ATS-N. One commenter suggests that this information would be better 
suited as a disclosure to subscribers rather than formally filed with 
the Commission and publicly disclosed.\1028\ We do not agree and 
believe that this information would allow non-subscribers to better 
evaluate their brokers' order routing practices and whether the routing 
of their orders to an NMS Stock ATS would achieve their trading or 
investment strategies.
---------------------------------------------------------------------------

    \1028\ See SIFMA Letter at 24-25.
---------------------------------------------------------------------------

    Another commenter requests that the Commission consider harmonizing 
any definitions used in the Item with those found in Regulation 
SCI.\1029\ As discussed in the Proposal, the Commission does not intend 
to alter or amend the requirements of Regulation SCI with this Item, 
nor does it intend to require NMS Stock ATSs to adopt specific 
procedures during a system disruption as it did in Regulation 
SCI.\1030\ Instead, we are requiring an NMS Stock ATS to disclose what 
procedures, if any, it follows when suspending or stopping trading so 
that market participants can better understand how their orders will be 
handled under those circumstances.
---------------------------------------------------------------------------

    \1029\ See UBS Letter at 8.
    \1030\ See Proposal, supra note 2, at 81076. We are removing 
references to ``system disruptions'' to mitigate any confusion with 
Regulation SCI. We believe this technical change does not change the 
substantive information required.
---------------------------------------------------------------------------

21. Trade Reporting
    Part IV, Item 13(a) of proposed Form ATS-N would have required 
disclosures regarding trade reporting. We are adopting Part IV, Item 
13(a) of proposed Form ATS-N with certain modifications discussed 
below, and renumbering the request as Part III, Item 21 of adopted Form 
ATS-N. One commenter suggests that the prompt to disclose ``any 
arrangements'' is broad and poses challenges to keep current and 
recommends it would be more useful to limit the requested arrangements 
to those that are material to or a core feature of the operations of 
the ATS.\1031\ In response to this comment, we are revising the request 
to focus on ``material'' arrangements for reporting transactions on the 
NMS Stock ATS. We recognize that there could be arrangements relevant 
to trade reporting, such as the specific software used to report, that 
play a minor role in the ATS's trade reporting and need not be 
disclosed. We believe that this change clarifies the Form ATS-N 
requirement and reduces potential burdens on NMS Stock ATSs while 
providing market participants with sufficient information to understand 
how their trade information will be reported.
---------------------------------------------------------------------------

    \1031\ See SIFMA Letter at 26.
---------------------------------------------------------------------------

    In addition, we are adding a phrase to the Item to make clear that 
the explanation of procedures or material arrangements required 
includes ``where an ATS reports transactions and under what 
circumstances.'' We believe this language will help NMS Stock ATSs 
better understand what would be responsive to Part III, Item 21 of 
adopted Form ATS-N and focus their responses accordingly, and is 
consistent with the request in Part IV, Item 13(a) of proposed Form 
ATS-N. For example, the NMS Stock ATS will be required to disclose the 
SRO to which it reports transactions, and any alternative trade 
reporting destinations, if applicable. Information about where an NMS 
Stock ATS reports transactions and under what circumstances would have 
been responsive to Part IV, Item 13(a) of proposed Form ATS-N, which 
required the NMS Stock ATS to ``describe any arrangements or procedures 
for reporting transactions on the NMS Stock ATS.'' The addition of the 
phrase to Item 21(a) clarifies those procedures that would be 
responsive to the request. Finally, we are revising the proposed Item 
to clarify that the NMS Stock ATS explain any ``procedures and material 
arrangements'' (emphasis added), instead of ``procedures or material 
arrangements'' (emphasis added). We intended that a description of both 
procedures and material arrangements would provide a complete and 
comprehensive disclosure of the most important aspects of the NMS Stock 
ATS's trade reporting.
22. Clearance and Settlement
    Part IV, Item 13(b) of proposed Form ATS-N would have required 
disclosures regarding clearance and settlement. The Commission is 
adopting Part IV, Item 13(b) of proposed Form ATS-N with certain 
modifications discussed below, and renumbering it as Part III, Item 22 
of adopted Form ATS-N. The integrity of the trading markets depends on 
the prompt and accurate clearance and settlement of securities 
transactions.\1032\ Part III, Item 22 is designed to help market 
participants understand the measures the NMS Stock ATS takes to 
facilitate clearance and settlement of transactions, including 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.\1033\
---------------------------------------------------------------------------

    \1032\ See Proposal, supra note 2, at 81081.
    \1033\ Id.
---------------------------------------------------------------------------

    One commenter suggests that the prompt to disclose ``any 
arrangements'' is broad and poses challenges to keep current and 
recommends it would be more useful to limit the requested arrangements 
to those that are material to or a core feature of the operations of 
the ATS.\1034\ In response to this comment, and for similar reasons to 
those stated above for Part III, Item 21 (``Trade Reporting''), we are 
revising this request to focus the Item on ``material'' arrangements to 
facilitate the clearance and settlement of transaction on the NMS Stock 
ATS. For example, an arrangement under which a third party would have a 
role in clearance and settlement on the NMS Stock ATS may constitute a 
material arrangement that could trigger the disclosure requirement 
under Part III, Item 22. Limiting the explanation required to material 
arrangements will reduce the burden on

[[Page 38860]]

NMS Stock ATSs while at the same time still allowing market 
participants to understand and more easily compare clearing 
arrangements required across NMS Stock ATSs.
---------------------------------------------------------------------------

    \1034\ See SIFMA Letter at 26.
---------------------------------------------------------------------------

    For similar reasons as stated above for Part III, Item 21 (``Trade 
Reporting''), we are revising this request to state that the NMS Stock 
ATS describe any ``procedures and material arrangements'' (emphasis 
added), instead of ``procedures or material arrangements'' (emphasis 
added). In addition, we are removing the phrase ``undertaken by the NMS 
Stock ATS'' from the proposed requirement. NMS Stock ATSs may engage a 
third party to facilitate the clearance and settlement of transactions 
on the NMS Stock ATS, and we do not intend to limit the procedures and 
material arrangements explained to only those specifically performed by 
the NMS Stock ATS.
23. Market Data
    Part IV, Item 11 of proposed Form ATS-N would have required 
disclosures regarding market data. The Commission is adopting Part IV, 
Item 11 of proposed Form ATS-N with certain modifications and 
renumbering the request as Part III, Item 23 of adopted Form ATS-N. 
Market data is a critical component to understanding the operations of 
an NMS Stock ATS. For instance, the market data received by an NMS 
Stock ATS might affect the price at which orders and trading interest 
is prioritized and executed in the ATS, including orders that are 
pegged to an outside reference price. The source of an NMS Stock ATS's 
market data could impact the execution price received by a subscriber. 
Disclosures about the NMS Stock ATS's sources of market data, and how 
the ATS uses such data, can help to inform market participants about 
how their orders would be handled and executed by the NMS Stock ATS.
    One commenter recommends the elimination of prompts that it 
suggests request proprietary, sensitive, or duplicative information. 
The commenter instead recommends a general, high-level description 
regarding the determination of NBBO and pricing.\1035\ As routing is a 
function performed by a broker-dealer and outside the ATS, the 
Commission is revising the request to make clear that an NMS Stock ATS 
would not be required to provide information about the market data that 
the broker-dealer operator uses to route orders and trading interest 
from the NMS Stock ATS to away destinations. Part III, Item 23 would 
require information, however, about the ATS's use of market data to 
determine when resting orders and trading interest will be removed from 
inside the NMS Stock ATS because these orders and trading interest 
reside inside the ATS and the data used to act on them could impact 
their execution.
---------------------------------------------------------------------------

    \1035\ See SIFMA Letter at 25.
---------------------------------------------------------------------------

    An NMS Stock ATS would also be required to provide information 
about how the ATS uses market data to provide the services it offers. 
Among other things, for example, the NMS Stock ATS would need to 
disclose in response to Part III, Item 23, of adopted Form ATS-N, its 
use of market data to display, price, prioritize, execute, and remove 
trading interest. As part of its explanation for how the NMS Stock ATS 
uses market data, the ATS would be required to specify, if applicable, 
when the ATS may change between its use of different sources of market 
data to provide its services.
    Given commenters' concerns that the use of the term ``describe'' in 
Form ATS-N is vague and would lead to discursive disclosures and 
obscure key information,\1036\ the Commission is providing additional 
examples in the text of the Item to give NMS Stock ATSs more guidance 
on the types of information that would be responsive to the request, 
including how the ATS determines the NBBO and protected quotes in the 
Item.
---------------------------------------------------------------------------

    \1036\ See supra note 941.
---------------------------------------------------------------------------

    One commenter believes that the form should require annual 
disclosures of an NMS Stock ATS's approximate latency (in microseconds) 
to receive market data feeds, assemble the NBBO, and deliver the 
updated NBBO to the matching engine.\1037\ As discussed elsewhere in 
relation to comments requesting quantitative data,\1038\ the Commission 
is not adopting ongoing reporting requirements for NMS Stock ATSs to 
report performance metrics of their system and therefore not requiring 
NMS Stock ATS to disclose this information. The information above could 
be important to market participants because they could be concerned, 
for example, about price impacts on their trading interest if the NMS 
Stock ATS compiles the NBBO slower than other trading venues, or that 
they would trade on stale prices, as well as the potential for 
information leakage. To address the commenter's concern, the Commission 
is providing guidance to NMS Stock ATSs that, in response to Part III, 
Item 23, the NMS Stock ATS should explain how market data is received 
by the ATS, compiled, and delivered to the matching engine. For 
example, among other possible arrangements, the NMS Stock ATS could 
explain in response to the Item that market data is received by the 
broker-dealer operator and assembled there, and subsequently delivered 
to the matching engine, or that market data is sent directly to the 
matching engine, which normalizes the data for its use.
---------------------------------------------------------------------------

    \1037\ See HMA Letter at 19.
    \1038\ See Section V.D.13 (discussing why the Commission is 
requiring narrative responses instead of a quantitative component, 
such as the percentage of orders and trades per segmented class), 
and V.D.26 (discussing why the Commission is requiring narrative 
responses instead of quantitative data from NMS Stock ATSs).
---------------------------------------------------------------------------

24. Order Display and Execution Access
    Part IV, Item 14 of proposed Form ATS-N would have required 
disclosures regarding order display and execution access pursuant to 
Rule 301(b)(3). The Commission is adopting Part IV, Item 14 in proposed 
Form ATS-N, with certain modifications, and renumbering this Item as 
Part III, Item 24 in adopted Form ATS-N.
    One commenter recommends eliminating this request altogether on the 
grounds that it is unclear how subscribers would benefit from the 
detailed information under this Item or how it would be used.\1039\ The 
Commission does not agree. As noted in the Proposal, 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 the order display requirements.\1040\ Thus, the 
commenter's suggestion that the Item is more appropriate in the context 
of a Commission examination would not remedy the current lack of notice 
to the public once the NMS Stock ATS triggers the order display 
requirement. This notice would inform the Commission and the public 
whether an NMS Stock ATS is subject to Rule 301(b)(3). Removing Part 
IV, Item 14 (adopted as Part III, Item 24) would forego the benefit to 
market participants of knowing when an NMS Stock ATS has become a 
significant source of liquidity in an NMS stock and how they can access 
applicable quotations of that ATS. The commenter maintains, but does 
not describe how, the required disclosure would undermine the NMS Stock 
ATS's subscriber access criteria, and we do not agree that the required 
disclosure would do so.
---------------------------------------------------------------------------

    \1039\ See SIFMA Letter at 27.
    \1040\ See Proposal, supra note 2, at 81082.
---------------------------------------------------------------------------

    We recognize that an NMS Stock ATS may not be subject to Rule 
301(b)(3)(ii) of Regulation ATS even if the ATS displays subscriber 
orders in an NMS stock to any person (other than employees of the ATS) 
(Rule 301(b)(3)(i)(A)), and executes 5% or

[[Page 38861]]

more of the average daily trading volume in that NMS stock as reported 
by an effective transaction reporting plan during at least four of the 
preceding six calendar months (Rule 301(b)(3)(i)(B)).\1041\ If an NMS 
Stock ATS satisfies the Rule 301(b)(3)(i) threshold, the ATS must also 
meet the criteria of Rule 301(b)(3)(ii) to be subject to the 
requirements of Rules 301(b)(3)(ii) and (iii). As proposed, Part IV, 
Item 14 of Form ATS-N would have required that an NMS Stock ATS that 
meets the threshold requirements of Rule 301(b)(3)(i), but is not 
subject to Rules 301(b)(3)(ii) and (iii), to provide information about 
how they display and provide execution access. This was not the 
Commission's intended result. Rather, the Commission intended for an 
NMS Stock ATS that is subject to Rule 301(b)(3)(ii) and (iii) to 
provide the information that the Commission proposed in Part IV, Item 
14(a)-(c) of proposed Form ATS-N. Therefore, the Commission is 
modifying the disclosure requirement of this Item and relocating it to 
Part III, Item 24 of Form ATS-N. As adopted, Part III, Item 24(a) of 
Form ATS-N asks if the NMS Stock ATS meets the threshold requirements 
of Rule 301(b)(3)(i) of Regulation ATS, and, if so, whether the NMS 
Stock ATS is required to comply with Rule 301(b)(3)(ii) of Regulation 
ATS (i.e., does the ATS display to more than one person in the system). 
If the NMS Stock ATS is required to comply with Rule 301(b)(3)(ii), 
Part III, Item 24(b) requires the NMS Stock ATS to provide the 
information that the Commission proposed in Part IV, Item 14(a)-(c) of 
proposed Form ATS-N (i.e., the ticker symbol of the NMS stocks 
displayed, information about how the ATS displays such orders, and 
information about how the ATS provides access to such orders).\1042\
---------------------------------------------------------------------------

    \1041\ See Liquidnet Letter at 13-14 (stating that the ``order 
display requirement of [Rule 301(b)(ii)] only applies where orders 
are `displayed to more than one person in the [ATS]'' such that the 
disclosure obligation of proposed Part IV, Item 14 would only apply 
where an ATS displays orders to more than one subscriber in 
securities where it has exceeded the applicable 5% threshold).
    \1042\ If the NMS Stock ATS responds ``no'' to Part III, Item 
24(a) it will not be required to respond to Item 24(b), and if it 
responds ``yes'' to Item 24(a) but ``no'' to Item 24(b), it will not 
be required to provide any additional information in response to 
Item 24.
---------------------------------------------------------------------------

    To ensure consistency with Rule 301(b)(3) of Regulation ATS, the 
Commission is making minor modifications to the request to better 
comport with requirements of Rule 301(b)(3), and in response to the 
commenter's concerns regarding proposed Form ATS-N's disclosure 
requirements for NMS Stock ATSs that meet the threshold requirements of 
Rule 301(b)(3)(i), but may not be subject to Rules 301(b)(ii) and 
(iii).\1043\
---------------------------------------------------------------------------

    \1043\ See Liquidnet Letter at 13-14.
---------------------------------------------------------------------------

25. Fair Access
    Part IV, Item 15 of proposed Form ATS-N would have required 
disclosures regarding the fair access requirement of Rule 301(b)(5). 
The Commission is adopting Part IV, Item 15 of proposed Form ATS-N, 
with certain modifications, and renumbering this Item as Part III, Item 
25 in adopted Form ATS-N. The Commission received comment recommending 
the elimination of the request altogether on the grounds that it is 
unclear how subscribers would benefit from the detailed information 
under the Item or how it would be used.\1044\
---------------------------------------------------------------------------

    \1044\ See SIFMA Letter at 27.
---------------------------------------------------------------------------

    The Commission does not agree for the same reason discussed above 
in connection with Part III, Item 24. As noted in the Proposal, 
although triggering the fair access provision requires the NMS Stock 
ATSs to provide certain information confidentially to the Commission 
under Exhibit C of Form ATS-R,\1045\ there is no mechanism under which 
an ATS must notify market participants after it has triggered the fair 
access threshold under the current regulatory regime for ATSs.\1046\ 
Removing Part IV, Item 15 of proposed Form ATS-N (adopted Part III, 
Item 25) as suggested by the commenter, would forego the benefit to 
market participants of knowing when an NMS Stock ATS has become a 
significant source of liquidity in an NMS stock and must comply with 
fair access requirements of Rule 301(b)(5). We believe that the 
information that an NMS Stock ATS will be required to disclose pursuant 
to Part III, Item 25 will allow market participants to assess whether 
fair access is in fact being granted by NMS Stock ATSs that meet the 
fair access threshold of Rule 301(b)(5), in part by making publicly 
available a description of the NMS Stock ATS's written standards for 
granting access. In addition, the commenter mentions that, but does not 
describe how, the required disclosure would undermine the NMS Stock 
ATS's subscriber access criteria.
---------------------------------------------------------------------------

    \1045\ See Proposal, supra note 2, at 81082, n.502. An ATS that 
meets any of the trading volume thresholds set forth in Rule 
301(b)(5)(i), must comply with the requirements of Rule 
301(b)(5)(ii) (including the requirement to disclose to the 
Commission on Form ATS-R the information required by Rule 
301(b)(5)(ii)(D)), unless it meets the exception set forth in Rule 
301(b)(5)(iii).
    \1046\ See Proposal, supra note 2, at 81082.
---------------------------------------------------------------------------

    Similar to Part IV, Item 14 of proposed Form ATS-N as discussed 
above,\1047\ Part IV, Item 15 of proposed Form ATS-N would have applied 
to an NMS Stock ATS that meets the threshold requirements of Rule 
301(b)(5)(i), but is not required to comply with Rule 301(b)(5)(ii). 
The Commission intended for an NMS Stock ATS to provide this 
information only if it is required to comply with Rule 301(b)(5)(ii). 
Therefore, the Commission is modifying the disclosure requirement of 
this Item and relocating it to Part III, Item 25 of adopted Form ATS-N. 
As adopted, Part III, Item 25(a) of Form ATS-N asks if the NMS Stock 
ATS meets the threshold requirements of Rule 301(b)(5)(i)(A) of 
Regulation ATS and if so, whether the NMS Stock ATS is required to 
comply with Rule 301(b)(5)(ii) of Regulation ATS (i.e., the ATS does 
not meet the exception set forth in Rule 301(b)(5)(iii)). If the NMS 
Stock ATS is required to comply with Rule 301(b)(5), Part III, Item 
25(b) requires the NMS Stock ATS to provide the information that the 
Commission proposed in Part IV, Item 15(a) and 15(b) of proposed Form 
ATS-N (i.e., the ticker symbol of each NMS stock and a description of 
the ATS's written standards for granting access to trading on the 
ATS).\1048\
---------------------------------------------------------------------------

    \1047\ See supra Section V.D.24.
    \1048\ If the NMS Stock ATS responds ``no'' to Part III, Item 
25(a), it will not be required to respond to Item 25(b), and if it 
responds ``yes'' to Item 25(a) but ``no'' to Item 25(b), it will not 
be required to provide any additional information in response to 
Item 25.
---------------------------------------------------------------------------

    To ensure consistency with Rule 301(b)(5) of Regulation ATS, the 
Commission is making minor modifications to the request to better 
comport with requirements of Rule 301(b)(5), and for consistency with 
the modifications the Commission is making to Part III, Item 24 
described above.
26. Aggregate Platform-Wide Data; Trading Statistics
a. Disseminated Aggregated Platform-Wide Data
    Part IV, Item 16 of proposed Form ATS-N would have required 
disclosures regarding market quality statistics published or provided 
to subscribers. The disclosure requests in Part IV, Item 16 of proposed 
Form ATS-N are now contained in Part III, Item 26 of adopted Form ATS-
N.
    We received several comments on Part IV, Item 16 of proposed Form 
ATS-N. Some commenters express concerns about the potential effects 
that the public disclosure of the information under Part IV, Item 16 
would have on the flow of information to

[[Page 38862]]

subscribers.\1049\ One commenter expresses concern that the proposed 
requirements of Part IV, Item 16 would have made the process of 
providing information requested by customers more difficult, noting 
that it receives information requests on an ongoing basis from traders 
at more than 800 firms.\1050\ Another commenter questions the value 
that the snapshot disclosed under Part IV, Item 16 would have for the 
general public, and states that adopting Part IV, Item 16 as proposed 
would cause NMS Stock ATSs to stop sharing some categories of 
information with clients.\1051\
---------------------------------------------------------------------------

    \1049\ See SIFMA Letter at 27; Liquidnet Letter at 15.
    \1050\ See Liquidnet Letter at 15.
    \1051\ See SIFMA Letter at 27.
---------------------------------------------------------------------------

    We continue to believe that it is appropriate to require an NMS 
Stock ATS to make public aggregate, platform-wide order flow and 
execution statistics it already otherwise collects and publishes or 
provides to one or more subscribers to the NMS Stock ATS. We believe 
that an NMS Stock ATS may choose to create and publish or provide to 
one or more subscribers or persons information concerning order flow 
and execution quality for different reasons. Certain performance 
metrics and statistics may be important factors for market participants 
in comparing and selecting an ATS that is most appropriate for their 
investment objectives.
    We acknowledge a commenter's point that that these disclosures 
might limit communication between NMS Stock ATSs and their participants 
to the extent that an NMS Stock ATS chooses to cease providing such 
statistics to subscribers due to the Form ATS-N requirements.\1052\ 
However, we believe that only a few NMS Stock ATSs would take this type 
of action because such ATSs would have already chosen to distribute 
such statistics to outside persons, thus triggering the requirements of 
Item 26. Furthermore, we believe that the benefits of this disclosure--
requiring that all market participants have an equal opportunity to 
analyze aggregate platform-wide order flow and execution data that is 
distributed by an NMS Stock ATS--justify the potential cost of some 
ATSs choosing to no longer distribute such statistics to select 
subscribers on their platforms.
---------------------------------------------------------------------------

    \1052\ See id.
---------------------------------------------------------------------------

    Another commenter believes this request should not require the 
disclosure of ``bespoke'' statistics for a subscriber.\1053\ The 
commenter is concerned that if an NMS Stock ATS has to amend its Form 
ATS-N each time it receives a subscriber's request for additional 
information, it will not provide investors with additional information; 
accordingly, the commenter suggests revising Part IV, Item 16 in a way 
that would not discourage an NMS Stock ATS from providing additional 
market quality information to investors. We share the concern that if 
an NMS Stock ATS is compelled to amend its Form ATS-N each time it 
receives a request for additional information from a market 
participant, it will not provide investors with this information. Item 
26, however, would not require an NMS Stock ATS to amend its Form ATS 
every time it receives a data request. As explained in the Proposal, to 
comply with this request, an NMS Stock ATS would only be required to 
file a Form ATS-N updating amendment on a quarterly basis.\1054\ We are 
not modifying the language or substantive requirements in adopted Form 
ATS-N. Rather, to provide greater clarity regarding when and how NMS 
Stock ATSs are required to respond to Item 26(a), we are adding an 
instruction to Form ATS-N to state that an NMS Stock ATS shall file a 
Form ATS-N amendment pursuant to Rule 304(a)(i)(2)(B) of Regulation ATS 
to provide information in response to Item 26(a). Furthermore, as 
explained above, the benefits of this disclosure justify the potential 
cost of some ATSs choosing to no longer distribute such statistics to 
select subscribers on their platforms.
---------------------------------------------------------------------------

    \1053\ See MFA/AIMA Letter at 5.
    \1054\ See Proposal, supra note 2, at 81084. As also explained 
in the Proposal, if, for example, an NMS Stock ATS publishes or 
provides a particular statistic on a daily basis, the NMS Stock ATS 
would include in Exhibit 4 of adopted Form ATS-N 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). 
See id. at n.512. If an NMS Stock ATS publishes or provides a 
particular statistic weekly, the NMS Stock ATS would be required to 
include in Exhibit 4 of adopted Form ATS-N 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). See id.
---------------------------------------------------------------------------

    In addition, one commenter believes that broker-dealer operators 
and their affiliated broker-dealers should be permitted to respond to 
individualized questions from subscribers and to continue to provide 
customized reports in the course of responding to those individualized 
questions without attendant Form ATS-N revisions or amendment 
requirements.\1055\ This commenter states that without clarification 
regarding how individualized or custom reports are to be treated, this 
disclosure requirement could potentially introduce misleading or skewed 
information into the public arena, which could undermine the 
transparency goals of the proposed rules.\1056\ Similarly, one 
commenter states that the Commission should clarify that Part IV, Item 
16 would not apply when an NMS Stock ATS provides data to a customer 
relating to that customer's specific usage of the ATS.\1057\ The 
commenter states that institutions must have access to this type of 
information to fulfill their best execution obligations, but making 
this type of information public could compromise an institution's 
anonymity.\1058\ We note that Part III, Item 26 of adopted Form ATS-N 
requires only aggregate platform-wide data and, thus, would not apply 
when an NMS Stock ATS provides a participant with individualized or 
custom reports containing data relating to that participant's specific 
usage of the ATS.
---------------------------------------------------------------------------

    \1055\ See SIFMA Letter at 27.
    \1056\ See id.
    \1057\ See Liquidnet Letter at 16.
    \1058\ See id.
---------------------------------------------------------------------------

    Commenters also recommend changes and/or other clarifications to 
the requests under Part IV, Item 16 of proposed Form ATS-N. One of 
these commenters recommends that the Commission eliminate the public 
disclosure requirements under Item 16 and instead propose a revised 
report on aggregate order flow and execution that is to be filed on an 
annual and confidential basis with the Commission as an exhibit to Form 
ATS-N.\1059\ As noted above, we are adopting the proposed disclosure 
requests, as the public disclosure of the material encompassed by Part 
IV, Item 16 of proposed Form ATS-N will benefit market participants.
---------------------------------------------------------------------------

    \1059\ See SIFMA Letter at 28.
---------------------------------------------------------------------------

    Another commenter recommends revising Part IV, Item 16 of proposed 
Form ATS-N to only mandate the disclosure of the required market 
quality statistics when the NMS Stock ATS publishes or otherwise 
provides such statistics to a substantial portion of its subscribers 
(e.g., 10% or more).\1060\ As explained above, we believe that there is 
a strong policy objective behind ensuring that the information 
encompassed by Part III, Item 26 of adopted Form ATS-N is available to 
a wide array or market participants. We believe that setting a 
threshold for when these disclosure requirements are

[[Page 38863]]

triggered would not advance this policy objective because an NMS Stock 
ATS would be able to limit distribution of the statistics encompassed 
by Part II, Item 26 of adopted Form ATS-N to a select number of 
participants on the ATS.
---------------------------------------------------------------------------

    \1060\ See MFA/AIMA Letter at 5; see also 17 CFR 242.605 
(requiring market centers, which include ATSs, to make available for 
each calendar month an electronic report on certain categories of 
order execution information).
---------------------------------------------------------------------------

    As an alternative to the proposed requirements for the disclosure 
of aggregate platform-wide statistics on Form ATS-N, a commenter 
recommends that the Commission designate specific execution statistics 
for all ATSs to provide.\1061\ However, if the Commission were to adopt 
the requests of Part IV, Item 16 as proposed, the commenter believes 
that the Commission should clarify that trade-specific data would not 
be subject to this filing requirement, including pre-trade and post-
trade transaction cost analyses. The commenter also requests 
clarification that this disclosure request only covers execution 
quality statistics and that other types of statistics are not included. 
By way of example, the commenter believes that disclosing the 
percentage of customers that have used a specific product or product 
feature would not trigger the requirements of Part III, Item 26 because 
that information would not be considered a market quality statistic. 
Finally, the commenter believes that NMS Stock ATSs should be permitted 
to file the relevant statistics under Part III, Item 26 without filing 
any associated communication to a specific customer (such as the other 
contents of an email containing these statistics or a questionnaire 
submitted by the customer), as this could compromise customer 
anonymity.
---------------------------------------------------------------------------

    \1061\ See Liquidnet Letter at 15. We are not expanding the 
regulatory regime of Regulation ATS to require the public disclosure 
of specific, standardized statistics for ATSs. See also infra 
Section V.D.26.b.
---------------------------------------------------------------------------

    We confirm that Part III, Item 26 of adopted Form ATS-N only 
requires the disclosure of order flow and execution statistics, and 
that trade-specific data that does not include aggregate, platform-wide 
information would not be covered by this request. We note, however, 
that whether or not a specific type of statistic should be categorized 
as an order and execution statistic or considered aggregate, platform-
wide data will depend on the nature of the specific statistics being 
compiled by the NMS Stock ATS. An NMS Stock ATS should independently 
evaluate any statistics that it compiles and distributes to determine 
whether they are responsive to this disclosure request. We also agree 
that protecting customer anonymity should be a priority with any public 
disclosure under this Item, and thus, an ATS would not be required to 
publicly file customer communications associated with the responsive 
statistics.
    While we are not changing the substance of the proposed data 
request being adopted in Part III, Item 26, we are making technical 
modifications to improve the means by which the disclosures are filed 
on Form ATS-N. We believe that these modifications will make it easier 
for market participants to review and compare the filed information. In 
addition to changing the proposed request into a ``yes'' or ``no'' 
question in adopted Form ATS-N, Part III, Item 26 requires the NMS 
Stock ATS to attach both the responsive statistics and its explanation 
of the categories or metrics of those statistics as Exhibits 4 and 5, 
respectively, rather than including such information as part of the 
form, as was proposed. We believe it will be easier for market 
participants to review the disclosures as stand-alone documents than it 
would be if they were filed and publicly posted as narratives in the 
form. Also, in lieu of filing Exhibits 4 and 5, the NMS Stock ATS may 
certify that the information requested under Exhibits 4 and 5 is 
available at the website provided in Part I, Item 5 of the form and is 
accurate as of the date of the filing.
b. Other Standardized Statistical Disclosures
    In the Proposal, we solicited 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.\1062\ Several commenters believe that the 
Commission should add additional public statistical disclosure 
requirements to the ATS regulatory regime.\1063\ We believe that it is 
appropriate to take an incremental approach to the disclosure of 
additional market statistics. At this time, we believe it is 
appropriate to only require NMS Stock ATSs to provide to all market 
participants--via public disclosure on Form ATS-N--aggregate, platform 
wide order flow and execution statistics that they already collect and 
distribute and that would be encompassed by adopted Item 26. 
Accordingly, we are not adopting rules to require NMS Stock ATSs or 
national securities exchanges to report quantitative data above what 
these trading centers are already required to report under current 
federal securities laws.\1064\
---------------------------------------------------------------------------

    \1062\ See Proposal, supra note 2, at 81084-85.
    \1063\ See, e.g., T. Rowe Price Letter at 1 (recommending that 
ATSs be required to collect and disclose statistics about the 
percentage of volume executed in block and demi-block sizes, 
percentage of volume executed relative to national best bid/offer 
(i.e., near, far, midpoint, and intra-spread), trade size and market 
cap distribution, and aggregate statistics regarding 
counterparties); Citadel Letter at 4 (advocating for the Commission 
to require the reporting of end-of-day trade information that the 
commenter believes would bring greater transparency to market 
participants); HMA Letter at 22 (recommending that ATSs be required 
to collect and disclose statistics about Order Trading and 
Descriptive Statistics, Subscriber Characteristics, and ATS 
Relationship and Trading Statistics); Anonymous at 1 (stating that 
the same data produced by national securities exchanges should also 
be provided by ATSs, including transactional short sale data); and 
Liquidnet Letter at 16 (recommending that ATSs be required to 
publicly report all individual ATS executions on an attributed 
basis, which could be subject to a suitable delay period, such as 30 
days).
    \1064\ See 17 CFR 242.605 and 17 CFR 242.606.
---------------------------------------------------------------------------

    We also received comments advocating that this rulemaking include 
amendments to Rule 605 of Regulation NMS.\1065\ Other commenters 
recommend enhancing the disclosure requirement of Rule 606 of 
Regulation NMS.\1066\ Should we decide to take action with respect to 
the reporting of additional market quality data under Rule 605, we 
would do so in a separate rulemaking. Additionally, a separate 
rulemaking has been proposed to amend Rule 606 by requiring additional 
disclosures by broker-dealers to customers about the routing of their 
institutional orders.\1067\ We are currently considering the proposal 
and comments received.
---------------------------------------------------------------------------

    \1065\ See 17 CFR 242.605. Rule 605 generally requires a market 
center that trades NMS stocks to make available to the public 
monthly electronic execution reports that include uniform 
statistical measures of execution quality. See HMA Letter at 20; 
Consumer Federation of America Letter at 7; Markit Letter at 5-6.
    \1066\ 17 CFR 242.606. Rule 606 of Regulation NMS requires every 
broker or dealer to make publicly available for each calendar 
quarter a report on its routing of non-directed orders in NMS 
securities during that quarter. See Markit Letter at 6-7; ICI Letter 
at 8.
    \1067\ See Securities Exchange Act Release No. 78309 (July 13, 
2016), 81 FR 49432 (July 27, 2016).
---------------------------------------------------------------------------

VI. Amendments to Rule 301(b)(10) and Rule 303(a)(1) for Written 
Safeguards and Written Procedures To Protect Confidential Trading 
Information

    Current Rule 301(b)(10) of Regulation ATS \1068\ 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.\1069\ Rule 301(b)(10), however, does not currently require 
that the safeguards and procedures

[[Page 38864]]

mandated under Rule 301(b)(10) be memorialized in writing.
---------------------------------------------------------------------------

    \1068\ See 17 CFR 242.301(b)(10).
    \1069\ See Regulation ATS Adopting Release, supra note 3, at 
70879.
---------------------------------------------------------------------------

    We proposed to amend Rule 301(b)(10)(i) to require that all ATSs 
(including both NMS Stock ATSs and non-NMS Stock ATSs) adopt 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 
Regulation ATS or any other applicable rules,\1070\ and implement 
written standards controlling employees of the ATS trading for their 
own accounts.\1071\ In addition, proposed Rule 301(b)(10)(ii) would 
require that the oversight procedures, which an ATS adopts and 
implements to ensure that the above safeguards and procedures are 
followed, be in writing.\1072\
---------------------------------------------------------------------------

    \1070\ See Rule 301(b)(10)(i)(A).
    \1071\ See Rule 301(b)(10)(i)(B).
    \1072\ See Rule 301(b)(10)(ii).
---------------------------------------------------------------------------

    We received five comments on the proposed amendment to Rule 
301(b)(10).\1073\ Four commenters indicate that they support the 
requirement that ATSs memorialize safeguards and procedures in writing 
as proposed.\1074\ An additional commenter does not object to the 
Commission's proposal to require that an ATS's procedures to protect 
confidential information be memorialized in writing.\1075\
---------------------------------------------------------------------------

    \1073\ See ICI Letter at 10; MFA/AIMA Letter at 6; HMA Letter at 
23; STANY Letter at 2; Liquidnet Letter at 17. See also Investor 
Advocate Letter at 2.
    \1074\ See ICI Letter at 10; MFA/AIMA Letter at 6; HMA Letter at 
23; STANY Letter at 2.
    \1075\ See Liquidnet Letter at 17. In addition, this commenter 
expresses concern that the requirements of Regulation ATS relating 
to protection of confidential information could be interpreted in a 
manner that would be harmful to long-term investors by prohibiting 
broker-dealers that operate ATSs from providing information to 
customers that the customers can use to evaluate and enhance their 
trading performance, such reports of participants' positive action 
rates and the positive action rates of the contras with which they 
match. See id. The commenter is concerned that if Rule 301(b)(10) is 
interpreted to restrict the distribution of this type of 
information, this would harm long-term investors. See id. Proposed 
and adopted amendments to Rule 301(b)(10) to require an ATS to 
maintain written procedures to protect confidential trading 
information neither (i) change the standard for what constitutes 
adequate safeguards and procedures to protect subscribers' 
confidential trading information nor (ii) narrow or expand the scope 
of what is considered to be confidential trading information under 
that rule. In general, the determination of what constitutes 
subscribers' confidential trading information is a facts and 
circumstances analysis, but it is also outside of the scope of this 
rulemaking to provide interpretive guidance about the scope of Rule 
301(b)(10).
---------------------------------------------------------------------------

    We are adopting the amendments to Rule 301(b)(10) as proposed. We 
continue 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. We also continue to believe 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, will strengthen the effectiveness of the ATS's safeguards and 
procedures and will 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.\1076\ 
The proposed revisions would aid investors, market participants, and 
regulators by consolidating written safeguards and procedures into one 
place for easy review and evaluation.\1077\ Further, we agree with the 
comment that asserts that the process of consolidating these safeguards 
and procedures may facilitate ATS operators' identification of gaps or 
opportunities for improvement of these measures.\1078\ In addition, we 
believe 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 
assist 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. 
Furthermore, we believe that the amendments we are adopting to Rule 
301(b)(1) will benefit market participants because they will be able to 
better evaluate the implementation of such safeguards and procedures, 
once they are reduced to writing.
---------------------------------------------------------------------------

    \1076\ In addition, we are requiring public disclosure related 
to such safeguards and procedures. See supra Section V.C.6.
    \1077\ See HMA Letter at 23.
    \1078\ See id.
---------------------------------------------------------------------------

    We also proposed to amend the record preservation requirements of 
Rule 303(a)(1) to incorporate the amendments to Rule 301(b)(10).\1079\ 
We received no comments on the proposed change to Rule 303(a)(1).\1080\ 
We are adopting, as proposed, Rule 303(a)(1)(v), which requires that an 
ATS, for a period of not less than three years, the first two years in 
an easily accessible place, 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).\1081\
---------------------------------------------------------------------------

    \1079\ See supra Section V.C.8.
    \1080\ See supra Section III.B.6.
    \1081\ See proposed Rule 303(a)(1)(v).
---------------------------------------------------------------------------

VII. EDGAR Filing Requirements; Structured Data

    Form ATS-N would be filed electronically in a structured format 
through EDGAR. By filing in EDGAR, NMS Stock ATSs will be given the 
option of filing using a web-fillable Form ATS-N which will render into 
XML in EDGAR, or to file directly in XML using the XML schema for NMS 
Stock ATSs as published on the Commission's website. With both options, 
the Commission will receive the Form ATS-N information in XML format. 
For those NMS Stock ATSs that would prefer to manually key in all of 
their Form ATS-N responses, as had been originally proposed by us, 
those NMS Stock ATSs can do so using the Commission's web-fillable Form 
ATS-N, which will render into XML in EDGAR. For those NMS Stock ATSs 
that would prefer to map the information in their existing systems so 
that filing of Form ATS-N can be more automated and more efficient for 
them, those NMS Stock ATS can file in XML using the XML schema as 
published on the Commission's website. The Commission's XML schema and 
the Commission's web-fillable Form ATS-N both reflect the same set of 
custom XML tags and XML restrictions designed by the Commission to 
submit the disclosures in Form ATS-N.
    As we proposed, all effective Forms ATS-N and all properly filed 
Form ATS-N amendments will be made publicly available. Because Form 
ATS-N will be filed in an XML format (either using the Commission's 
web-fillable form or as an XML file submitted according to the 
Commission's XML schema) in EDGAR, once effective, all Forms ATS-N will 
be centrally located on EDGAR for the public to access in the same XML 
format in which the Form ATS-N was received by the Commission.
    The XML format is a text-searchable format that does not require 
the use of optical character recognition and will enhance the 
Commission's and the public's abilities to better gather, analyze, 
aggregate, compare, and use the Form ATS-N data. Requiring XML should 
result in the Form ATS-N data being provided in a consistent, 
structured format. XML is an open

[[Page 38865]]

standard that defines, or ``tags,'' data using standard definitions. 
The tags establish a consistent structure of identity and context. This 
consistent structure can be automatically recognized and processed by a 
variety of software applications such as databases, financial reporting 
systems, and spreadsheets, and then made immediately available to the 
end user to search, aggregate, compare, and analyze.
    In addition, XML is an open standard that is maintained by a 
consensus based market standards organization, rather than the 
Commission, and undergoes constant review. As updates to XML or 
industry practice develop, the Commission's XML schema and web-fillable 
XML architecture may also have to be updated to reflect the updates in 
technology. If that occurs, the supported version of the XML schema 
would be made available on the Commission's website and the outdated 
version of the schema would be removed in order to maintain data 
quality and consistency with the standard, while the web-fillable Form 
ATS-N would be updated in EDGAR to reflect the same changes in 
technology as the Commission's XML schema.
    The Commission's XML schema and architecture for the web-fillable 
Form ATS-N would also incorporate certain validations to help ensure 
consistent formatting and completeness among all Forms ATS-N, in other 
words, to help ensure data quality. Validations are restrictions placed 
on the formatting for each data element so that comparable data is 
presented comparably. However, these validations would not be designed 
to ensure the underlying accuracy of the data. Any Form ATS-N filed in 
EDGAR would have to comply with validations that are incorporated 
within the XML schema, otherwise the Form ATS-N will not be accepted by 
EDGAR.
    We believe that requiring Form ATS-N be provided in an XML format 
would provide the Commission and the public with data about NMS Stock 
ATSs in a format that facilitates search capabilities, and comparative 
analyses across NMS Stock ATSs and across filings, including more 
advanced text analytics for the more narrative responses of Form ATS-N. 
Absent this requirement, users of the Form ATS-N data that wanted to 
aggregate the data or search across filings or filers would need to 
spend additional time transferring the data into a consistent format 
before it could be analyzed, or incur the cost of a service provider 
that specializes in this data aggregation and comparison process. 
Further, unrestricted manual entry of data may lead to errors, thereby 
potentially reducing data quality and usability.
    We understand that there are costs associated with structuring and 
that these costs may vary depending on the filer and the type of 
structuring. By offering two options for filers to submit Form ATS-N in 
EDGAR, filers will be able to select the method best suited to their 
situation. Overall, the we believe that the XML format of Form ATS-N 
will have enhanced benefits for the Commission's and the public's use 
of Form ATS-N while minimizing costs relative to filers having to file 
Form ATS-N using other structured formats.\1082\ Requiring the 
Commission's XML schema with its incorporated validations (whether 
submitted as XML or in the web-fillable form) will help ensure that the 
data that filers submit is complete and appropriately formatted so that 
additional time will not have to be spent on subsequent Form ATS-N 
filings to correct for those errors. By comparison, the EFFS system 
originally proposed does not support the open-source XML format, but 
rather a proprietary XML implementation called XFDL. As a result, the 
EFFS system has fewer validation capabilities and cannot test for 
consistency and completeness as broadly as the XML format, and in 
particular, at the element level. In addition, as proposed, filers 
would have been required to individually upload each narrative response 
as a separate exhibit, whereas the XML format permits filers to provide 
all their narrative responses in one structured XML file, which will 
slightly diminish their time spent in filing in the Form ATS-N 
narrative information.
---------------------------------------------------------------------------

    \1082\ See infra Section X.D.11.
---------------------------------------------------------------------------

    End users will be able to download the consistently structured 
information directly into databases and analyze it using various 
software. This would enhance their ability to conduct large-scale 
analysis and immediate cross-filing comparisons of NMS Stock ATSs, as 
well as comparisons across reporting periods within the same and among 
different NMS Stock ATSs. Moreover, as an open standard, XML is widely 
available to the public at no cost. By comparison, viewing information 
in the current EFFS system requires a license of a commercial 
proprietary viewer, which currently is not separately available to 
every member of the public without licensing.
    Commenters who supported the standardization of Form ATS-N 
information also underscored the importance of making the information 
comparable.\1083\ While the commenters did not make specific reference 
to the structured format, having the Form ATS-N information submitted 
using the Commission's XML schema or the web-fillable form will enhance 
the comparability of the Form ATS-N data by ensuring that the 
information has been submitted completely and consistently. Two 
commenters addressed the importance of completeness to Form ATS-N 
filings.\1084\ With the Commission's XML schema, the restrictions 
incorporated into the schema (and consequently, also reflected in the 
web-fillable form) will help test for completeness of the data before 
submission and reduce filer uncertainty on the completeness and 
consistency of their filing. One commenter recommends that we consider 
ways to present information that would improve the readability and 
navigability of disclosure through the use of technology such as 
hyperlinks and/or XBRL technology.\1085\ The XML format is a technology 
format that presents the data consistently, which improves the 
readability and navigability of the data. In fact, XBRL is an XML-based 
technology, but, as discussed later, we do not think that XBRL is the 
appropriate format for this form.\1086\ While hyperlinks may be useful 
in some situations to cross-reference information, hyperlinks do not by 
themselves enhance the comparability of the underlying data, but can be 
incorporated within the XML format, as permitted.
---------------------------------------------------------------------------

    \1083\ See Fidelity Letter at 1; Morgan Stanley Letter at 2; 
SIFMA Letter at 3; UBS Letter at 2-3.
    \1084\ See MFA/AIMA Letter at 4; SIFMA Letter at 32-33.
    \1085\ See Fidelity Letter at 5.
    \1086\ See infra Section X.D.11.
---------------------------------------------------------------------------

    Because Form ATS-N filings will be submitted electronically,\1087\ 
we are revising Rule 101 of Regulation S-T \1088\ to add paragraph 
(a)(1)(xxi) to the list of mandated electronic submissions. 
Specifically, paragraph (a)(1)(xvii) adds to this list Form ATS-N.
---------------------------------------------------------------------------

    \1087\ See supra Section V.A.1.
    \1088\ 17 CFR 232.101.
---------------------------------------------------------------------------

VIII. Effective Date and Compliance Date

    We did not receive any comments about the effective date for the 
amendments. The rules being adopted today will become effective 60 days 
after the date of publication in the Federal Register.
    With regard to the adopted amendments to Rules 301(b)(10) and 
303(a)(1)(v) of Regulation ATS,\1089\ we

[[Page 38866]]

believe the 60 day effective date provides sufficient time for ATSs to 
memorialize in writing their safeguards and procedures to protect 
subscribers' confidential trading information (to the extent that those 
safeguards and procedures are not currently maintained in written 
form). Current Rule 301(b)(10) of Regulation ATS \1090\ requires every 
ATS to have safeguards and 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 Regulation ATS or any other applicable rules,\1091\ and 
implement standards controlling employees of the ATS trading for their 
own accounts.\1092\ We note that the adopted amendments to Rules 
301(b)(10) and 303(a)(1)(v) do not modify that requirement other than 
to require that those safeguards and procedures be written, pursuant to 
Rule 301(b)(1) and preserved pursuant to Rule 303(a)(1)(v). 
Accordingly, we believe that the 60 days after the final rule is 
published in the Federal Register is reasonable for the amendments to 
Rules 301(b)(10) and 303(a)(1)(v) to become effective, and for ATSs to 
comply with those rules.
---------------------------------------------------------------------------

    \1089\ See supra Section VI.
    \1090\ See 17 CFR 242.301(b)(10).
    \1091\ See Rule 301(b)(10)(i)(A).
    \1092\ See Rule 301(b)(10)(i)(B).
---------------------------------------------------------------------------

    We believe that the compliance dates provided in Rules 304 and 
301(b)(2)(viii) provide sufficient time for NMS Stock ATSs to prepare 
and file Form ATS-N disclosures with the Commission. Rule 
304(a)(1)(iv)(A) requires a Legacy NMS Stock ATS to file with the 
Commission an initial Form ATS-N, in accordance with Rule 304, no 
earlier than January 7, 2019, and no later than February 8, 2019.\1093\ 
Rule 301(b)(2)(viii) provides that a Legacy NMS Stock ATS that is 
operating pursuant to an initial operation report on Form ATS on file 
with the Commission as of January 7, 2019 shall be subject to the 
requirements of Rule 301(b)(2)(i) through (vii) until the Legacy NMS 
Stock ATS files an initial Form ATS-N with the Commission pursuant to 
Rule 304(a)(1)(iv)(A).\1094\ In addition, pursuant to Rule 
301(b)(2)(viii), as of January 7, 2019, an entity seeking to operate as 
a new NMS Stock ATS shall also be subject to Rule 304 and the rules 
amended in relation.\1095\
---------------------------------------------------------------------------

    \1093\ See supra Section IV.A.4.a. See also Rule 
304(a)(1)(iv)(A).
    \1094\ See supra Section III.B.4.
    \1095\ See supra Section III.B.4; IV.A.1. See also supra note 
291 and accompanying text.
---------------------------------------------------------------------------

IX. Paperwork Reduction Act

    Certain provisions of the proposal contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\1096\ The titles of these requirements 
are:
---------------------------------------------------------------------------

    \1096\ 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); and
     Rule 304 and Form ATS-N (a new collection of information).
    In accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11, we 
submitted these requirements to the Office of Management and Budget 
(``OMB'') for review and approval in accordance with the PRA and its 
implementing regulations.\1097\ The title for the new collection of 
information in Rule 304 and Form ATS-N is ``Rule 304 and Form ATS-N.'' 
We have applied for a new OMB Control Number for this collection in 
accordance with 44 U.S.C. 3507(j) and 5 CFR 1320.13. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information requirement unless it displays a currently 
valid OMB control number.
---------------------------------------------------------------------------

    \1097\ 44 U.S.C. 3507; 5 CFR 1320.11.
---------------------------------------------------------------------------

    In the Proposal, we solicited comments on the proposed collection 
of information burdens and asked whether commenters agree with our 
estimate of the number of respondents and burdens of the Proposal. We 
received one comment on our estimates of the collection of information 
burden included in the Proposal, which is addressed below.\1098\
---------------------------------------------------------------------------

    \1098\ See infra note 1235 and accompanying text.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The amendments to Regulation ATS include two new categories of 
obligations that require a collection of information within the meaning 
of the PRA. The first category relates to Rule 301(b)(10) and Rule 303 
of Regulation ATS \1099\ and applies to all ATSs, while the second 
category relates to Form ATS-N and applies only to NMS Stock ATSs.
---------------------------------------------------------------------------

    \1099\ 17 CFR 242.301(b)(10); 17 CFR 242.303.
---------------------------------------------------------------------------

1. Requirements Relating to Rule 301(b)(10) and 303(a)(1) of Regulation 
ATS
    The amendments to Regulation ATS will require an ATS to place in 
writing the safeguards and procedures required by Rule 301(b)(10) to 
protect subscribers' confidential trading information and oversight 
procedures to ensure that the safeguards and procedures are followed. 
In addition, we are amending Rule 303(a)(1) \1100\ of Regulation ATS to 
require an ATS to preserve at least one copy of written safeguards and 
written procedures, and written oversight procedures created in the 
course of complying with Rule 301(b)(10) for a period of not less than 
three years, the first two years in an easily accessible place.\1101\
---------------------------------------------------------------------------

    \1100\ 17 CFR 242.303(a)(1).
    \1101\ Id.
---------------------------------------------------------------------------

2. Requirements Relating to Rules 301(b)(2)(viii) and 304 of Regulation 
ATS, Including Form ATS-N
    Any ATS that meets the definition of an NMS Stock ATS is required 
to complete an initial Form ATS-N, file it with the Commission via 
EDGAR, and make public via posting on its website a direct URL 
hyperlink to the Commission's website that contains the documents 
enumerated in Rule 304(b)(2).\1102\
---------------------------------------------------------------------------

    \1102\ See generally Section IV.
---------------------------------------------------------------------------

    Form ATS-N requires that the entity submitting the filing would 
indicate whether the NMS Stock ATS currently operates pursuant to a 
Form ATS, and the type of Form ATS-N filing--whether the Form ATS-N is 
an initial Form ATS-N, a Form ATS-N amendment (whether a material 
amendment, updating amendment, correcting amendment, or order display 
and fair access amendment), a notice of cessation, and if it is a 
notice of cessation, the date the NMS Stock ATS will cease to operate, 
or if it is a withdrawal. If the filing is a Form ATS-N amendment, the 
NMS Stock ATS is also required to provide a brief summary of the 
amendment and the EDGAR accession number for the Form ATS-N filing to 
be amended. If the filing is a withdrawal, the NMS Stock ATS is 
required to provide the EDGAR accession number for the Form ATS-N 
filing to be withdrawn.
    Part I requires information about the broker-dealer operator.\1103\ 
Part II of Form ATS-N requires an NMS Stock ATS to disclose information 
about the ATS-related activities of the broker-dealer operator and its 
affiliates.\1104\ Part

[[Page 38867]]

III of Form ATS-N requires an NMS Stock ATS to provide certain 
information about the manner of operations of the NMS Stock ATS.\1105\ 
Part IV of Form ATS-N requires an NMS Stock ATS to provide contact 
information. In addition, Form ATS-N will require NMS Stock ATSs to 
file the form electronically via EDGAR with a typed signature.\1106\
---------------------------------------------------------------------------

    \1103\ See Section V.B.2.
    \1104\ See Section V.C.
    \1105\ See Section V.D.
    \1106\ See Section V.A.1.
---------------------------------------------------------------------------

    We are also amending Rule 303(a)(2)(ii) to require that an NMS 
Stock ATS preserve, for the life of the enterprise and of any successor 
enterprise, copies of reports filed pursuant to Rule 304.\1107\
---------------------------------------------------------------------------

    \1107\ See Rule 303(a)(2)(ii).
---------------------------------------------------------------------------

    Furthermore, an ATS that trades both NMS stocks and non-NMS stocks 
will 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 will 
also be required to file two Forms ATS-R filings--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. Amendments to Rule 301(b)(10) and 303(a)(1) of Regulation ATS
    We continue to believe that both the Commission and the SRO of 
which the ATS's broker-dealer operator is a member will use the written 
safeguards and written procedures required by the amendments to Rule 
301(b)(10) to better understand how each ATS protects subscribers' 
confidential trading information from unauthorized disclosure and 
access. We continue to believe that the information contained in the 
records required to be preserved by Rule 303(a)(1)(v) will 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. We also believe that the requirement to memorialize in 
writing the safeguards and procedures to protect subscribers' 
confidential trading information will help 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. Rules 301(b)(2)(viii), 304 of Regulation ATS, Including Form ATS-N, 
and 301(b)(9)
    We believe that market participants will use the information 
publicly disclosed on Form ATS-N to compare and evaluate NMS Stock ATSs 
when making their routing decisions.\1108\ In addition, we believe we 
will use the information disclosed on Form ATS-N, Form ATS, and Form 
ATS-R to oversee the growth and development of NMS Stock ATSs.\1109\ We 
believe that the information contained in the records required to be 
preserved by the amendment to Rule 303(a)(2)(ii) will 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.
---------------------------------------------------------------------------

    \1108\ See supra Section III.A.1.a.
    \1109\ See id.
---------------------------------------------------------------------------

C. Respondents

    The ``collection of information'' requirements under the amendments 
to Regulation ATS relating to Rule 301(b)(10) and Rule 303(a)(1)(v) 
would apply to all ATSs, including NMS Stock ATSs. The ``collection of 
information'' requirements under the amendments to Regulation ATS 
relating to Rule 304, Form ATS-N, and the amendments to Rule 
303(a)(2)(ii) would apply only to NMS Stock ATSs, and the ``collection 
of information'' requirements under the amendments to Rule 301(b)(9) 
would apply to NMS Stock ATSs that also transact in both NMS stocks and 
non-NMS stocks. Currently, there are 87 ATSs that have filed Form ATS 
with us. Of these 87 ATSs, 41 would meet the definition of an NMS Stock 
ATS.\1110\ Accordingly, the we estimate that 87 entities would be 
required to comply with the amendments related to Rule 301(b)(10) of 
Regulation ATS and 41 entities would be required to complete Form ATS-
N.\1111\
---------------------------------------------------------------------------

    \1110\ As of March 31, 2018, 41 ATS have disclosed on their Form 
ATS that they trade or expect to trade NMS stock.
    \1111\ We recognize 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 January 
2014 through the first half of 2017, an average of 12 Form ATS 
initial operation reports were filed each year with us. Similarly, 
some ATSs may cease operations in the normal course of business or 
possibly in response to the proposed amendments to Regulation ATS. 
From January 2014 through the March 31, 2018, an average of 9 ATSs, 
including those that trade NMS stocks have ceased operations. For 
the purposes of this paperwork burden analysis, we assume that 87 
respondents would be required to comply with the proposed amendments 
to Rule 301(b)(10), if adopted. We are 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, there are currently 10 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.\1112\ Under the 
amendments to Regulation ATS, these 10 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 10 ATSs would have to amend 
their Forms ATS to remove information regarding operations 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.\1113\
---------------------------------------------------------------------------

    \1112\ Data compiled from Forms ATS and ATS-R submitted to us as 
of March 31, 2018. These 10 ATSs are included within the 41 NMS 
Stock ATSs.
    \1113\ 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. An ATS that trades both NMS 
stocks and non-NMS stocks 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 Form ATS-N, we recognize there may be entities that 
might file a Form ATS-N to operate an NMS Stock ATS in the future. From 
January 2014 through March 2018, an average of 2 new ATSs per year 
disclose that they trade or expect to trade NMS stocks on their Form 
ATS initial operation reports, and would therefore fall within the 
definition of an NMS Stock ATS. Similarly, some ATSs that currently 
trade NMS stocks may choose to cease operations rather than comply with 
the amendments requiring them to file Form ATS-N. Other ATSs may choose 
to cease operations in the normal course of business. From January 2014 
through March 2018, an average of 9 ATSs that trade NMS stocks have 
ceased operations each year.\1114\
---------------------------------------------------------------------------

    \1114\ In the Proposal, we cited the average number of new ATSs 
and ATSs that ceased operations from 2012 through the first half of 
2015, which were 2 and 6, respectively. See Proposal, supra note 2, 
at 81092.
---------------------------------------------------------------------------

    We believe that most ATSs that currently trade NMS stocks would 
continue to operate notwithstanding the amendments to Regulation ATS. 
For the purposes of this analysis of the paperwork burden associated 
with the amendments to Regulation ATS, we assume that there will be 41 
respondents. This number assumes that most ATSs that currently trade 
NMS

[[Page 38868]]

stocks would file a Form ATS-N with the Commission. We acknowledge that 
some ATSs may cease operations altogether and other entities that may 
commence operations as an NMS Stock ATS. Based on the current number of 
initial operation reports and cessation of operations reports on 
current Form ATS for ATSs that trade NMS stocks described above, we 
estimate that 2 to 3 new entities will file initial Form ATS-N to 
become an NMS Stock ATS and 7 to 9 NMS Stock ATSs will cease operations 
in each of the next three years.

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS
a. Baseline Measurements
    We believe 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.\1115\ 
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, we estimate that the average annual burden they voluntarily 
undertake to update and preserve those written safeguards and written 
procedures is 4 hours.\1116\ Because neither current Rule 301(b)(10) 
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.\1117\ In accordance with the 
below analysis, we are modifying the current PRA burdens for Rules 301 
and 303 to account for the new requirement that ATSs have and preserve 
in written format the safeguards and procedures to protect subscribers' 
confidential trading information.\1118\
---------------------------------------------------------------------------

    \1115\ See infra Section VI.
    \1116\ 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.
    \1117\ 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'').
    \1118\ See infra note 1125 and accompanying text.
---------------------------------------------------------------------------

b. Burdens
    We recognize that 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, we believe that there will be no increased burden under 
the amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS. 
We believe that the current practices of those ATSs would already be in 
compliance with the rules and the amendments should not require these 
ATSs to take any 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). In the Proposal, we estimated 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 8 hours.\1119\ We did not receive any comment on the 
preliminary estimates. 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, we believe that recording these items in a 
written format would not impose a substantial burden on ATSs and would 
rely on internal staff to record the ATS's Rule 301(b)(10) procedures 
in writing. Therefore, we estimate 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,\1120\ but we estimate that the burden could 
range between 5 and 10 hours.\1121\ We estimate that, of the 87 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.\1122\ 
Accordingly, we estimate that the aggregate initial, one-time burden on 
all ATSs would be 120 hours based on our highest approximation of the 
additional burden per ATS.\1123\
---------------------------------------------------------------------------

    \1119\ See Proposal, supra note 2, at 81094.
    \1120\ Attorney at 7 hours + Compliance Clerk at 1 hour = 8 
burden hours.
    \1121\ Attorney at 4-9 hours + Compliance Clerk at 1 hour = 5-10 
burden hours.
    \1122\ It is likely that most, if not all, ATSs already 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.
    \1123\ (Attorney at 7 hours + Compliance Clerk at 1 hour) x (15 
ATSs) = 120 burden hours.
---------------------------------------------------------------------------

    We estimate 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.\1124\ As a result, we estimate that the total 
aggregate, ongoing burden per year for all ATSs would be 348 
hours,\1125\ and thus, we are modifying the current PRA burden 
estimates for Rules 301 and 303 to account for this increased burden on 
ATSs.
---------------------------------------------------------------------------

    \1124\ See supra note 1116 and accompanying text.
    \1125\ (Attorney at 2 hours + Compliance Clerk at 2 hours) x 87 
ATSs = 348 burden hours.
---------------------------------------------------------------------------

2. Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Form ATS-
N
a. Baseline Measurements
    Currently, Rule 301(b)(2)(i) of Regulation ATS \1126\ 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 \1127\ requires an ATS to file amendments to its current 
Form ATS at least 20

[[Page 38869]]

calendar days prior to implementing a material change to its 
operations. Rule 301(b)(2)(iii) of Regulation ATS \1128\ 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.\1129\ Regarding shutting down an 
ATS, Rule 301(b)(2)(v) of Regulation ATS \1130\ requires an ATS to 
promptly file a cessation of operation report on current Form ATS upon 
ceasing operations as an ATS.
---------------------------------------------------------------------------

    \1126\ 17 CFR 242.301(b)(2)(i).
    \1127\ 17 CFR 242.301(b)(2)(ii).
    \1128\ 17 CFR 242.301(b)(2)(iii).
    \1129\ 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).
    \1130\ 17 CFR 242.301(b)(2)(v).
---------------------------------------------------------------------------

    Our 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.\1131\ With respect to Form ATS 
amendments, we understand, 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.\1132\ The 
frequency and scope of Form ATS amendments vary depending on whether 
the ATS is implementing a material change or an updating change. Some 
ATSs may not change how 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. Our currently approved estimated average compliance burden 
for each amendment to Form ATS is approximately 6 hours.\1133\ 
Accordingly, the estimated average annual ongoing burden of updating 
and amending Form ATS is approximately 12 hours per NMS Stock 
ATS.\1134\ With respect to ceasing operations, the currently approved 
average estimated compliance burden for an ATS to complete a notice of 
cessation is 2 hours to check the appropriate box on Form ATS and send 
the notice of cessation to the Commission.\1135\ Our currently approved 
estimate for the average compliance burden for each Form ATS-R filing 
is 4 hours.\1136\
---------------------------------------------------------------------------

    \1131\ Attorney at 13 hours + Compliance Clerk at 7 hours = 20 
burden hours. See Rule 301 PRA Update, supra note 1117, 79 FR 6237.
    \1132\ See id.
    \1133\ Attorney at 4.5 hours + Compliance Clerk at 1.5 hours = 6 
burden hours. See id.
    \1134\ 2 Form ATS amendments filed annually x 6 burden hours per 
Form ATS amendment = 12 burden hours per ATS.
    \1135\ Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 2 
burden hours. See PRA Update, supra note 1117, 79 FR 6237.
    \1136\ Attorney at 3 hours + Compliance Clerk at 1 hour = 4 
burden hours. See id.
---------------------------------------------------------------------------

b. Burdens
    We recognize that Rules 301(b)(2)(viii) and 304 of Regulation ATS, 
including Form ATS-N, would impose certain burdens on 
respondents.\1137\ Although many of the disclosures required by Form 
ATS-N are currently required by Form ATS, Form ATS-N requires an NMS 
Stock ATS to provide significantly more detail in those disclosures 
than currently required by Form ATS. Form ATS-N also requires 
additional disclosures not currently mandated by current Form ATS such 
as those contained in Part II of adopted Form ATS-N. Under the 
amendments to Regulation ATS, NMS Stock ATSs will be required to 
complete and file the enhanced and additional disclosures on Form ATS-
N.\1138\ Section IX.D.2.b.i below provides the estimated burden above 
the current Form ATS baseline of each item of Form ATS-N. Many of the 
disclosure items on Form ATS-N are already required disclosures by 
respondents in whole or in part on current Form ATS, while other 
disclosure items on Form ATS-N are novel (i.e., current Form ATS does 
not require some form of the disclosure). Section IX.D.2.b.ii 
aggregates these new burdens and the additional burdens above the 
current Form ATS baseline that will be imposed by Form ATS-N.
---------------------------------------------------------------------------

    \1137\ In establishing the estimates below with respect to Form 
ATS-N, we have considered its estimate of the burden for an SRO to 
amend a Form 19b-4. Specifically, we 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, 60294 (October 8, 
2004).
    \1138\ These disclosures will be provided on Form ATS-N and may 
have to be amended periodically as provided in proposed Rule 304.
---------------------------------------------------------------------------

(i) Analysis of Estimated Additional Burden for Form ATS-N
(a) Part I
    In the Proposal, we estimated that preparing Parts I and II for a 
Form ATS-N would add 0.5 hours to the current baseline for an NMS Stock 
ATS to prepare an initial operation report on current Form ATS.\1139\ 
Part I of adopted Form ATS-N contains substantially the same 
information as Parts I and II of proposed Form ATS-N. However, adopted 
Form ATS-N does not include several proposed disclosure requirements 
and contains several new requests. Overall, we estimate that the burden 
for Part I of adopted Form ATS-N will be the same as that which was 
estimated for proposed Form ATS-N. Accordingly, we estimate that Part I 
of adopted Form ATS-N will add an additional 0.5 hours above the 
baseline of current Form ATS.
---------------------------------------------------------------------------

    \1139\ See Proposal, supra note 2, at 81095.
---------------------------------------------------------------------------

(b) Part II
    As explained above, Part II, Items 1 and 2 contain disclosure 
requests about the broker-dealer operator's and affiliates', 
respectively, trading activity on the NMS Stock ATS. For Part II, Item 
1(a), to the extent that the broker-dealer operator is not permitted to 
enter or direct orders and trading interest to the NMS Stock ATS, the 
NMS Stock ATS would only be required to check ``no.'' In addition, to 
the extent the broker-dealer operator enters or directs the entry of 
orders and trading interest into the NMS Stock ATS, but such orders and 
trading interest is treated the same as trading interest from other 
subscribers and persons, Part II, Item 1(b) would require that the NMS 
Stock ATS check ``no.''
    Part II, Item 1(a) of adopted Form ATS-N incorporates aspects of 
several proposed disclosures that addressed the activity of the broker-
dealer operator's trading activity on the NMS Stock ATS. First, Part 
II, Item 1(a) of adopted Form ATS-N incorporates requirements of Part 
III, Items 1 and 2 of proposed Form ATS-N, which would have requested 
disclosures about the non-ATS trading centers and other NMS Stock ATSs 
operated by the broker-dealer operator and its affiliates. In the 
Proposal, we estimated that preparing Part III, Item 1 for proposed 
Form ATS-N would add 10 hours to the current baseline of Form ATS and 
Part III, Item 2 would add 4 hours to the current baseline of Form ATS, 
for a total estimated burden of 14 hours for Part III, Items 1 and 2.
    Adopted Part II, Item 1(a) more narrowly tailors those proposed 
requests by focusing on the actual trading activities of the broker-
dealer operator on the NMS Stock ATS and its use of the ATS's services. 
Primarily, the request under adopted Item 1(a): (i) Does not require an 
NMS Stock ATS to list all non-ATS trading centers and NMS Stock ATSs 
operated by the broker-dealer operator, regardless of whether those 
entities trade on the NMS Stock ATS; and (ii) replaces what some 
commenters perceived as potentially broad narrative requests to 
describe the ``interaction and coordination'' between

[[Page 38870]]

the NMS Stock ATS and those non-ATS trading centers and other NMS Stock 
ATSs. Instead, the NMS Stock ATS is now required to name and describe 
each type of business unit of the broker-dealer operator that enters or 
directs the entry of orders and trading interest into the NMS Stock 
ATS, and we have replaced the term ``interaction and coordination'' 
with specific, enumerated data points and narratives that the NMS Stock 
ATS must provide. Furthermore, the corresponding affiliate disclosures 
for Part III, Items 1 and 2 of proposed Form ATS-N are now encompassed 
by Part II, Item 2(a) of adopted Form ATS-N, so Part II, Item 1(a) of 
adopted Form ATS-N will not impose the entire burden that was estimated 
for proposed Part III, Items 1 and 2. It will impose the burden from 
those proposed items that would have been imposed by the disclosure 
requirements related to the broker-dealer operator itself, which we 
believe is a small fraction of the proposed estimate relevant to the 
requirements related to affiliates of the broker-dealer operator. 
Accordingly, out of the 14-hour estimate for proposed Part III, Items 1 
and 2, we estimate that Part II, Item 1(a) of adopted Form ATS-N would 
add approximately 2.75 hours to the baseline estimate to complete an 
initial operation report on Form ATS.
    Second, the request under Part II, Items 1(a) of adopted Form ATS-N 
also incorporates aspects of the disclosures proposed under Part III, 
Item 5(a) of proposed Form ATS-N. We estimated that preparing proposed 
Part III, Item 5(a) would add 5 hours to the current baseline.\1140\ 
While we did not provide estimates for each individual subpart of Part 
III, Item 5 of proposed Form ATS-N, the aspects of Part III, Item 5 
that are incorporated into Part II, Item 1(a) of adopted Form ATS-N 
(i.e., information about the broker-dealer operator's trading activity 
on the ATS, other than the information covered by proposed Item 5(d)) 
accounted for approximately 1.5 hours of the 5 hour estimate. We 
believe that the aspects of proposed Part III, Item 5 that are 
incorporated into Part II, Item 1(a) of adopted Form ATS-N would still 
add approximately 1.5 hours to the baseline for an initial operation 
report on current Form ATS.\1141\ Adopted Form ATS-N requires the NMS 
Stock ATS to identify business units of the broker-dealer operator that 
enter or direct the entry of orders, whereas proposed Form ATS-N would 
have required the NMS Stock ATS to identity all business units that may 
enter orders or other trading interest. However, we believe that it 
would impose approximately the same burden for the broker-dealer 
operator to compile both lists because both would involve the 
collection of information about internal units of the broker-dealer 
operator.\1142\ Accordingly, we estimate that the adopted requests 
under Part II, Item 1(a) would add a total of approximately 4.25 hours 
to the current baseline for an initial operation report on current Form 
ATS. This would result in an aggregate initial burden of 174.25 hours 
above the baseline for all NMS Stock ATSs to complete Part II, Items 
1(a) and (b) of Form ATS-N.\1143\
---------------------------------------------------------------------------

    \1140\ See Proposal, supra note 2, at 81097.
    \1141\ The estimated burden hours for proposed Part III, Item 
5(a) related to affiliate trading on the ATS are now allocated to 
Part II, Item 2(a) of adopted Form ATS-N.
    \1142\ As noted below with regard to Part II, Item 2(a) of 
adopted Form ATS-N, however, the analogous change in scope for 
affiliate trading activity on the NMS Stock ATS will reduce the 
burden on NMS Stock ATSs relative to that which was proposed.
    \1143\ (Attorney at 3.75 + Compliance Manager at 0.5) x 41 NMS 
Stock ATSs = 174.25 burden hours.
---------------------------------------------------------------------------

    The information sought under Part II, Item 1(b) of adopted Form 
ATS-N would have been requested under Part III, Item 9 of proposed Form 
ATS-N. We estimated that completing Part III, Item 9 of proposed Form 
ATS-N would add 2 hours to the current baseline of Form ATS.\1144\ In 
most cases, Part II, Item 1(b) of adopted Form ATS-N will require the 
NMS Stock ATS to answer ``yes'' or ``no'' and list applicable item 
numbers in Part III of adopted Form ATS-N. An NMS Stock ATS will need 
to provide a narrative under Item 1(b) only if there are differences 
that are not applicable to Part III. But we believe that the subject 
matter covered by Part III is very comprehensive, and therefore, we do 
not believe that an NMS Stock ATS typically will need to provide 
additional narratives about differences in treatment that are not 
otherwise covered by Part III. Accordingly, we estimate that Part II, 
Item 1(b) of adopted Form ATS-N would add 0.25 hours out of the 
proposed 2-hour estimate for Part III, Item 9 to the current baseline 
for an initial operation report on Form ATS because in most instances, 
the NMS Stock ATS will be required to check the ``yes'' or ``no'' box 
and provide a list of relevant requests in Part III. This would result 
in an aggregate initial burden of 10.25 hours above the baseline for 
all NMS Stock ATSs to complete Part II, Item 1(b) of Form ATS-N.\1145\
---------------------------------------------------------------------------

    \1144\ See Proposal, supra note 2, at 81098.
    \1145\ Attorney at 0.25 hours x 41 NMS Stock ATSs = 10.25 burden 
hours.
---------------------------------------------------------------------------

    Similarly, Part II, Items 1(c) and 1(d) of adopted Form ATS-N 
include requests for information that are intended to highlight 
disclosures about conflicts of interests and potential information 
leakage in Part III, Items 12 and 16, respectively, of adopted Form 
ATS-N. Part IV, Item 1(d) of proposed Form ATS-N set forth the proposed 
disclosure requirements regarding liquidity providers on the NMS Stock 
ATS. This request for information is now set forth in Part III, Item 12 
of adopted Form ATS-N. In Part II, Item 1(c) of adopted Form ATS-N, we 
have now added the additional disclosure requirements for the NMS Stock 
ATS to answer a ``yes'' or ``no'' question and provide a list of any 
internal business units that trade on the NMS Stock ATS as liquidity 
providers in order to highlight information about potential conflicts 
of interest that might be disclosed in Part III, Item 12 of adopted 
Form ATS-N. We therefore estimate that, on average, preparing Part II, 
Item 1(c) for a Form ATS-N would add 1 hour to the current baseline for 
an initial operation report on current Form ATS. This would result in 
an aggregate initial burden of 41 hours above the baseline for all NMS 
Stock ATSs to complete Part II, Item 1(c) of Form ATS-N.\1146\
---------------------------------------------------------------------------

    \1146\ Compliance Manager at 1.0 hours x 41 NMS Stock ATSs = 41 
burden hours.
---------------------------------------------------------------------------

    Part III, Items 1(b)(iii) and 2(b)(iii) of proposed Form ATS-N 
would have required the NMS Stock ATS to explain the circumstances 
under which subscriber orders or trading interest received by the NMS 
Stock ATS may be removed from the NMS Stock ATS and sent to non-ATS 
trading centers or other NMS Stock ATSs operated or controlled by the 
broker-dealer operator, respectively. These disclosures are now 
incorporated into Part III, Item 16 of adopted Form ATS-N. However, we 
believe that information about the routing or removal of orders from 
the NMS Stock ATS to a trading center operated or controlled by the 
broker-dealer operator may include information that market participants 
find necessary to evaluate potential conflicts of interest or 
information leakage on the NMS Stock ATS, so we have added Part II, 
Item 1(d) to Part II of adopted Form ATS-N. Part II, Item 1(d) of 
adopted Form ATS-N requires the NMS Stock ATS to answer a ``yes'' or 
``no'' question. The narrative associated with this disclosure will be 
set forth in Part III, Item 16. We therefore estimate that, on average, 
preparing Part II, Item 1(d) for a Form ATS-N would add 0.5 hour to the 
current baseline for an initial operation report on current Form ATS. 
This would result in an aggregate initial

[[Page 38871]]

burden of 20.5 hours above the baseline for all NMS Stock ATSs to 
complete Part II, Item 1(d) of Form ATS-N.\1147\
---------------------------------------------------------------------------

    \1147\ Compliance Manager at 0.5 hours x 41 NMS Stock ATSs = 
20.5 burden hours.
---------------------------------------------------------------------------

    The requests under Part II, Item 2 of adopted Form ATS-N mirror 
those of Part II, Item 2 of adopted Form ATS-N, except that the former 
requires disclosures about the trading activity of the broker-dealer 
operator and the latter require disclosures about the trading 
activities of affiliates.\1148\ As with Item 1, to the extent no 
affiliate of the broker-dealer operator can enter or direct the entry 
of orders and trading interest into the NMS Stock ATS, the NMS Stock 
ATS would be required to check ``no'' under Part II, Item 2(a). In 
addition, to the extent that there are no differences between treatment 
of affiliates that can enter or direct the entry of orders and trading 
interest into the ATS and other subscribers and persons regarding 
services offered and provided by the NMS Stock ATS, the NMS Stock ATS 
would \ be required to check ``no'' under Part II, Item 2(b).
---------------------------------------------------------------------------

    \1148\ See supra Section V.C.1.
---------------------------------------------------------------------------

    Likewise, as with Part II, Item 1(a) of adopted Form ATS-N, the 
disclosure requests in Part II, Item 2(a) of adopted Form ATS-N are 
more narrowly tailored than those which were proposed, and the 
disclosure requests about trading activities of the broker-dealer 
operator are no longer contained in the same questions as those 
regarding affiliate trading in adopted Form ATS-N. Most significantly, 
we believe that the burden for an NMS Stocks ATS to provide information 
about each of its broker-dealer operator's affiliates that trades on 
the NMS Stock ATS will be less than it would have been to provide: (i) 
A comprehensive list of all non-ATS trading centers and NMS Stock ATSs 
operated by affiliates, as was proposed under Part III, Items 1 and 2, 
respectively; and (ii) a list of each affiliate that may enter orders 
or other trading interest on the NMS Stock ATS, as was proposed under 
Part III, Item 5(a). Under their current disclosure requirements 
pursuant to Regulation ATS, ATSs must compile a list of subscribers 
that were participants on the ATS for its quarterly reports on current 
Form ATS-R.\1149\ On the other hand, there is no current requirement 
for an ATS to maintain a list of its broker-dealer operator's 
affiliates' non-ATS trading centers or NMS Stock ATSs, as was proposed. 
To the extent that an NMS Stock ATS must dedicate resources to 
determine whether any of its affiliates direct the entry of orders or 
trading interest into the ATS through a third-party broker-dealer in 
order to be responsive to Part II, Item 2(a) of adopted Form ATS-N, we 
believe that burden will also be less than it would have been to 
compile--and keep up-to-date--a list of all non-ATS trading centers and 
NMS Stock ATSs operated by its affiliates.
---------------------------------------------------------------------------

    \1149\ See Exhibit A of Form ATS-R.
---------------------------------------------------------------------------

    Additionally, the burden to complete Item 2(a) will likely vary 
significantly among NMS Stock ATSs because the number of affiliates of 
each broker-dealer operator--and the number of those affiliates that 
trade on the NMS Stock ATS--may vary significantly among ATSs. However, 
even though the wording of the disclosure requests are almost 
identical, Part II, Item 2(a) of adopted Form ATS-N will likely impose 
a greater burden than that of Part II, Item 1(a) because we believe it 
will take an NMS Stock ATS longer to compile the necessary information 
about affiliated third-party entities than it will to compile that 
information for internal business units of the broker-dealer operator. 
Accordingly, we estimate that, on average, preparing adopted Part II, 
Item 2(a) would add approximately 6.25 hours to the current baseline 
for an initial operation report on current Form ATS. This will result 
in an aggregate initial burden of 256.25 hours above the baseline for 
all NMS Stock ATSs to complete Part II, Item 2(a) of Form ATS-N.\1150\
---------------------------------------------------------------------------

    \1150\ (Attorney at 5.75 hours + Compliance Manager at 0.5 
hours) x 41 NMS Stock ATSs = 256.25 burden hours.
---------------------------------------------------------------------------

    Like Part II, Item 1(b) of adopted Form ATS-N, the disclosure 
request in Part II, Item 2(b) will usually require the NMS Stock ATS to 
answer ``yes'' or ``no'' and list applicable item numbers in Part III 
of adopted Form ATS-N. An NMS Stock ATS must provide a narrative under 
Item 2(b) only if there are differences that are not applicable to Part 
III. Accordingly, we estimate that Part II, Item 2(b) of adopted Form 
ATS-N would add .25 hours out of the proposed 2 hours for Part III, 
Item 9 to the current baseline for an initial operation report on Form 
ATS because in most instances, the NMS Stock ATS will be required to 
check the ``yes'' or ``no'' box and provide a list of relevant requests 
in Part III. This would result in an aggregate initial burden of 10.25 
hours above the baseline for all NMS Stock ATSs to complete Part II, 
Item 1(b) of Form ATS-N.\1151\
---------------------------------------------------------------------------

    \1151\ Attorney at 0.25 hours x 41 NMS Stock ATSs = 10.25 burden 
hours.
---------------------------------------------------------------------------

    Furthermore, as is the case with Part II, Item 1 of adopted Form 
ATS-N, Part II, Items 2(c) and 2(d) of adopted Form ATS-N includes 
requests for information that are intended to highlight potential 
conflicts of interests and information leakage that will be disclosed 
in Part III, Items 12 and 16, respectively, of adopted Form ATS-N. 
Accordingly, similar to Part II, Item 1(c), we estimate that, on 
average, preparing Part II, Item 2(c) for a Form ATS-N would add 1 hour 
to the current baseline for an initial operation report on current Form 
ATS. This would result in an aggregate initial burden of 41 hours above 
the baseline for all NMS Stock ATSs to complete Part II, Item 1(c) of 
Form ATS-N.\1152\ Similar to Part II, Item 1(d), we estimate that, on 
average, preparing Part II, Item 2(d) for a Form ATS-N would add 0.5 
hour to the current baseline for an initial operation report on current 
Form ATS. This would result in an aggregate initial burden of 20.5 
hours above the baseline for all NMS Stock ATSs to complete Part II, 
Item 2(d) of Form ATS-N.\1153\
---------------------------------------------------------------------------

    \1152\ (Compliance Manager at 1.0 hours) x 41 NMS Stock ATSs = 
41 burden hours.
    \1153\ (Compliance Manager at 0.5 hours) x 41 NMS Stock ATSs = 
20.5 burden hours.
---------------------------------------------------------------------------

    As explained above, Part II, Item 3 of adopted Form ATS-N contains 
disclosure requests about order interaction with the broker-dealer 
operator and its affiliates. To the extent that the NMS Stock ATS does 
not allow subscribers to opt out of interacting with the broker-dealer 
operator, the NMS Stock ATS must check ``no'' to Part II, Item 3(a). 
Similarly, to the extent that the NMS Stock ATS does not allow 
subscribers to opt out of interacting with the broker-dealer operator, 
the NMS Stock ATS must check ``no'' to Part II, Item 3(b). In addition, 
to the extent that the terms and conditions of the opt out processes 
are the same for all subscribers, the NMS Stock ATS must check ``no'' 
to Part II, Item 3(c).
    The requirements under Part II, Items 3(a) and (b) of adopted Form 
ATS-N are intended to cover the subject matter originally proposed 
under Part III, Item 5(d) of proposed Form ATS-N.\1154\ In the 
Proposal, we estimated that all of the items of Part III, Item 5 of 
proposed Form ATS-N would add 5 hours to the current baseline for an 
initial operation report on current Form ATS.\1155\ While we did not 
provide estimates for each individual subpart of Part III, Item 5 of 
proposed Form ATS-N, subpart (d) of Part III, Item 5 of proposed Form 
ATS-N accounted for approximately 1 hour of the 5 hour estimate. We 
believe that the requests under Part II, Items 3(a)

[[Page 38872]]

and (b) would still add approximately 1 hour to the baseline for an 
initial operation report on current Form ATS. As described in the 
Proposal, the broker-dealer operator should already know whether 
subscribers can opt out of interacting with the orders and trading 
interests of the broker-dealer operator and its affiliates.\1156\
---------------------------------------------------------------------------

    \1154\ Other requirements of Part III, Item 5 of proposed Form 
ATS-N are incorporated in adopted Part II, Item 1.
    \1155\ See Proposal, supra note 2, at 81097.
    \1156\ See id. at 81096.
---------------------------------------------------------------------------

    In addition, we have incorporated the disclosure request from Part 
III, Item 9 regarding differentiated and preferential treatment into 
the disclosure request under Part II, Item 3(c) of adopted Form ATS-N. 
We estimate that Item 3(c) would add approximately .5 hours out of the 
proposed 2 hours for Part III, Item 9 to the baseline for an initial 
operation report on Form ATS. To the extent there are such differences, 
the NMS Stock ATS would be required to provide a narrative under Part 
II, Item 3(c) regarding services or functionalities of the NMS Stock 
ATS in addition to the narratives about manner of operations required 
under Part III. Accordingly, we estimate that, on average, preparing 
Part II, Item 3 for adopted Form ATS-N would add 1.5 hours to the 
baseline for an initial operation report on current Form ATS. This will 
result in an aggregate initial burden of 61.5 hours above the baseline 
for all NMS Stock ATSs to complete Part II, Item 3 of adopted Form ATS-
N.\1157\
---------------------------------------------------------------------------

    \1157\ (Attorney at 1 hours + Compliance Manager at 0.5 hours) x 
41 NMS Stock ATSs = 61.5 burden hours.
---------------------------------------------------------------------------

    As explained above, Part II, Item 4 of adopted Form ATS-N contains 
disclosure requests about arrangements with other trading centers. In 
the Proposal, we estimated that the requirements of Part III, Item 4 of 
proposed Form ATS-N--which set forth the proposed requests regarding 
arrangements with unaffiliated trading centers--would add 4 hours to 
the current baseline for an initial operation report on current Form 
ATS.\1158\ We have revised the proposed disclosure to clarify the scope 
of requested information and to add a requirement to disclose any 
arrangements with affiliated trading centers.\1159\ As we stated in the 
Proposal, depending on the extent to which the broker-dealer operator 
or any affiliate of the broker-dealer operator has any formal or 
informal arrangement with a trading center to access the services of 
the NMS Stock, the hourly burden related to completing Part II, Item 4 
would likely vary.\1160\ While the scope of Part III, Item 4 of 
proposed Form ATS-N only encompassed arrangements with unaffiliated 
trading centers, Part II, Item 4 of adopted Form ATS-N encompasses 
arrangements with both unaffiliated and affiliated trading centers. 
However, we still believe that the hourly burden for the adopted 
disclosure request will vary depending on the extent to which a broker-
dealer operator enters into arrangements with its affiliates and on the 
number of the broker-dealer operator's affiliates. We therefore, 
estimate that, on average and consistent with the proposed disclosure 
requirement, preparing Part II, Item 4 for a Form ATS-N would still add 
approximately 4 hours, on average, to the current baseline for an 
initial operation report on current Form ATS. This results in an 
aggregate initial burden of 164 hours above the current baseline for 
all NMS Stock ATSs to complete Part II, Item 4 of adopted Form ATS-
N.\1161\
---------------------------------------------------------------------------

    \1158\ See Proposal, supra note 2, at 81096.
    \1159\ See supra Section V.C.3.
    \1160\ See Proposal, supra note 2, at 81096.
    \1161\ (Compliance Manager at 3 hours + Senior Marketing Manager 
at 1 hour) x 164 NMS Stock ATSs = 164 burden hours.
---------------------------------------------------------------------------

    As explained above, Part II, Item 5 of adopted Form ATS-N contains 
disclosure requests about other products or services. To the extent 
that that the broker-dealer operator or any of its affiliates does not 
offer subscribers any products or services for the purpose of effecting 
transactions or for submitting, disseminating, or displaying orders and 
trading interest in the NMS Stock ATS, the NMS Stock ATS would need to 
check ``no'' on Part II, Items 5(a) and 5(b) and Items 5(c) and 5(d), 
respectively.
    Part II, Item 5 of adopted Form ATS-N adopts, with modifications, 
the disclosure requests in Part III, Item 3 of proposed Form ATS-N, 
which would have required an NMS Stock ATS to disclose whether the 
broker-dealer operator, or any of its affiliates, offers subscribers 
any products or services used in connection with trading on the NMS 
Stock ATS (e.g., algorithmic trading products, market data feeds). In 
the Proposal, we estimated that it would take an average of 3 hours for 
an NMS Stock ATS to disclose this information.\1162\ As noted in the 
Proposal, we believe that depending on the extent to which the broker-
dealer operator or any of its affiliates offers subscribers or persons 
any products or services for the purpose of effecting transactions or 
for submitting, disseminating, or displaying orders and trading 
interest in the NMS Stock ATS, the hourly burden related to completing 
Part II, Item 5 would likely vary.\1163\ We have modified the proposed 
disclosures to require a summary of the terms and conditions for use 
and a cross-reference to the applicable Item number(s) in Part III of 
adopted Form ATS-N where the use of the product or service is 
explained. Only if there is no applicable Item in Part III would the 
NMS Stock ATS be required to include a narrative of the use of the 
product or service with the ATS under Part II, Item 5. While we have 
revised the wording of the adopted disclosure request to reduce the 
potential of NMS Stock ATSs unnecessarily disclosing commercially 
sensitive information,\1164\ we do not believe that the estimated 
burden of the proposed disclosure request should change. It was not our 
intent to require NMS Stock ATSs to provide granular details that might 
constitute commercially sensitive information in response to the 
proposed disclosure requests. We therefore, estimate that, on average 
and consistent with the estimate in the Proposal, preparing Part II, 
Item 5 for a Form ATS-N would add 3 hour to the current baseline for an 
initial operation report on current Form ATS. This results in an 
aggregate initial burden of 123 hours above the current baseline for 
all NMS Stock ATSs to complete Part II, Item 5 of Form ATS-N.\1165\
---------------------------------------------------------------------------

    \1162\ See Proposal, supra note 2, at 81096.
    \1163\ See id.
    \1164\ See supra Section V.C.4.
    \1165\ (Compliance Manager at 2 hours + Senior Marketing Manager 
at 1 hour) x 41 NMS Stock ATSs = 123 burden hours.
---------------------------------------------------------------------------

    As explained above, Part II, Item 6 of adopted Form ATS-N contains 
disclosure requests about the activities of service providers. Part II, 
Item 6(a) is similar to the request contained in Part III, Item 7 of 
proposed Form ATS-N, and Part II, Items 6(b) and (c) of adopted Form 
ATS-N are similar to the requests in Part III, Item 8 of proposed Form 
ATS-N. In the Proposal, we estimated that, on average, preparing Part 
III, Item 7 of proposed Form ATS-N would add 4 hours to the current 
baseline for an initial operation report on current Form ATS.\1166\ 
Part II, Item 6(a) of adopted Form ATS-N asks for information about 
shared employees like proposed Part III, Item 7, but does not require 
the NMS Stock ATS to disclose the identity and titles of such 
employees, as was proposed. In addition, Part II, Item 6(a) requires a 
summary of such information, which results in a reduced filing burden 
relative to that which was proposed.
---------------------------------------------------------------------------

    \1166\ See Proposal, supra note 2, at 81097.
---------------------------------------------------------------------------

    Part III, Item 8 of proposed Form ATS-N would have required an NMS 
Stock ATS to disclose information about whether any operation, service, 
or function of the NMS Stock ATS is

[[Page 38873]]

performed by any person(s) other than the broker-dealer operator of the 
NMS Stock ATS. We had estimated that, on average, preparing Part III, 
Item 8 for proposed Form ATS-N would add 3 hours to the current 
baseline for an initial operation report on current Form ATS.\1167\ 
Like Part II, Item 6(a), Part II, Item 6(b) of adopted Form ATS-N only 
requires a summary of the role and responsibilities of service 
providers to the ATS. As with Part II, Item 6(a) of adopted Form ATS-N, 
we estimate that only requiring a summary narrative for the service 
provider request in adopted Form ATS-N would result in a reduced filing 
burden relative to that which was proposed. Additionally, Item 6(c) 
requires the NMS Stock ATS to identify service providers and their 
affiliates that use the services of the ATS and list the services used; 
Part III, Item 8(c) of proposed Form ATS-N would have required the NMS 
Stock ATS to describe the circumstances and means by which service 
providers enter orders or trading interest on the ATS. Due to the 
reduced filing burden of adopted Part II, Items 6(a)-(c) relative that 
which was proposed, we estimate that, on average, Part II, Items 6(a)-
(c) of adopted Form ATS-N would add 4.5 hours to the current baseline 
for an initial operating report on Form ATS.
---------------------------------------------------------------------------

    \1167\ See id.
---------------------------------------------------------------------------

    Furthermore, as with Part II, Items 1, 2, and 3 of adopted Form 
ATS-N, we have incorporated aspects of Part III, Item 9 of proposed 
Form ATS-N regarding differentiated and preferential treatment into 
Part II, Item 6(d) of adopted Form ATS-N.\1168\ We estimate that Item 
3(c) would add approximately .5 hours out of the proposed 2-hour burden 
estimate for Part III, Item 9 to the current baseline for an initial 
operation report on current Form ATS because the NMS Stock ATS would be 
required to provide a narrative in Item 6(d) in additional to 
narratives about the manner of operations under Part III of adopted 
Form ATS-N. Accordingly, we estimate that on average, Part II, Item 6 
of adopted Form ATS-N will add approximately 5 hours to the burden for 
an initial operation report on current Form ATS. This results in an 
aggregate initial burden of 205 hours above the current baseline for 
all NMS Stock ATSs to complete Part II, Item 6 of Form ATS-N.\1169\
---------------------------------------------------------------------------

    \1168\ Other requirements of Part III, Item 5 of proposed Form 
ATS-N are incorporated in adopted Part II, Item 1.
    \1169\ (Attorney at 3 hours + Compliance Manager at 2 hours) x 
41 NMS Stock ATSs = 205.
---------------------------------------------------------------------------

    As explained above, Part II, Item 7 of adopted Form ATS-N contains 
disclosure requests about the NMS Stock ATS's protection of 
confidential subscriber trading information. Part II, Item 7 of adopted 
Form ATS-N is similar to Part III, Item 10 of proposed Form ATS-N, 
which would have required 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.\1170\ As previously discussed, NMS Stock 
ATSs will now be required to have and maintain written policies and 
procedures under Rule 301(b)(10) of Regulation ATS.\1171\ Part II, Item 
7(a) of adopted Form ATS-N requires a description of these policies and 
procedures, and the request in Item 7(a) will contain the information 
requested in Part III, Items 10(c) and (d) of proposed Form ATS-N. Part 
II, Item 7(b)-(c) of adopted Form ATS-N requests the same information 
as Part III, Item 10(a) of proposed Form ATS-N. Lastly, Part II, Item 
7(d) is similar to Part III, Item 10(b) of proposed Form ATS-N, but the 
adopted request only requires a summary of roles and responsibilities, 
rather than identification of the positions or titles of all persons 
that have access to confidential trading information and a description 
of the circumstances of such access as was proposed. We continue to 
believe 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 such, we believe that this change 
to proposed Part II, Item 10(b) of adopted Form ATS-N does not increase 
the proposed burden estimate. Rather, because the adopted request in 
Part II, Item 7(d) reduces the level of detail from that which was 
proposed and the other requests from proposed Part III, Item 10 are 
unchanged in adopted Form ATS-N, we estimate that the burden for Part 
II, Item 7 of adopted Form ATS-N is less than that which was proposed 
by 0.5 hours. In the Proposal, we estimated that Part III, Item 10 
would add 2 hours to the baseline for an NMS Stock ATS to complete this 
item.\1172\ Accordingly, we estimate that, on average, preparing Part 
II, Item 7 for a Form ATS-N would add 1.5 hours above the current 
baseline for an initial operation report on current Form ATS. This 
would result in an aggregate initial burden of 61.5 hours above the 
current baseline for all NMS Stock ATSs to complete Item 7 of Part II 
of Form ATS-N.\1173\
---------------------------------------------------------------------------

    \1170\ 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.
    \1171\ See supra Section VI.
    \1172\ See Proposal, supra note 1 at 81098.
    \1173\ (Attorney at 1.0 hour + Compliance Manager at 0.5 hour) x 
41 NMS Stock ATSs = 61.5 burden hours.
---------------------------------------------------------------------------

(c) Part III
    Part III, Item 1 of adopted Form ATS-N is based on Part IV, Item 
1(c) of proposed Form ATS-N, although certain information from the 
proposed item is not required to be disclosed in this item. 
Specifically, the requirement to describe any criteria for 
distinguishing among types of subscribers, classes of subscribers, or 
other persons is being removed from the item because such information 
is covered under Part III, Item 13 of adopted Form ATS-N on 
``Segmentation; Notice.'' \1174\ Moreover, the required information on 
whether the NMS Stock ATS accepts non-broker-dealers as subscribers to 
the ATS is being converted to a ``yes'' or ``no'' question and placed 
in Part III, Item 2 of adopted Form ATS-N.
---------------------------------------------------------------------------

    \1174\ See supra Section V.D.1.
---------------------------------------------------------------------------

    Part IV, Item 1 of proposed Form ATS-N is, in large part, already 
required under current Form ATS.\1175\ We estimated all of Part IV, 
Item 1 of proposed Form ATS-N, which includes subparts (a)-(e), would 
add 6 hours to the to the current baseline for an initial operation 
report on current Form ATS.\1176\ We now estimate that Part III, Item 1 
as adopted would add 0.5 hours of burden to the current baseline. The 
current requirement of Exhibit A on Form ATS to describe the classes of 
subscribers on the ATS should oftentimes have substantial overlap with 
the requirement in Part III, Item 1 to select the types of subscribers 
from a list of checkboxes and identify any other types of subscribers. 
The additional 0.5 hours of burden is meant to account for identifying 
and listing any types of

[[Page 38874]]

subscribers that are not already captured by the classes of subscribers 
identified in Exhibit A of Form ATS. We therefore estimate that, on 
average, preparing Part III, Item 1 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 
20.5 hours above the current baseline for all NMS Stock ATSs to 
complete Part III, Item 1 of adopted Form ATS-N.\1177\
---------------------------------------------------------------------------

    \1175\ See Proposal, supra note 2, at 81098-81099.
    \1176\ The requirements related to subparts (a)-(e) of Item 1 of 
proposed Form ATS-N have been broken out into separate questions 
with the exception of subpart (b) which is being eliminated. We did 
not provide estimates for each individual subpart of Part IV, Item 1 
of proposed Form ATS-N.
    \1177\ Attorney at 0.5 hours x 41 NMS Stock ATSs = 20.5 burden 
hours.
---------------------------------------------------------------------------

    Part III, Item 2 of adopted Form ATS-N requires similar information 
to that required under Part IV, Items 1(a) and 1(b) of proposed Form 
ATS-N.\1178\ In the Proposal, we estimated all of Part IV, Item 1 of 
proposed Form ATS-N, which includes subparts (a)-(e), would add 6 hours 
to the to the current baseline for an initial operation report on 
current Form ATS.\1179\ However, a number of provisions of Part IV, 
Item 1 of proposed Form ATS-N either have been eliminated or moved to 
other Items in the adopted Form. Depending on the complexity of the NMS 
Stock ATS, the disclosure burden related to Part III, Item 2 of Form 
ATS-N would likely vary. For example, an NMS Stock ATS with two sets of 
conditions for different persons to satisfy before accessing the ATS 
services would likely have less of a burden than an NMS Stock ATS with 
five groups of persons that have to satisfy varying conditions. 
Accordingly, we estimate that, on average, preparing Part III, Item 2 
for a Form ATS-N would add 1.0 hour to the current baseline for an 
initial operation report on current Form ATS. This would result in an 
aggregate initial burden of 41 hours above the current baseline for all 
NMS Stock ATSs to complete Part III, Item 2 of adopted Form ATS-
N.\1180\
---------------------------------------------------------------------------

    \1178\ Adopted Part III, Item 2 removed some of the provisions 
in Part IV, Items 1(a) and 1(b) of proposed Form ATS-N and formatted 
the item to ''yes'' or ``no'' questions.
    \1179\ See Proposal, supra note 2, at 81098-81099.
    \1180\ (Attorney at 0.7 hours + Compliance Manager at 0.3 hours) 
x 41 NMS Stock ATSs = 41 burden hours.
---------------------------------------------------------------------------

    Part III, Item 3 of adopted Form ATS-N requires similar information 
to that required under Part IV, Item 1(e) of proposed Form ATS-N, with 
certain clarifications to reduce potential confusion with the 
application of Rule 301(b)(5) of Regulation ATS. First, Item 3(a) as 
adopted asks for a summary description of the conditions for excluding, 
in whole or in part, a subscriber from the ATS's services rather than 
the more detailed proposed requirement that the NMS Stock ATS describe 
the circumstances by which access for a subscriber or other person may 
be limited or denied. Second, we are no longer requiring that the NMS 
Stock ATS describe its procedures or standards to determine whether to 
exclude. Third, we are changing the language in the request to 
correspond closely with the definition of ATS in Regulation ATS.\1181\ 
In the Proposal, we estimated all of Part IV, Item 1 of proposed Form 
ATS-N, which includes subparts (a)-(e), would add 6 hours to the 
current baseline for an initial operation report on current Form 
ATS.\1182\ Although ATSs are not required to establish conditions for 
excluding subscribers from using the ATS, as stated in the 
Proposal,\1183\ in our experience, ATSs often have rules governing 
subscribers' participation on the ATS, and if a subscriber fails to 
comply with these rules, the ATS may limit or deny access to the NMS 
Stock ATS. The burden associated with the request would likely vary 
depending on the complexity of the ATS, whether it has conditions for 
excluding subscribers, and whether those conditions differ among 
subscribers. For some NMS Stock ATSs, the information required by Part 
III, Item 3 would require gathering information on its practices for 
excluding subscribers that previously may have been ad hoc decisions in 
order to prove the summary of conditions for excluding subscribers 
required by the Item. Accordingly, we estimate that, on average, 
preparing Part III, Item 3 for a Form ATS-N would add 1 hour to the 
current baseline for an initial operation report on current Form ATS. 
This would result in an aggregate initial burden of 41 hours above the 
current baseline for all NMS Stock ATSs to complete Part III, Item 3 of 
adopted Form ATS-N.\1184\
---------------------------------------------------------------------------

    \1181\ See 17 CFR 242.300(a).
    \1182\ See Proposal, supra note 2, at 81098-81099.
    \1183\ See Proposal, supra note 2, at 81063.
    \1184\ (Attorney at 0.7 hours + Compliance Manager at 0.3 hours) 
x 41 NMS Stock ATSs = 41 burden hours.
---------------------------------------------------------------------------

    Part III, Item 4 of adopted Form ATS-N is substantially similar to 
Part IV, Item 2 of proposed Form ATS-N, except that we are modifying 
the example provided in this item by replacing references in the 
Proposal to hours when ``pre-opening or after-hours trading occurs'' 
(emphasis added) with ``hours of operation outside of regular trading 
hours'' and the format of the item is being changed to a ``yes'' or 
``no'' question. In the Proposal, we estimated 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, 
and we believe this estimate is still accurate for the adopted 
Item.\1185\ The NMS Stock ATS is aware of the hours during which it 
operates, including any hours of operation outside of regular trading 
hours. Based on the experience of the Commission and its staff 
reviewing Form ATS and ATS-R filings, we believe 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 trading interest may be sent to the NMS Stock ATS are 
not the same for all subscribers and the broker-dealer operator, the 
disclosure burden related to Part IV, Item 2 would likely be greater. 
Considering the foregoing, we continue to believe that, on average, 
preparing Part III, Item 4 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 20.5 hours above 
the current baseline for all NMS Stock ATSs to complete Part III, Item 
4 of adopted Form ATS-N.\1186\
---------------------------------------------------------------------------

    \1185\ See Proposal, supra note 2, at 81099.
    \1186\ Compliance Manager at 0.5 hours x 41 NMS Stock ATSs = 
20.5 burden hours.
---------------------------------------------------------------------------

    Part III, Item 5 of adopted Form ATS-N is based on Part IV, Item 
4(a) of proposed Form ATS-N, although we have made modifications to the 
proposed item, and also are incorporating Part III, Item 6 proposed 
Form ATS-N. First, we are separating the requests regarding direct and 
indirect means of entry for orders and trading interest into the NMS 
Stock ATS so that information regarding direct means of entry will be 
disclosed in Part III, Item 5(a) of adopted Form ATS-N and information 
about other means of entry for orders and trading interest will be 
disclosed in adopted Part III, Item 5(c) of adopted Form ATS-N. Also, 
the information required by Part III, Item 5(a) on the direct means of 
order entry is being revised from the Proposal to be in a ``yes'' or 
``no'' format. We are also moving and revising Part III, Item 6 of 
proposed Form ATS-N to adopted Part III, Item 5(c) regarding the means 
available for entering orders other than entering orders 
directly.\1187\ Part III, Item 5(c) of adopted Form ATS-N would not 
require a broker-dealer operator to disclose its SOR's routing table or 
other information about how the SOR may route orders. Part III, Item 
5(b) of adopted Form ATS-N no longer contains the proposed language 
``[d]escribe the interaction and coordination,'' which was contained in

[[Page 38875]]

Part III, Item 6(b) of proposed Form ATS-N. Rather, Part III, Item 5(b) 
requires the NMS Stock ATS to ``identify and explain'' sources of order 
flow other than those used for direct entry into the ATS. Furthermore, 
the adopted disclosure requirements of Part III, Item 5(c) require the 
NMS Stock ATS to ``list and provide a summary description of the terms 
and conditions for entering orders or trading interest into the ATS'' 
through these sources.
---------------------------------------------------------------------------

    \1187\ See supra Section V.D.5.
---------------------------------------------------------------------------

    In the Proposal, we estimated that, on average, preparing Part IV, 
Item 4, which includes both subparts (a) (related to order entry) and 
(b) (related to co-location) would add 5 hours to the current baseline 
for an initial operation report on current Form ATS.\1188\ While we did 
not provide estimates for each individual subpart, each subpart of Part 
IV, Item 4 of proposed Form ATS-N accounted for half of the 5 hour 
estimate (i.e., 2.5 hours each for subparts (a) and (b)). Furthermore, 
we estimated that, on average, preparing Part III, Item 6 of proposed 
Form ATS-N would add 10 hours to the current baseline for an initial 
operation report on current Form ATS. We estimate that the burden hours 
for adopted Part III, Item 5 that correspond to the information 
required in Part IV, Item 4(a) of proposed Form ATS-N would be 
substantially similar (i.e., 2.5 hours). Therefore, we estimate Part 
III, Item 4 would add 2.5 hours to the current baseline for an initial 
operation report on current Form ATS.\1189\ The disclosure requirements 
that were proposed in Part III, Item 6 of proposed Form ATS-N have been 
revised and moved to this Item 5(c) as adopted. We expect that the 
associated burden would be reduced as we are allowing the NMS Stock ATS 
to ``list and provide a summary description of the terms and conditions 
for entering orders or trading interest into the ATS,'' as opposed to 
the ``interaction and coordination'' language used in the Proposal. 
Therefore, we estimate this requirement would add 8.0 hours to the 
current baseline for an initial operation report on current Form ATS 
\1190\ Thus, in total, we estimate that, on average, preparing Part 
III, Item 5 for a Form ATS-N would add 10.5 hours to the current 
baseline for an initial operation report on current Form ATS. This 
would result in an aggregate initial burden of 430.5 hours above the 
current baseline for all NMS Stock ATSs to complete Part III, Item 5 of 
adopted Form ATS-N.\1191\
---------------------------------------------------------------------------

    \1188\ See Proposal, supra note 2, at 81101-02.
    \1189\ (Attorney at 0.5 hours + Compliance Manager at 1 hours + 
Senior Systems Analyst at 1 hours) x 41 NMS Stock ATSs = 102.5 
burden hours.
    \1190\ (Attorney at 3 hours + Compliance Manager at 2 hours + 
Senior Systems Analyst at 3 hours) x 41 NMS Stock ATSs = 328 burden 
hours.
    \1191\ (Attorney at 3.5 hours + Compliance Manager at 3 hours + 
Senior Systems Analyst at 4 hours) x 41 NMS Stock ATSs = 430.5 
burden hours.
---------------------------------------------------------------------------

    We have made various revisions to the proposed item in adopted Part 
III, Item 6 of adopted Form ATS-N. Part III, Item 6(a) is limiting the 
proposed request by allowing for a ``summary'' of the terms and 
conditions for co-location and related services. We are also converting 
the information required by Part IV, Item 4(b) of proposed Form ATS-N 
into a series of ``yes'' or ``no'' questions, with accompanying 
explanations as applicable, in Part III, Item 6 of adopted Form ATS-N. 
\1192\ We are also separating the requests for disclosure into separate 
sub-parts.
---------------------------------------------------------------------------

    \1192\ See supra note 839.
---------------------------------------------------------------------------

    In the Proposal, the we estimated that, on average, preparing Part 
IV, Item 4 of proposed Form ATS-N, which included subparts (a) 
(connectivity and order entry) and (b) (co-location), would add 5 hours 
to the current baseline for an initial operation report on current Form 
ATS.\1193\ We intended that each subpart of Part IV, Item 4 accounted 
for half of the 5 hour estimate (i.e., 2.5 hours each for subparts (a) 
and (b)). We have reduced the burden compared to the proposed item by 
allowing for a summary of the terms and conditions related to co-
location and related services in Part III, Item 6(a). On the other 
hand, the information required in Part III, Item 6(e) of Form ATS-N was 
previously proposed under a different item (Part IV, Item 7 of proposed 
Form ATS-N), and therefore, the burden related to responding to this 
item is now being added to Item 6(e) as adopted. Therefore, as we have 
revised Part III, Item 6 to both reduce the associated burden (by 
allowing for a summary) and increase the associated burden (by moving 
information required in proposed Part IV, Item 7 of proposed Form ATS-
N), we believe that the burden hours for Part III, Item 6 will remain 
the same as the proposed estimate for Part IV, Item 4(b), 2.5 hours 
above the current baseline for an initial operation report. This would 
result in the aggregate initial burden of 95 hours above the current 
baseline for all NMS Stock ATSs to complete Part III, Item 6 of adopted 
Form ATS-N.\1194\
---------------------------------------------------------------------------

    \1193\ See Proposal, supra note 2, at 81101-02. The requirements 
related to subparts (a) and (b) of Item 4 of proposed Form ATS-N 
have been broken out into separate items in the adopted form. Item 
4(a) is being adopted as Part III, Item 5, as modified. See supra 
notes 1188- 1191 and accompanying text.
    \1194\ (Attorney at 1 hour + Compliance Manager at 1 hour + 
Senior Systems Analyst at .5) x 41 NMS Stock ATSs = 102.5 burden 
hours.
---------------------------------------------------------------------------

    The disclosure requirements in Part III, Item 7 of adopted Form 
ATS-N are substantially the same as those set forth in Part IV, Item 
3(a) and(b) of proposed Form ATS-N. ATSs that currently trade NMS 
stocks vary in the depth of their disclosures related to order types. 
We estimated in the Proposal that, on average, preparing Part IV, Item 
3 of proposed Form ATS-N, which also included Items 3(c) and 3(d) that 
have been moved to other items in the adopted form,\1195\ would add 6 
hours to the current baseline for an initial operation report on 
current Form ATS.\1196\ Because the requirements in Part III, Item 7 of 
adopted Form ATS-N are substantially the same as the corresponding 
requirements set forth in subparts (a) and (b) of Part IV, Item 3 of 
proposed Form ATS-N, we estimate that the burden hours will also be 
substantially similar. While we did not provide estimates for each 
individual subpart of Part IV, Item 3 of proposed Form ATS-N, subparts 
(a) and (b) of Part IV, Item 3 of proposed Form ATS-N, accounted for 4 
hours (of the 6 burden hours estimated for Part IV, Item 3). 
Consequently, we estimate that adopted Part III, Item 7 will also add 4 
hours above the current baseline for an initial operation report on 
current Form ATS, resulting in the aggregate initial burden of 164 
hours above the current baseline for all NMS Stock ATSs to complete 
Part III, Item 7 of adopted Form ATS-N.\1197\
---------------------------------------------------------------------------

    \1195\ Item 3(c) of proposed Form ATS-N is being adopted with 
modifications as Item 8 of adopted Form ATS-N. Item 3(d) is being 
adopted with modifications as Item 9 of adopted Form ATS-N.
    \1196\ See Proposal, supra note 2, at 81099.
    \1197\ (Attorney at 1.0 hours + Compliance Manager at 2 hours + 
Senior Systems Analyst at 1) x 41 NMS Stock ATSs = 164 burden hours.
---------------------------------------------------------------------------

    Part III, Item 8 of adopted Form ATS-N is based on Part IV, Item 
3(c) of proposed Form ATS-N. In adopted Form ATS-N, Part III, Item 8, 
we separated the requests proposed under Item 3(c) into six sub-parts. 
However, the requirements have not changed significantly.\1198\ 
Additionally, we are adding to Part III, Item 8(a) of adopted Form ATS-
N a request for the NMS Stock ATS to provide information about any 
maximum order or trading interest size requirements. Because the 
requirements in Part III, Item 8 of adopted Form ATS-N are 
substantially the same as the corresponding

[[Page 38876]]

requirements set forth in Part IV, Item 3 of proposed Form ATS-N, we 
estimate that the burden hours in adopted Part III, Item 8 that 
correspond to the information required in proposed Part IV, Item 3 
would be substantially similar. While we did not provide estimates for 
each individual subpart of Part IV, Item 3 of proposed Form ATS-N, 
subpart (c) of Part IV, Item 3 of proposed Form ATS-N, would have 
accounted for 1 hour (of the 6 burden hours estimated for Part IV, Item 
3). Consequently, we estimate that the burden hours in adopted Part 
III, Item 8 would add 1 hour to the current baseline for an initial 
operation report on current Form ATS, resulting in the aggregate 
initial burden of 41 hours above the current baseline for all NMS Stock 
ATSs to complete Part III, Item 8 of adopted Form ATS-N.\1199\
---------------------------------------------------------------------------

    \1198\ We are relocating Part IV, Item 3(c) of proposed Form 
ATS-N to Part III, Item 8 of adopted Form ATS-N and adopting a 
``yes'' or ``no'' format. We are requiring that the NMS Stock ATS 
identify and explain any differences in the treatment of subscribers 
and the broker-dealer operator, as applicable, in separate sub-items 
8(b), 8(d), and 8(f), respectively, which is the same as required in 
Part IV, Item 3(c) of the Proposal.
    \1199\ (Attorney at .25 hours + Compliance Manager at .25 hours 
+ Senior Systems Analyst at .5) x 41 NMS Stock ATSs = 41burden 
hours.
---------------------------------------------------------------------------

    Part III, Item 9 of adopted Form ATS-N is based on Part IV, Item 
3(d) of proposed Form ATS-N. We separated Part IV, Item 3(d) of 
proposed Form ATS-N into two sub-parts in adopted Part III, Item 9. 
However, the requirements have not changed substantially. We are adding 
``price or size minimums'' as examples of information that could be 
contained in the messages and ``order management system, smart order 
router and FIX'' to illustrate the types of mechanisms that could 
transmit messages, such as IOIs and conditional orders. Because the 
requirements in Part III, Item 9 of adopted Form ATS-N are 
substantially the same as the corresponding requirements set forth in 
Part IV, Item 3(d) of proposed Form ATS-N, we estimate that the burden 
hours in adopted Part III, Item 9 that correspond to the information 
required in Part IV, Item 3(d) of proposed Form ATS-N are substantially 
similar. While we did not provide estimates for each individual subpart 
of Part IV, Item 3 of proposed Form ATS-N, subpart (d) would have 
accounted for 1 hour (of the 6 burden hours estimated for Part IV, Item 
3). Accordingly, we estimate that the burden hours in adopted Part III, 
Item 9 would add 1 hour to the current baseline for an initial 
operation report on current Form ATS, resulting in the aggregate 
initial burden of 41 hours above the current baseline for all NMS Stock 
ATSs to complete Part III, Item 9 of adopted Form ATS-N.\1200\
---------------------------------------------------------------------------

    \1200\ (Attorney at .25 hours + Compliance Manager at 0.25 hours 
+ Senior Systems Analyst at 0.5) x 41 NMS Stock ATSs = 41 burden 
hours. As noted above, we estimate the burden for Part III, Item 7 
of adopted Form ATS-N to be 4 hours above the baseline and the 
burden for Part III, Item 8 to be 1 hour above the baseline. 
Accordingly, we estimate that the total burden hours above the 
baseline for Part III, Items 7, 8, and 9 of adopted Form ATS-N is 6 
hours, which is the same as that which was proposed for Part IV, 
Item 3.
---------------------------------------------------------------------------

    Part III, Item 10 of adopted Form ATS-N corresponds with Part IV, 
Item 9(a) of proposed Form ATS-N. We separated what was proposed in 
Part IV, Item 9(a) into five sub-parts in adopted Part III, Item 10. We 
are adding to Part III, Item 10(a) of adopted Form ATS-N requirements 
regarding ``when'' and how such orders and trading interest are 
``priced [and] prioritized'' and ``any order types allowed'' during the 
opening and reopening processes.\1201\ Additionally, we are formatting 
the requests that parallel the information requested in the Proposal 
into three sub-parts (adopted Items 10(a), 10(c) and 10(e)) and adding 
a ``yes'' or ``no'' question to Item 10(e) to improve readability and 
facilitate comparisons of the information for market participants. 
Also, we are adding a new requirement to identify and explain any 
differences in the treatment of subscribers and the broker-dealer 
operator in the opening and reopening processes, if applicable, in the 
form of ``yes'' or ``no'' questions in adopted Part III, Items 10(b) 
and 10(d). We estimate that the overall burden hours for adopted Part 
III, Item 10 will be slightly more than Part IV, Item 9(a) because 
while the adopted subparts that parallel the information requested in 
the proposed item (adopted Items 10(a), 10(c) and 10(e)) result in a 
similar burden, we expect that the new subparts (adopted Items 10(b) 
and 10(d)) will impose an additional burden on some NMS Stock ATSs that 
treat subscribers and the broker-dealer operator differently. While we 
did not provide an estimate for each individual subpart of Part IV, 
Item 9 of proposed Form ATS-N, subpart (a) would have accounted for 1 
hour (of the 3 burden hours estimated for Part IV, Item 9).\1202\ 
Consequently, we estimate that the burden hours in adopted Part III, 
Item 10 would add 1.25 hours to the current baseline for an initial 
operation report on current Form ATS, resulting in the aggregate 
initial burden of 51.25 hours above the current baseline for all NMS 
Stock ATSs to complete Part III, Item 9 of adopted Form ATS-N.\1203\
---------------------------------------------------------------------------

    \1201\ The words in quotes in this sentence represent new text 
from that proposed in Item 9(a), adopted as Item 10(a). The 
requirement to explain when orders and trading interest are priced, 
prioritized, matched and executed when the NMS Stock ATS opens or 
re-opens for trading is not expected to change significantly the 
burden on the ATS given that Form ATS-N requires disclosure of the 
hours of operations under Part III, Item 4 of adopted Form ATS-N.
    \1202\ Part IV, Item 9(b) of proposed Form ATS-N is being 
adopted with modifications as Item 17 of adopted Form ATS-N. Part 
IV, Item 9(c) of proposed Form ATS-N is being adopted with 
modifications as Item 18 of adopted Form ATS-N. We are estimating 
1.25 burden hours for Item 17 and 1.25 burden hours for Item 18 of 
adopted Form ATS-N.
    \1203\ (Attorney at .5 hours + Senior Systems Analyst at .75) x 
41 NMS Stock ATSs = 51.25 burden hours.
---------------------------------------------------------------------------

    Part III, Item 11 of adopted Form ATS-N is substantively similar to 
Part IV, Item 7 of proposed Form ATS-N, but we are making various 
revisions to the Item. We are limiting the request to require NMS Stock 
ATSs to provide a summary of the structure of the NMS Stock ATS 
marketplace instead of describing the means or facilities used by the 
NMS Stock ATS to bring together the orders of multiple buyers and 
sellers. In Part III, Item 11(c) of adopted Form ATS-N, we are 
combining the requests in the Proposal in Part IV, Items 7(b) (``Order 
Interaction Rules'') and 7(c) (``Other Trading Procedures''). Part IV, 
Items 7(b) and 7(c) of proposed Form ATS-N were intended to solicit 
information about the ATS's established non-discretionary methods that 
dictate the terms of trading among the multiple buyers and sellers 
entering orders and trading interest. In addition to a trading 
facility, non-discretionary methods include rules and procedures. We 
are revising the language in adopted Item 11(c) to recognize this 
overlap by requiring the NMS Stock ATS to ``explain the established, 
non-discretionary rules and procedures of the NMS Stock ATS, including 
order interaction rules,'' which requires the same information as the 
proposed subparts. As another component of an NMS Stock ATS's non-
discretionary methods, we are moving the trading procedures description 
required in proposed Item 7(c) into adopted Item 11(c) and including 
the examples of the trading procedures of an NMS Stock ATS (e.g., price 
protection mechanisms, shorts sales, locked-cross markets) in adopted 
Item 11(c) as well. Finally, we are converting the prompts in Part IV, 
Item 7(a), 7(b) and 7(c) of proposed Form ATS-N to identify and explain 
any differences among subscribers and persons into ``yes'' or ``no'' 
questions in Items 11(b) and 11(d) of adopted Form ATS-N.
    Consistent with the estimate in the Proposal, we estimate that, on 
average, preparing Part III, Item 11 for a Form ATS-N will 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 will result in an aggregate initial burden of 246 hours

[[Page 38877]]

above the current baseline for all NMS Stock ATSs to complete Part III, 
Item 11 of adopted Form ATS-N.\1204\
---------------------------------------------------------------------------

    \1204\ Attorney at 1.0 + Compliance Manager at 2.0 + Senior 
Systems Analyst at 3.0) x 41 NMS Stock ATSs = 246 burden hours.
---------------------------------------------------------------------------

    The requirements of Part III, Item 12 were proposed as Part IV, 
Item 1(d) of proposed Form ATS-N. In the Proposal, we estimated that 
the entire Part IV, Item 1 (which also would have addressed 
eligibility, terms and conditions of use, types of subscribers, and 
liquidity providers) \1205\ would add 6 hours to the current baseline 
for an initial operation report on current Form ATS. The requirements 
related to eligibility, terms and conditions of use, types of 
subscribers, and liquidity providers have been broken out into separate 
questions, and Part III, Item 12 of adopted Form ATS-N solely relates 
to formal and informal arrangements with subscribers or the broker-
dealer operator to provide orders or trading interest to the NMS Stock 
ATS. We believe that Part III, Item 12 of adopted Form ATS-N will add 1 
hour to the current baseline for an initial operation report on current 
Form ATS. This would result in an aggregate initial burden of 41 hours 
above the current baseline for all NMS Stock ATSs to complete Part III, 
Item 12 of adopted Form ATS-N.\1206\
---------------------------------------------------------------------------

    \1205\ Proposed Part IV, Item 1(a) (``eligibility'') is being 
adopted with modifications as Part III, Item 2 of adopted Form ATS-
N. Proposed Part IV, Item 1(b) (``terms and conditions'') is not 
being adopted, except for the request to state whether contractual 
agreements are written, which is being adopted with modifications as 
Part III, Item 2(d) of adopted Form ATS-N. Proposed Part IV, Item 
1(c) (``Types of Subscribers'') is being adopted with modifications 
as Part III, Item 1 and Item 2(a) of adopted Form ATS-N. Proposed 
Part IV, Item 1(e) (``Limitation and Denial of Services'') is being 
adopted with modifications as Part III, Item 3 of adopted Form ATS-
N.
    \1206\ (Attorney at 0.7 hours + Compliance Manager at 0.3 hours) 
x 41 NMS Stock ATSs = 41 burden hours.
---------------------------------------------------------------------------

    Part III, Item 13 of adopted Form ATS-N corresponds with Part IV, 
Item 5(a) and (b) of proposed Form ATS-N. The requirements of Part III, 
Item 13 of adopted Form ATS-N cover the requirements proposed under 
Part IV, Items 5(a) and 5(b), although we have modified the proposed 
requirements.\1207\ We are adding ``yes'' or ``no'' questions to Part 
III, Item 13(a), 13(b), 13(d) and 13(e) of adopted Form ATS-N to 
facilitate responses to the items and to facilitate market participants 
finding the information.
---------------------------------------------------------------------------

    \1207\ See supra Section V.D.13.
---------------------------------------------------------------------------

    We are also modifying certain components of Part IV, Item 5 of 
proposed Form ATS-N. First, we are adding the terms ``classifications, 
tiers, or levels'' to adopted Part III, Item 13(a) through (e) in 
addition to ``categories'' to describe the groupings that an NMS Stock 
ATS may segment subscriber orders. Second, we are providing two 
additional examples, order size and duration, of criteria for 
segmentation of subscribers' orders and trading interest. Third, we are 
providing additional specificity around what ``changing segmented 
categories'' means by requiring NMS Stock ATSs to provide a discussion 
around overriding a determination of segmented category. Fourth, we are 
requiring a description of how segmentation affects order interaction 
on Part III, Item 13 of adopted Form ATS-N. Finally, we are requiring 
under Part III, Item 13(d) of adopted Form ATS-N that the NMS Stock ATS 
describe ``whether and how such designation can be contested.''
    In the Proposal, we estimated 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. The proposed requirement 
regarding order preferencing is broken out into a separate item, Part 
III, Item 14 of adopted Form ATS-N, which is described below. We also 
are adding a ``yes'' or ``no'' question in adopted Part III, Item 13(b) 
regarding identifying orders by a customer of a broker-dealer as a 
customer order. We believe the aforementioned minor modifications to 
the proposed question will slightly increase the burden for the adopted 
item. Therefore, we believe that Part III, Item 13 of adopted Form ATS-
N will add 6 hours to the current baseline for an initial operation 
report on current Form ATS. This would result in an aggregate initial 
burden of 205 hours above the current baseline for all NMS Stock ATSs 
to complete Part III, Item 13 of adopted Form ATS-N.\1208\
---------------------------------------------------------------------------

    \1208\ (Attorney at 2.0 hours + Compliance Manager at 2.25 hours 
+ Senior Systems Analyst at 1.75 hours) x 41 NMS Stock ATSs = 205 
burden hours.
---------------------------------------------------------------------------

    Part III, Item 14(a) is substantially similar to Part IV, Item 5(c) 
of proposed Form ATS-N. However, we have added a requirement in Item 
14(b), that if counter-party selection functionality is not the same 
for all subscribers and the broker-dealer operator, that the NMS Stock 
ATS identify and explain any differences. The burden associated with 
this change is likely to vary among NMS Stock ATS depending on their 
complexity and the extent to which they treat all subscribers and the 
broker-dealer operator the same or differently. We estimated that, on 
average, preparing all of Part IV, Item 5 (including subparts (a), (b), 
and (c)) 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 counter-party selection.\1209\ We understand 
that most, but not all, ATSs that currently trade NMS stocks allow 
subscribers to enter some type of counter-party selection criteria. 
These ATSs vary in the depth of their description as to how they allow 
counter-party selection. We believe that Part III, Item 14 of adopted 
Form ATS-N, which solely relates to counter-party selection, will add 2 
hours to the current baseline for an initial Form ATS. This will result 
in an aggregate initial burden of 82 hours above the current baseline 
for all NMS Stock ATSs to complete Part III, Item 14 of adopted Form 
ATS-N.\1210\
---------------------------------------------------------------------------

    \1209\ See Proposal, supra note 2, at 81100. Proposed Part IV, 
Items 5(a) and 5(b) are being adopted with modifications as Part 
III, Item 13 of adopted Form ATS-N. We are estimating 5 burden hours 
for Part III, Item 13 of adopted Form ATS-N.
    \1210\ (Attorney at 0.5 hours + Compliance Manager at 0.75 hours 
+ Senior Systems Analyst at 0.75 hours) x 41 NMS Stock ATSs = 82 
burden hours.
---------------------------------------------------------------------------

    Part III, Item 15 is modified from a similar requirement of Part 
IV, Item 6 of proposed Form ATS-N, which asked about order display and 
the subscribers and persons to which orders and trading interest are 
displayed or otherwise made known. We are changing the language in this 
item from ``order information or other trading interest'' to 
``subscriber orders and trading interest.'' We are also revising the 
proposed requests to make clear that it only applies to the display of 
the NMS Stock ATS's subscriber orders and trading interest as opposed 
to non-ATS orders and trading interest handled or otherwise displayed 
to the broker-dealer operator. Accordingly, the disclosure of non-ATS 
orders by affiliates of the NMS Stock ATS and others external to the 
ATS of non-ATS orders would not have to be disclosed. However, if for 
example, an affiliate of the NMS Stock ATS is displaying an order that 
is simultaneously bound for or resting in the NMS Stock ATS, then Item 
15 would apply. In addition, we have revised the request so that Part 
III, Item 15(b) of adopted Form ATS-N makes clear that the request does 
not

[[Page 38878]]

require the NMS Stock ATS to identify employees of the ATS who are 
operating the system. Finally, we are adding a ``yes'' or ``no'' 
questions in Part III, Item 15(a) that asks if the NMS Stock ATS is an 
ECN as defined in Rule 600(a)(23) of Regulation NMS.
    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 
III, Item 15 would likely vary among NMS Stock ATSs. In the Proposal, 
we estimated that, on average, preparing Part IV, Item 6 of proposed 
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. Although we are revising the item text to provide more 
specificity so NMS Stock ATSs better understand the requirements and 
scope of the request and provide sufficient information to market 
participants in Part III, Item 15 of adopted Form ATS-N, we are also 
simplifying responses to the item by no longer requiring NMS Stock ATSs 
to identify the subscriber or person to whom order and trading interest 
is displayed and instead requiring disclosure of the types of market 
participants that receive the information. Thus, we believe these 
changes would, in total, provide no additional burden from proposed 
Form ATS-N. We therefore believe that preparing Part III, Item 15 of 
adopted Form ATS-N will add 5 hours to the current baseline for an 
initial Form ATS. This will result in an aggregate initial burden of 
205 hours above the current baseline for all NMS Stock ATSs to complete 
Part III, Item 15 of adopted Form ATS-N.\1211\
---------------------------------------------------------------------------

    \1211\ (Attorney at 1 hour + Compliance Manager at 2 hours + 
Senior Systems Analyst at 2 hours) x 41 NMS Stock ATSs = 205 burden 
hours.
---------------------------------------------------------------------------

    Part III, Item 16(a) relates to disclosures surrounding orders and 
trading interest in the NMS Stock ATS being routed to a destination 
outside the ATS. We understand, based on disclosures in Form ATS 
submissions, that some ATSs that currently trade NMS stocks do not 
route orders out of the ATS. Consequently, the disclosure burden 
related to Part III, Item 16 of adopted Form ATS-N will likely vary 
among NMS Stock ATSs depending on whether they route orders at all. In 
the Proposal, we estimated that, on average, preparing Part IV, Item 10 
for proposed 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. We, however, are substantially simplifying 
the item as adopted by converting subpart (a) into a ``yes'' or ``no'' 
question that no longer requires a description of the circumstances 
under which orders are routed, and also removes the requirement to 
describe the means by which routing is performed and the requirement to 
describe any differences among subscribers and persons. We therefore 
estimate that Part III, Item 16 of adopted Form ATS-N will add 2 hours 
to the current baseline for an initial operation report, depending on 
the extent to which the ATS routes orders and trading interest. This 
will result in an aggregate initial burden of 82 hours above the 
current baseline for all NMS Stock ATSs to complete Part III, Item 16 
of adopted Form ATS-N.\1212\
---------------------------------------------------------------------------

    \1212\ (Attorney at 0.5 hours + Compliance Manager at 0.5 hours 
+ Senior Systems Analyst at 1 hours) x 41 NMS Stock ATSs = 82 burden 
hours.
---------------------------------------------------------------------------

    The requirements of Part III, Item 17(a) are similar to those 
proposed in Part IV, Item 9(b) of the proposed Form ATS-N.\1213\ We 
estimated that, on average, preparing all of Part IV, Item 9, including 
subparts (a)-(c), for proposed Form ATS-N would have added 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.\1214\ While we did not provide an 
estimate for each individual subpart of Part IV, Item 9 of proposed 
Form ATS-N, subpart (b) would have accounted for 1 hour (of the 3 
burden hours estimated for Part IV, Item 9). As we stated in the 
Proposal, current Form ATS, Exhibit F requires an ATS to describe its 
closing processes. Therefore, we continue to believe that Part III, 
Item 17 of adopted Form ATS-N will not impose a significant additional 
requirement. We are newly requiring, as Part III, Item 17(b) of adopted 
Form ATS-N, that if the treatment of orders and trading interest during 
the close is not the same for all subscribers and the broker-dealer 
operator, the NMS Stock ATS identify and explain such differences. The 
burden associated with this change is likely to vary among NMS Stock 
ATS depending on their complexity and the extent to which they treat 
all subscribers and the broker-dealer operator the same or differently. 
Therefore, we believe that it would add 1.25 hours to the current 
baseline for an initial operation report on Form ATS-N. This would 
result in an aggregate initial burden of 51.25 hours above the current 
baseline for all NMS Stock ATSs to complete Part III, Item 17 of 
adopted Form ATS-N.\1215\
---------------------------------------------------------------------------

    \1213\ Although we are revising the item text to provide more 
specificity so NMS Stock ATSs better understand the requirements and 
scope of the request and provide sufficient information to market 
participants, we believe these revisions should not change the 
burden of the required disclosure.
    \1214\ Part IV, Items 9(a) and 9(c) of proposed Form ATS-N are 
being adopted with modifications as Part III, Items 10 and 18 of 
adopted Form ATS-N, respectively. We are estimating 1.25 burden 
hours for Item 10 and 1.25 burden hours for Item 18 of adopted Form 
ATS-N.
    \1215\ (Compliance Manager at .75 hours + Senior Systems Analyst 
at 0.50 hour) x 41 NMS Stock ATSs = 51.25 burden hours.
---------------------------------------------------------------------------

    Subparts (a) and (b) of Part III, Item 18 of adopted Form ATS-N are 
substantially similar to Part IV, Item 9(c) of proposed Form ATS-N. We 
estimated that, on average, preparing all of Part IV, Item 9 for a 
proposed 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.\1216\ While we did not provide an estimate for each 
individual subpart of Part IV, Item 9 of proposed Form ATS-N, subpart 
(c) would have accounted for 1 hour (of the 3 burden hours estimated 
for Part IV, Item 9). In the Proposal, we stated that Exhibit F of 
current Form ATS requires an ATS to describe after-hours trading 
procedures. These procedures may vary widely across different ATSs. 
Therefore, we continue to estimate that the additional requirements 
will not impose a significant additional burden above the current 
baseline for an initial operation report on current Form ATS. Unlike 
Part IV, Item 9(c) of proposed Form ATS-N, an ATS that has trading 
outside of regular hours that follows the same procedures as trading 
within regular trading hours would need to check the boxes to indicate 
it conducts trading outside of its regular trading hours and to 
indicate that its trading procedures do not differ between regular and 
outside of regular trading hours; it would not need to describe any 
after-hours trading procedures. We, however, also added the requirement 
that the NMS Stock ATS describe, as applicable, the treatment of orders 
and trading interest outside of regular trading hours if it is not the 
same for all subscribers and broker-dealer operator as Item 18(c) of 
adopted Form ATS-N. In light of these changes, we believe that Part 
III, Item 18 of adopted Form ATS-N would add 1.25 hours to the current 
baseline for an initial operation report on Form ATS-N. This would 
result in an

[[Page 38879]]

aggregate initial burden of 51.25 hours above the current baseline for 
all NMS Stock ATSs to complete Part III, Item 18 of adopted Form ATS-
N.\1217\
---------------------------------------------------------------------------

    \1216\ Part IV, Items 9(a) and 9(b) of proposed Form ATS-N are 
being adopted with modifications as Part III, Items 10 and 17 of 
adopted Form ATS-N, respectively. We are estimating 1.25 burden 
hours for Item 10 and 1.25 burden hours for Item 17 of adopted Form 
ATS-N.
    \1217\ (Compliance Manager at .75 hours + Senior Systems Analyst 
at 0.50 hour) x 41 NMS Stock ATSs = 51.25 burden hours.
---------------------------------------------------------------------------

    Part III, Item 19 of adopted Form ATS-N is similar to Part IV, Item 
12 of proposed Form ATS-N. In the Proposal, we estimated 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 relating to fees, rebates, or other charges. As 
discussed in the Proposal,\1218\ current Form ATS does not require an 
ATS to disclose and explain its fee structure, and few, if any, do so 
in their current Form ATS filings. We recognize 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, the disclosure burden related to Part III, Item 19 
of adopted Form ATS-N will likely vary.
---------------------------------------------------------------------------

    \1218\ See id. at 81103.
---------------------------------------------------------------------------

    However, we are requiring additional specificity related to the 
description of fees of the NMS Stock ATS that are based on or bundled 
with the use of non-ATS services or products offered by the broker-
dealer operator or its affiliates. These were not previously explicitly 
specified by Part IV, Item 12 of proposed Form ATS-N, and the adopted 
item will likely require additional burden hours for NMS Stock ATSs 
that are operated by multi-service broker-dealers that bundle their ATS 
fees with other non-ATS services or products. In contrast, we are 
narrowing the request for NMS Stock ATSs to describe any differences in 
fees or rebates charged to different ``subscribers,'' and instead 
asking for NMS Stock ATSs to disclose any differentiation between fees 
and/or rebates charged among ``types'' of subscribers, which should 
reduce the burden of responding as differences among individual 
subscribers need not be explained. Accordingly, we estimate that, on 
average, preparing Part III, Item 19 of Form ATS-N would add 6 hours to 
the current baseline for an initial operation report on current Form 
ATS. This will result in an aggregate initial burden of 246 hours above 
the current baseline for all NMS Stock ATSs to complete Part III, Item 
19 of Form ATS-N.\1219\
---------------------------------------------------------------------------

    \1219\ (Attorney at 2 hour + Compliance Manager at 3 hours + 
Senior Systems Analyst at 1 hour) x 41 NMS Stock ATSs = 246 burden 
hours.
---------------------------------------------------------------------------

    Part III, Item 20 of adopted Form ATS-N is substantially similar to 
Part IV, Item 8 of proposed Form ATS-N with certain modifications. We 
are renaming the item ``Suspension of Trading,'' converting the prompt 
in Part IV, Item 8(a) of proposed Form ATS-N to identify and explain 
any differences among subscribers and persons into a ``yes'' or ``no'' 
question in Part III, Item 20(b) of adopted Form ATS-N, revising the 
language to refer to procedures for stopping trading, and clarifying 
that suspensions of trading in an NMS stock are responsive. In the 
Proposal, we estimated 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.
    We believe that NMS Stock ATSs should be able to provide the 
disclosures in Part III, Item 20 of adopted Form ATS-N as they should 
already be aware of how the ATS operates, handles system disruptions, 
malfunctions or other suspensions based on the information required in 
Exhibits G and F of current Form ATS. We recognize, however, that Part 
III, Item 20 is significantly more specific and detailed in its 
disclosure requirements than current Form ATS.
    Accordingly, we estimate that respondents would incur an additional 
burden above the current baseline when preparing the disclosures 
required under Part III, Item 20 of Form ATS-N, consistent with the 
estimated burden for proposed Item IV, Part 8. We estimate that, on 
average, preparing Part III, Item 20 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 suspending or stopping trading on the NMS Stock 
ATS. This would result in an aggregate initial burden of 102.5 hours 
above the current baseline for all NMS Stock ATSs to complete Part III, 
Item 20 of proposed Form ATS-N.\1220\
---------------------------------------------------------------------------

    \1220\ (Attorney at 1 hour + Compliance Manager at .5 hours + 
Senior Systems Analyst at 1 hour) x 41 NMS Stock ATSs = 102.5 burden 
hours.
---------------------------------------------------------------------------

    Part III, Item 21 is substantially the same as Part IV, Item 13(a) 
of proposed Form ATS-N with certain modifications. We are limiting the 
description of any arrangements for reporting transactions on the NMS 
Stock ATS to only ``material arrangements'' in the adopted item, and 
converting the prompt in the proposed Part IV, Item 13(a) to describe 
any differences among subscribers and persons into a ``yes'' or ``no'' 
question in Part III, Item 21(b) of adopted Form ATS-N.
    Part III, Item 22 is substantially the same as Part IV, Item 13(b) 
of proposed Form ATS-N with certain modifications. We are limiting the 
description of any arrangements to facilitate the clearance and 
settlement of transactions on the NMS Stock ATS to only ``material 
arrangements'' in the adopted item, and converting the prompt in Part 
IV, Item 13(b) of proposed Form ATS-N to describe any differences among 
subscribers and persons into a ``yes'' or ``no'' question in Part III, 
Item 22(b) of adopted Form ATS-N. In addition, we are removing the 
phrase ``undertaken by the NMS Stock ATS'' from the proposed 
requirement to describe any procedures or arrangements by the NMS Stock 
ATS to facilitate clearance and settlement on the ATS.
    In the Proposal, we estimated 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.\1221\ We believe 
that preparing Part III, Items 21 and 22 for a Form ATS-N will impose a 
lesser burden as compared to the proposed items because the adopted 
items only require that ``material'' arrangements related to reporting 
and clearance and settlement of transactions be disclosed (as opposed 
to ``any arrangements'' in the Proposal). Therefore, we estimate that, 
on average, preparing Part III, Item 21 and 22 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 will result in an aggregate initial burden of 20.5 
hours above the current baseline for all NMS Stock ATSs to complete 
Part III, Items 21 and 22 of adopted Form ATS-N.\1222\
---------------------------------------------------------------------------

    \1221\ See Proposal, supra note 2, at 81103.
    \1222\ Compliance Manager at 0.50 hours x 41 NMS Stock ATSs = 
20.5 burden hours.
---------------------------------------------------------------------------

    Part III, Item 23 of adopted Form ATS-N is substantially the same 
as Part IV, Item 11 of proposed Form ATS-N with certain modifications. 
We are revising the request to make clear that an NMS Stock ATS would 
not be

[[Page 38880]]

expected to provide information about the market data that the broker-
dealer operator uses to route orders and trading interest from the NMS 
Stock ATS to away destinations by removing from the item the prompt to 
describe how the ATS uses market data to determine routing 
destinations. As discussed above in Section V.D.23, we believe, 
however, that it would be responsive to Part III, Item 23 for the NMS 
Stock ATS to provide information about the ATS's use of market data to 
determine when resting orders and trading interest will be removed from 
inside the NMS Stock ATS as such orders and trading interest reside 
inside the ATS. Accordingly, the NMS Stock ATS should disclose, in 
response to this request, the market data that is used to remove 
resting orders and trading from the NMS Stock ATS. Because the adopted 
Item is removing the requirement from the proposed Item for information 
related to using market data to determine routing destinations, and the 
adopted Item is adding a requirement to explain how market data is used 
to determine when resting orders will be removed from the NMS Stock 
ATS, we believe that the resulting overall burden for the adopted Item 
will remain the same. In addition, we are adding a requirement that if 
the use of market data is not the same for all subscribers and the 
broker-dealer operator, that the NMS Stock ATS must identify and 
explain any differences.
    We believe that the disclosures under Part III, Item 23 will 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. The information requested in Part III, Item 23 of 
adopted Form ATS-N is similar to that required by Part IV, Item 11 of 
proposed Form ATS-N. In the Proposal, we estimated 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.\1223\ However, unlike Part IV, Item 11 of 
proposed Form ATS-N, Part III, Item 23 also requests information 
regarding differences in treatment between subscribers and the broker-
dealer operator. We believe that this requirement would add to the 
total additional burden; however, we believe that such information 
should be readily available to the NMS Stock ATS. Therefore, we believe 
that preparing Part IV, Item 11 for a Form ATS-N will 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 205 hours 
above the current baseline for all NMS Stock ATSs to complete Part IV, 
Item 11 of adopted Form ATS-N.\1224\
---------------------------------------------------------------------------

    \1223\ See Proposal, supra note 2, at 81103.
    \1224\ (Compliance Manager at 2.5 hours + Senior Systems Analyst 
at 2.5 hours) x 41 NMS Stock ATSs = 205 burden hours.
---------------------------------------------------------------------------

    Part III, Items 24 and 25 of adopted Form ATS-N correspond with of 
Part IV, Item 14 and 15 of proposed Form ATS-N. Current Form ATS does 
not require an ATS to disclose the information that would be required 
under Part III, Items 24 and 25 of Form ATS-N. However, based on the 
experience of the Commission and its staff, we continue to believe 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 we believe 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 
III, Items 24 and 25 of Form ATS-N may result. Because Items 24 and 25 
of Part III are tied to existing obligations that arise pursuant to 
Rule 301(b)(3) and Rule 301(b)(5) of Regulation ATS, respectively, we 
believe that NMS Stock ATSs should already be generally aware of the 
procedures they would follow pursuant to those rules, which should 
reduce the burden associated with the disclosures that would be 
required under Items 24 and 25. An NMS Stock ATS would only have to 
respond to Part III, Items 24 or 25 of a Form ATS-N if the NMS Stock 
ATS previously operated as an ATS, triggered the applicable 5% 
thresholds, and was subject to Rules 301(b)(3) and 301(b)(5). Further, 
NMS Stock ATSs would be less likely to have to complete Item 24 as 
compared to Item 25 because Item 24 requires as an additional 
precondition that the NMS Stock ATS displays orders in an NMS stock to 
more than one person in the system (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 24 or 25 (or both) in a Form ATS-N Amendment. In the 
Proposal, we estimated 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. We 
believe that the requirements in Part III, Items 24 and 25 remain 
substantially unchanged, and that the burden should remain the same. 
Therefore, we continue to believe that completion of Part III, Item 24 
or 25 would be 5 hours per item.
    Triggering the 5% threshold, a precondition necessary to require 
completion of Part III, Items 24 and 25 of Form ATS-N, currently 
occurs, and we estimate would continue to occur, very infrequently. 
Based on the review of Form ATS and Form ATS-R disclosures by the 
Commission and its staff, we estimate that 1 NMS Stock ATS would have 
to complete Item 24, and 2 NMS Stock ATSs would have to complete Item 
25 in any given year. Accordingly, we estimate that the disclosures 
that would be required under Part III, Items 24 and 25 of adopted Form 
ATS-N would result in an aggregate initial burden of 15 hours above the 
current baseline.\1225\
---------------------------------------------------------------------------

    \1225\ (Attorney at 2 hours + Compliance Manager at 1 hour + 
Senior Systems Analyst at 2 hours) x 3 NMS Stock ATSs = 15 burden 
hours.
---------------------------------------------------------------------------

    Part III, Item 26 of adopted Form ATS-N corresponds with of Part 
IV, Item 16 of proposed Form ATS-N. An NMS Stock ATS will not be 
required to develop or publish any new statistics for purposes of 
making the required disclosures under Item 26. It is only be required 
to make the disclosures for statistics it already otherwise publishes 
or provides in the course of its operations. Thus, NMS Stock ATSs that 
do not publish or otherwise provide aggregate platform-wide market 
quality statistics, other than those currently required under Rule 605 
of Regulation NMS, would not incur any additional burden due to the 
adopted disclosure request under Item 26. For NMS Stock ATSs that do 
publish or provide such statistics, Item 26 imposes an additional 
burden above the baseline because current Form ATS does not require the 
disclosure of market quality statistics. In the Proposal, we estimated 
that preparing Part IV, Item 16 of proposed Form ATS-N would add 7 
hours to the current baseline for an initial operation report on 
current Form ATS.\1226\ Part III, Item 26 of adopted Form ATS-N is 
substantially the same as Part IV, Item

[[Page 38881]]

16 of proposed Form ATS-N. Therefore, as adopted, we still estimate 
that preparing Part III, Item 26 will add 7 hours to the current 
baseline for an initial operation report on current Form ATS. This will 
result in an aggregate initial burden of 287 hours above the current 
baseline for all NMS Stock ATSs to complete Part III, Item 26 of 
adopted Form ATS-N.\1227\
---------------------------------------------------------------------------

    \1226\ See Proposal, supra note 2, at 81104.
    \1227\ (Attorney at 1 hour + Compliance Manager at 1 hour + 
Senior Systems Analyst at 5 hours) x 41 NMS Stock ATSs = 287 burden 
hours. Unlike the proposed requirement under Part IV, Item 16, the 
adopted requirement will allow the NMS Stock ATS to make 
certifications in lieu of filing Exhibits 4 and 5, which we believe 
will significantly reduce the burden imposed by this request for 
information.
---------------------------------------------------------------------------

(ii) Estimated Burden Above the Current Baseline for an Initial Form 
ATS-N, Form ATS-N Amendment, and Notice of Cessation on Form ATS-N
(a) Initial Form ATS-N
    Based on the above analysis, we estimate that an initial Form ATS-N 
will, on average, require approximately 107.4 burden hours above the 
baseline for an initial operation report on current Form ATS. This 
results in an estimated 127.4 hours in total, including the current 
baseline.\1228\ ATSs that trade NMS stocks vary in terms of their 
structure, the manner in which they operate, and the depth and extent 
of their disclosures on Form ATS. Consequently, we believe that the 
estimated hour burden regarding Form ATS-N will likely vary among NMS 
Stock ATSs, depending on such 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 or affiliate activities.
---------------------------------------------------------------------------

    \1228\ (Current Baseline at 20 hours) + (Part I at 0.5 hour) + 
(Part II at an average of 29 hours) + (Part III at an average of 
77.5 hours) + (Access to EDGAR at 0.15 hours, see infra Section 
IX.D.2.b.iv) = 127.4 burden hours. The aggregate totals by 
professional, including the baseline, are estimated to be 
approximately 54.1 hours for an Attorney, .5 hours for a Chief 
Compliance Manager, 33.9 hours for a Compliance Manager, 30.25 hours 
for a Senior Systems Analyst, 1 hour for a Senior Marketing Manager, 
and 7.65 hours for a Compliance Clerk. This estimated burden for a 
Form ATS-N includes the hour burden associated with completing Part 
III, Items 24 and 25 of proposed Form ATS-N. We believe 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, we estimate that ATSs that trade NMS stocks 
submit 2 amendments on Form ATS, on average, each year.\1229\ In the 
Proposal we estimated that the 46 respondents would file 3 Form ATS-N 
amendments each year, for an estimated total of 138 Form ATS-N 
amendments.\1230\
---------------------------------------------------------------------------

    \1229\ See supra note 1132 and accompanying text. During the 
fiscal year of 2017, we received 85 amendments from ATSs that trade 
NMS stocks, of which there were approximately 38 at any given time 
during 2017. Some ATSs that trade NMS stocks filed as many as 7 
amendments while others did not file any amendments in 2017.
    \1230\ See Proposal, supra note 2, at 81105.
---------------------------------------------------------------------------

    We currently estimate that the hourly burden related to an 
amendment to Form ATS is 6 hours.\1231\ In the Proposal, we estimated 
that the average hourly burden above this current baseline of 6 hours 
for each Form ATS-N amendment would be 3 hours--for a total of 9 
hours--to accommodate the more voluminous and detailed disclosures 
required by Form ATS-N as compared to Form ATS.\1232\
---------------------------------------------------------------------------

    \1231\ See supra note 1133 and accompanying text.
    \1232\ Attorney at 1 hour + Compliance Manager at 2 hours = 3 
burden hours above the baseline.
---------------------------------------------------------------------------

    Rule 304(a)(2) of Regulation ATS will contain the same three 
general categories of required amendments for Form ATS-N as Rule 
301(b)(2) of Regulation ATS currently requires for current Form ATS; 
\1233\ in addition, Form ATS-N requires two additional types of 
amendments--order display and fair access amendments. However, due to 
the greater detail and number of disclosures required by Form ATS-N, we 
believe that respondents will likely file more amendments to Form ATS-N 
than NMS Stock ATSs currently do for Form ATS. For example, adopted 
Form ATS-N requests information about the ATS-related activities of the 
broker-dealer operator and its affiliates in Part III of Form ATS-N, 
and these requests are not contained in current Form ATS. To the extent 
information provided in response to these requests changes, an NMS 
Stock ATS must file a Form ATS-N amendment. We are mitigating some of 
the additional burden by requiring that NMS Stock ATSs file correcting 
amendments only to correct ``material'' information that was inaccurate 
or incomplete when filed.\1234\ Current Form ATS requires ATSs to 
promptly file amendments upon discovery that any information was 
inaccurate when filed. As adopted, filers instead would correct any 
immaterial information when they file updating amendments, which could 
potentially reduce the frequency with which NMS Stock ATSs would need 
to file amendments.
---------------------------------------------------------------------------

    \1233\ See 17 CFR 242.301(b)(2). See also supra Section IV.B.1.
    \1234\ See supra note 498 and accompanying text.
---------------------------------------------------------------------------

    With respect to Form ATS-N amendments, one commenter expresses 
concern that due to the breadth of Form ATS-N disclosures, the 
estimated amount of time and resources required to keep Form ATS-N 
``evergreen'' is ``daunting,'' and asserts that the Commission did not 
fully consider in the Proposal the amount of time and resources that 
would be required to keep Form ATS-N current.\1235\ We fully considered 
the burden for each question on the Form ATS-N by indicating the 
estimated burden hour for each item. After consideration of comments, 
we made changes to adopted Form ATS-N, which we believe will alleviate 
some of the potential burdens of Form ATS-N, including, among other 
things, requiring correcting amendments only for ``material'' 
information,\1236\ narrowing the scope of the required disclosures 
related to affiliates that can enter or direct the entry of orders and 
trading interest into the ATS,\1237\ and eliminating the proposed 
requirement to attach 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.\1238\ However, as with amendments 
to Form ATS, the burden on NMS Stock ATSs associated with updating Form 
ATS-N to reflect current ATS functionality will vary depending on the 
frequency and scope of changes made by the NMS Stock ATSs. Making 
complete and comprehensible disclosures of material changes to the NMS 
Stock ATS's operations, such as the introduction of a new order type 
and its attributes or changes to segmentation procedures and 
parameters, would likely require more time and resources from an NMS 
Stock ATS than providing complete and comprehensible disclosures of a 
simple change to the NMS Stock ATS's physical or website address. We 
believe that the frequency with which an NMS Stock ATS files Form ATS-N 
amendments in a given year may vary greatly, as some NMS Stock ATSs may 
make infrequent changes to their operations and functionality, but 
other NMS Stock ATSs, such as those that publish or otherwise provide 
to one or more subscribers or person aggregate platform-wide market 
quality statistics, may file several Form ATS-N amendments annually.
---------------------------------------------------------------------------

    \1235\ See Fidelity Letter at 10.
    \1236\ See supra note 498 and accompanying text.
    \1237\ See supra Section V.C.
    \1238\ See supra Section V.B.2.
---------------------------------------------------------------------------

    Therefore, we continue to believe that the requirements for Form 
ATS-N amendments will add 3 hours above the current baseline of 6 hours 
for amendments to Form ATS, as set forth in the Proposal. We estimate 
that the 41 respondents will file 3 Form ATS-N amendments each year, 
for a total of 123

[[Page 38882]]

Form ATS-N amendments.\1239\ In addition, an NMS Stock ATS must provide 
a brief summary of the amendment at the top of Form ATS-N.\1240\ As 
proposed, an NMS Stock ATS would have been required to submit two 
redlines--Exhibit 3A to show changes to Part III of proposed Form ATS-N 
and Exhibit 4A to show changes to Part IV of proposed Form ATS-N. We 
estimated that the requirement would create an additional burden of 0.5 
hours to draft the summary and create the redline(s).\1241\ Adopted 
Form ATS-N requires NMS Stock ATSs to submit as Exhibit 3 one marked 
document that indicates changes to ``yes'' or ``no'' answers or 
additions to or deletions to both Part I, Parts II, and III. We believe 
that requiring a single marked document rather than two separate 
documents will reduce the filing burden on ATSs, and that requiring a 
marked document for changes to Part I would impose minimal burden, and 
therefore we estimate that this requirement would add an additional 
burden of 0.4 hours to draft the summary and prepare the marked 
documents showing the amendments the NMS Stock ATS is making.\1242\ 
This would result in a total estimated hourly burden, including the 
baseline, of 9.4 hours for a Form ATS-N amendment,\1243\ and an 
aggregate annual burden on all NMS Stock ATSs of 1,156.2 hours.\1244\
---------------------------------------------------------------------------

    \1239\ 41 respondents x 3 Form ATS-N amendments per year = 123 
Form ATS-N amendments per year.
    \1240\ See Exhibit 3 to Form ATS-N.
    \1241\ See Proposal, supra note 2, at 81105.
    \1242\ Compliance Clerk at 0.4 hours. Most word processing 
software provides for this functionality.
    \1243\ Attorney at 5.5 hours + Compliance Manager at 2 hours + 
Compliance Clerk at 1.9 hours = 9.4 burden hours.
    \1244\ 123 amendments per year x 9.4 hours = 1,156.2 aggregate 
burden hours. Therefore, the aggregate burden hours equals 1,156.2 
hours.
---------------------------------------------------------------------------

    Under the Proposal, a Legacy NMS Stock ATS would have continued to 
operate pursuant to its existing Form ATS initial operation report 
pending our review of the Legacy NMS Stock ATS's filed Form ATS-N and 
would have been required to continue filing amendments on Form ATS to 
provide notice of changes to the operations of its system.\1245\ 
Adopted Rule 304(a)(1)(iv)(C) requires a Legacy NMS Stock ATS to amend 
its Form ATS-N to notify the Commission of operational changes during 
the review period.\1246\ We believe that if a Legacy NMS Stock ATS had 
been required to file amendments to Form ATS during the Commission 
review period, the Legacy NMS Stock ATS would have also complied with 
the requirements of Rule 304 by amending its Form ATS-N to reflect such 
changes disclosed in such Form ATS amendments. During the Commission 
review period, the Legacy NMS Stock ATS would have, therefore, 
submitted amendments to both Form ATS and Form ATS-N. Although we are 
now requiring that a Legacy NMS Stock ATS amend its Form ATS-N during 
the review period rather than its Form ATS, this requirement does not 
change our estimates of the aggregate burden hours for filing 
amendments. Although a Legacy NMS Stock ATS will be required to amend 
Form ATS-N, which requires greater detail and a larger number of 
disclosures than Form ATS, the Legacy NMS Stock ATS will no longer need 
to file a Form ATS amendment during the review period and a Form ATS-N 
amendment to reflect changes disclosed in such Form ATS-N amendments.
---------------------------------------------------------------------------

    \1245\ See Proposal, supra note 2, at 81023; see also proposed 
Rule 304(a)(1)(i).
    \1246\ See 17 CFR 242.304(a)(1)(iv)(C).
---------------------------------------------------------------------------

(c) Notice of Cessation on Form ATS-N
    From January 2014 through March 2018, an average of 9 ATSs that 
trade NMS stocks ceased operations each year.\1247\ Although it is 
unclear how many NMS Stock ATSs might cease operations each year going 
forward, for purposes of providing a PRA burden estimate, we are 
estimating that this average would generally remain the same for NMS 
Stock ATSs using Form ATS-N because economic conditions, business 
reasons, and other factors may cause some NMS Stock ATSs to cease 
operations. Accordingly, we estimate that 9 respondents may file a 
cessation of operation report on Form ATS-N each year. In the Proposal, 
we estimated that the average compliance burden for each cessation of 
operations filing would be 2 hours.\1248\ We received no comments on 
this estimate, and continue to believe that the burden for filing a 
notice of cessation on Form ATS-N will not be significantly greater 
than that for filing a cessation of operations report on current Form 
ATS. Both Form ATS and Form ATS-N require the ATS to check the 
appropriate box indicating that the ATS is ceasing operations; however, 
Form ATS-N also requires that the NMS Stock ATS provide the date that 
the NMS Stock ATS expects to cease operating. Accordingly, we estimate 
that the average compliance burden for each respondent will be 2 
hours.\1249\ This will result in an aggregate annual burden of 18 hours 
for all NMS Stock ATSs that choose to cease operations and submit a 
cessation of operation report on Form ATS-N.\1250\
---------------------------------------------------------------------------

    \1247\ See supra note 1114.
    \1248\ See Proposal, supra note 2, at 81105.
    \1249\ Attorney at 1.5 hours + Compliance Clerk at 0.5 hours = 2 
burden hours. See supra note 1135, and accompanying text.
    \1250\ 2 burden hours x 9 NMS Stock ATSs = 18 aggregate annual 
burden hours.
---------------------------------------------------------------------------

(iii) ATSs That Trade Both NMS and Non-NMS Stocks
    ATSs that trade both NMS stocks and non-NMS stocks would incur: (1) 
The above baseline burdens related to filing a Form ATS-N and Form ATS-
N amendments; \1251\ (2) the additional burden of filing a new Form ATS 
to only disclose information related to non-NMS stock trading activity 
on the ATS; \1252\ and (3) the burden of completing and filing two 
Forms ATS-R. We received no comment on the estimated burden set forth 
in the Proposal for ATSs to separately file a Form ATS for its non-NMS 
stock trading activity and Form ATS-N for its NMS stock trading 
activity.\1253\ We continue to believe that the average estimated 
burden set forth in the Proposal is a reasonable estimate of the 
additional burden. Accordingly, we estimate that the total hourly 
burden for an ATS to separately file a Form ATS for its non-NMS stock 
trading activity and Form ATS-N for its NMS stock trading activity will 
be 20 burden hours to amend its initial operation report on Form ATS 
for its non-NMS stock trading activity and 127.4 burden hours to file 
its initial Form ATS-N. The estimated hour burden related to the 
initial operation report submission on Form ATS for non-NMS stock 
trading activity may 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.\1254\ As previously noted, there 
are currently 10 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, we estimate that the aggregate initial 
burden on ATSs to file these separate forms would be 1,774 hours, and 
the aggregate annual

[[Page 38883]]

burden for filing amendments to both forms would be 402 hours.\1255\
---------------------------------------------------------------------------

    \1251\ See supra Sections IX.D.2.b.ii.A and B.
    \1252\ See supra Section IX.D.2.a and accompanying text for the 
baseline estimates for submitting an IOR for Form ATS and amendments 
to Form ATS.
    \1253\ See supra note 1136 and accompanying text for the 
baseline estimate for submitting a Form ATS-R.
    \1254\ 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 9.4 estimated burden hours for Form ATS-
N amendments. See supra notes 1231-1232, 1240-1243 and accompanying 
text.
    \1255\ (Form ATS initial operation report at 20 hours + Form 
ATS-N at 127.4 hours) x 10 respondents = 1,774 aggregate burden 
hours. Using the estimates of 2 amendments each year to Form ATS, 
see supra Section IX.D.2.a, and 3 amendments each year to Form ATS-
N, see supra Section IX.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 9.4 hours)) x 10 
respondents = 402 aggregate ongoing burden hours per year relating 
to amendments.
---------------------------------------------------------------------------

    We estimate that the total burden for completing and filing two 
Forms ATS-R would be 4.5 hours, which is 0.5 hours \1256\ above the 
current baseline burden of 4 hours for filing a Form ATS-R.\1257\ We 
believe that ATSs required to file two Forms ATS-R will 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. We do not believe that those ATSs will 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 10 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, we estimate 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 180 hours.\1258\
---------------------------------------------------------------------------

    \1256\ Attorney at 0.5 hours = 0.5 burden hours.
    \1257\ See supra note 1136 and accompanying text for the 
baseline estimate for submitting a Form ATS-R.
    \1258\ ((Attorney at 3.5 hours + Compliance Clerk at 1 hour) x 
(4 filings annually)) x 10 ATSs = 180 aggregate burden hours.
---------------------------------------------------------------------------

(iv) Access to EDGAR
    The Proposal contemplated the use of an online filing system, the 
EFFS, but the adopted amendments to Regulation ATS will require NMS 
Stock ATSs to submit certain Form ATS-N filings through the 
Commission's EDGAR system. Based on the widespread use and availability 
of the internet, we believe that filing Form ATS-N in an electronic 
format will be a less burdensome and 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.\1259\
---------------------------------------------------------------------------

    \1259\ 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 requirement 
that NMS Stock ATSs file Form ATS-N in a structured XML format on 
EDGAR, including narrative responses that are block-text tagged, or 
use the web-fillable form.
---------------------------------------------------------------------------

    For a Form ATS-N filer to gain access to make filings on the EDGAR 
system, the filer must submit a Form ID as required by Regulation S-T 
Rule 11 (B) and submit the Form ID following the processes detailed in 
Volume I of the EDGAR Filer Manual. Once a Form ID has been 
successfully completed and processed, EDGAR will establish a Central 
Index Key (``CIK'') number which enables each authorized user to create 
EDGAR access codes, which will enable the NMS Stock ATS to use EDGAR. 
We estimate that the burden associated with receiving access to EDGAR 
by submitting a Form ID is 0.15 burden hours per response. All 
registered broker-dealers have been assigned a CIK number and do not 
need to submit a Form ID to access EDGAR.\1260\ Because all ATSs, 
regardless of whether they trade NMS stocks, are operated by registered 
broker-dealers, we estimate that there will be no burden associated 
with gaining access to EDGAR for Legacy NMS Stock ATSs or non-NMS Stock 
ATSs that later decide to trade NMS stocks. Based on the number of 
initial filings and cessation of operations reports on current Form ATS 
for ATSs that trade NMS stocks, we estimate that, 2 to 3 new entities 
will file Form ATS-N to become an NMS Stock ATS in each of the next 
three years. We estimate that among these new entities, 1 new entity 
per year will be operated by an entity that has not previously 
registered as a broker-dealer or that does not otherwise already have 
access to EDGAR. The total estimated hourly burden and aggregate 
initial burden for gaining access to EDGAR is therefore 0.15 
hours.\1261\
---------------------------------------------------------------------------

    \1260\ A broker-dealer that has never used EDGAR to make 
electronic submissions may use its assigned CIK number to receive 
access codes that will allow the broker-dealer operator to submit 
Form ATS-N filings on EDGAR without needing to apply for a Form ID.
    \1261\ Compliance Manager at 0.15 hours x 41 NMS Stock ATSs = 
6.15 burden hours.
---------------------------------------------------------------------------

v. Public Posting on NMS Stock ATS's Website
    Rule 304(b)(3) will require each NMS Stock ATS to make public via 
posting on the NMS Stock ATS's website, a direct URL hyperlink to the 
Commission's website that contains the documents enumerated in Rule 
304(b)(2). We estimate that each NMS Stock ATS will incur an initial, 
one-time burden to program and configure its website to post the 
required direct URL hyperlink pursuant to Rule 304(b)(3). We estimate 
that this initial, one-time burden would be approximately 2 hours, in 
part because many broker-dealer operators currently maintain a website 
for their NMS Stock ATSs.\1262\ This is unchanged from the estimate set 
forth in the Proposal.\1263\ We estimate that the aggregate initial, 
one-time burden will be approximately 82 hours.\1264\
---------------------------------------------------------------------------

    \1262\ Senior Systems Analyst at 2 burden hours.
    \1263\ See Proposal, supra note 2, at 81106-07.
    \1264\ Senior Systems Analyst at 2 hours x 41 NMS Stock ATSs = 
82 burden hours.
---------------------------------------------------------------------------

(v) Recordkeeping Requirements
    Because NMS Stock ATSs that solely trade NMS stocks will file Form 
ATS-N in lieu of Form ATS, we believe that the amendment to Rule 
303(a)(2)(ii) will not result in any burden for those ATSs that are not 
already accounted for under the current baseline burden estimate for 
Rule 303.\1265\ The estimated burden under amended Rule 303(a)(2)(ii) 
for each ATS is the same as in the Proposal.\1266\ For the 10 ATSs that 
transact in, or have indicated in Exhibit B to their Forms ATS that 
they expect to trade both NMS stock and non-NMS stock on their 
respective ATSs, we estimate that the burden above the current baseline 
estimate for preserving records relating to compliance with the 
amendment to Rule 303(a)(ii) will be, consistent with the estimate in 
the proposing release, approximately 3 hours annually per ATS for a 
total annual burden above the current baseline burden estimate of 30 
hours for all respondents.\1267\ Accordingly, we are modifying the PRA 
burden estimate for Rule 303 to account for the increased burden on 
ATSs that trade both NMS stock and non-NMS stock.
---------------------------------------------------------------------------

    \1265\ To comply with all of the record preservation 
requirements of Rule 303, we currently estimate that ATSs spend 
approximately 1,305 hours per year (87 respondents at 15 burden 
hours per respondent). See Rule 303 PRA Update, supra note 1613, 78 
FR 43943. At an average cost per burden hour of $111.32, the 
resultant total related cost of compliance is $145,272.60 per year 
(1,305 burden hours x $111.32/hour). See id. The cost per burden 
hour is adjusted for an inflation rate of 6.8% based on the Bureau 
of Labor Statistics data on CPI-U between July 2013 and March 2018.
    \1266\ See Proposal, supra note 2, at 81107.
    \1267\ 3 additional burden hours x 10 ATSs = 30 aggregate burden 
hours.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    All collections of information pursuant to the amended rules and 
Form ATS-N are mandatory for entities that meet the definition of NMS 
Stock ATS.

[[Page 38884]]

F. Confidentiality of Responses to Collection of Information

    With respect to the amendments to Rules 301(b)(2)(viii) and 304 of 
Regulation ATS, including Form ATS-N, the Commission will make publicly 
available on its website all effective Forms ATS-N, all properly filed 
Form ATS-N amendments to effective Forms ATS-N, and notices of 
cessation on Form ATS-N. The Commission will not make publicly 
available on its website initial Forms ATS-N that the Commission has 
declared ineffective, but these forms will be available for examination 
and inspection by the Commission and its staff, state securities 
authorities, and self-regulatory organizations. Form ATS-N amendments 
also require each NMS Stock ATS that has a website to post on the NMS 
Stock ATS's website a direct URL hyperlink to the Commission's website 
that contains the documents enumerated in Rule 304(b)(2). The 
collection of information required by the amendments to Rules 
301(b)(10), 303(a)(1)(v), 301(b)(9), and 303(a)(2)(ii) will 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 II, Item 7 of Form ATS-N, however, NMS Stock ATSs must describe 
the written safeguards and written procedures to ensure confidential 
treatment of trading information that will be required under Rule 
301(b)(10) as amended. To the extent that the Commission receives 
confidential information pursuant to this collection of information, 
such information will be kept confidential, subject to the provisions 
of applicable law.

G. Retention Period for Recordkeeping Requirements

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

X. Economic Analysis

A. Background

    We are 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.\1268\ We are concerned that the limited and differential 
level of operational transparency around NMS Stock ATSs impedes market 
participants' ability to adequately discern how their orders interact, 
match, and execute on NMS Stock ATSs, which impedes their ability to 
evaluate whether submitting order flow to a particular NMS Stock ATS 
aligns with their business interests and would help them achieve their 
investing or trading objectives. In addition, we are concerned that the 
current lack of transparency around the potential conflicts of interest 
that arise from the ATS-related activities of the broker-dealer 
operator and its affiliates hinders market participants' abilities to 
protect their interests when doing business on NMS Stock ATSs.
---------------------------------------------------------------------------

    \1268\ See supra Section I. See also supra Sections II.A and D.
---------------------------------------------------------------------------

    We are adopting amendments to Regulation ATS to require NMS Stock 
ATSs to publicly file Form ATS-N, which would require NMS Stock ATSs to 
provide detailed disclosures about their trading operations and the 
ATS-related activities of their broker-dealer operators and their 
affiliates. In addition, we are adopting new Rule 304 as part of 
Regulation ATS, which provides a process for the Commission to review 
Form ATS-N filings and declare an NMS Stock ATS's initial Form ATS-N, 
after notice and opportunity for hearing, ineffective.\1269\ Finally, 
we are adopting amendments to Rule 301(b)(10) of Regulation ATS to 
require that all ATSs memorialize in writing their procedures and 
safeguards to protect subscribers' confidential trading 
information.\1270\
---------------------------------------------------------------------------

    \1269\ Rule 304 also provides a process for the Commission to 
declare amendments to Form ATS-N ineffective.
    \1270\ Current Rule 301(b)(10) requires all ATSs establish 
procedures and safeguards to protect subscribers' confidential 
trading information, but it does not expressly require that such 
procedures and safeguards must be maintained in writing.
---------------------------------------------------------------------------

    The adopted amendments and Form ATS-N seek to make information 
regarding the operations of NMS Stock ATSs available to market 
participants, which will increase the operational transparency for NMS 
Stock ATSs, bringing it more in line with the operational transparency 
for national securities exchanges. The amendments also seek to improve 
the quality of information regarding different NMS Stock ATSs' 
operations and the ATS-related activities of their broker-dealer 
operators and their affiliates. As discussed in more detail below, we 
believe that this would help market participants make better-informed 
decisions about where to route their orders in order to achieve their 
trading or investment objectives, thereby improving the efficiency of 
capital allocation and enhancing execution quality. Additionally, we 
believe that requiring NMS Stock ATSs to memorialize their safeguards 
and written procedures in writing will improve Commission oversight by 
helping it better understand, monitor, and evaluate how each ATS 
protects subscribers' confidential trading information from 
unauthorized disclosure and access, which in turn could increase 
investor protection. On the other hand, creation of responses to aid 
disclosure of Form ATS-N and the possibility that we may declare the 
Form ATS-N ineffective would entail costs to NMS Stock ATSs, which 
could result in some of them ceasing to operate as ATSs. If some NMS 
Stock ATSs cease operating as ATSs, it could impact the competitive 
dynamics between NMS Stock ATSs and national securities exchanges, as 
well as the competitive dynamics among NMS Stock ATSs and between NMS 
Stock ATSs and broker-dealers who trade NMS stocks but do not operate 
an ATS.
    We are sensitive to the economic consequences and effects, 
including the costs and benefits, of our rules. The following economic 
analysis identifies and considers the costs and benefits--including the 
effects on efficiency, competition, and capital formation--that would 
result from new Rule 304, Form ATS-N and the amendments to Rule 3a1-
1(a) and Regulation ATS. These costs and benefits are discussed below 
and have informed the policy choices described throughout this 
release.\1271\
---------------------------------------------------------------------------

    \1271\ 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).

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

[[Page 38885]]

B. Baseline

    The numerous parties that would be affected by new Rule 304, Form 
ATS-N, and the 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 transact in 
NMS stocks on ATSs; and national securities exchanges that compete for 
order flow with NMS Stock ATSs and other OTC trading systems.
    We recognize that the economic effects of Rule 304, Form ATS-N, and 
the amendments, including costs and benefits and effects on efficiency, 
competition and capital formation, should be compared to a baseline 
that accounts for the current market and regulatory framework for 
trading NMS stocks. The baseline 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 ATS-related activities of their 
broker-dealer operators and their affiliates; and the competitive 
environment between 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
    As of March 31, 2018 there are 41 ATSs that have noticed on their 
Form ATS that they expect to trade NMS stocks.\1272\ During the first 
quarter in 2018, 33 ATSs, all of which operated as dark pools, traded 
NMS stocks and accounted for approximately 57 billion shares traded in 
NMS stocks (approximately $2.9 trillion in dollar volume), representing 
approximately 11.4% of total share trading volume (11.5% of total 
dollar trading volume) on all registered national securities exchanges, 
ATSs, and non-ATS OTC trading venues in the first quarter of 
2018.\1273\ Based on their market share, NMS Stock ATSs represent a 
significant source of liquidity in NMS stocks.
---------------------------------------------------------------------------

    \1272\ See supra note 9 and accompanying text.
    \1273\ See infra Table 1, ``NMS Stock ATSs Ranked by Dollar 
Trading Volume (January 1, 2018-March 30, 2018)'' Total dollar 
trading volume on all exchanges and off-exchange trading in the 
first quarter of 2018 was approximately $25.4 trillion and 
approximately 503 billion shares.
---------------------------------------------------------------------------

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.\1274\ A system that meets the 
criteria of Rule 3b-16(a) may operate as an ATS on the condition that 
the ATS complies with Regulation ATS, which requires, among other 
things, that the ATS make filings with the Commission on Form ATS and 
Form ATS-R,\1275\ which are ``deemed confidential when filed,'' as well 
as adhere to other reporting requirements under Regulation ATS.\1276\ 
Furthermore, ATSs must register as broker-dealers and become members of 
an SRO. Accordingly, the ATS must comply with rules applicable to a 
broker-dealer and the SRO's rules applicable to broker-dealers. In 
addition, FINRA Rules 6160 and 6170 require each NMS Stock ATS to use a 
single, unique MPID for trade reporting purposes.\1277\ FINRA uses the 
trade data reported by ATSs to publish aggregated weekly trading volume 
and trade count information on its website for each ATS on a security-
by-security basis.\1278\
---------------------------------------------------------------------------

    \1274\ See supra Section II.B (discussing the conditions to the 
exemption from the definition of ``exchange'' for an ATS).
    \1275\ See supra Section II.C (discussing the Form ATS filing 
requirements). See also supra note 65 and accompanying text 
(discussing the Form ATS-R filing requirements).
    \1276\ See supra Section II.C (discussing the requirements of 
Regulation ATS); see also 17 CFR 242.301(b).
    \1277\ See FINRA Rules 6160 and 6170. See also supra note 15.
    \1278\ FINRA computes the aggregated statistics from trade data 
reported by ATSs to the FINRA equity trade reporting facilities 
(i.e., the Alternative Display Facility, the Trade Reporting 
Facilities, and the OTC Reporting Facility). For trade data prior to 
February 1, 2016, FINRA publishes aggregated trade data reported by 
ATSs pursuant to former FINRA Rule 4552. 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. See FINRA OTC 
Transparency Data at https://otctransparency.finra.org/. See also 
supra note 15.
---------------------------------------------------------------------------

3. Lack of Standardized Public Disclosure
    As described in detail in the Proposal,\1279\ the level of 
information about the operations of NMS Stock ATSs and the ATS-related 
activities of the NMS Stock ATSs' broker-dealer operators and their 
affiliates vary across NMS Stock ATSs and across subscribers. Although 
Regulation ATS states that information on Form ATS is ``deemed 
confidential when filed,'' \1280\ some NMS Stock ATSs voluntarily make 
their filings publicly available.\1281\ NMS Stock ATSs that either 
voluntarily make their Form ATS publicly available, or publish summary 
information of their operations, provide market participants more 
information about their operations than do NMS Stock ATSs that do not 
make their Forms ATS or information about their operations publicly 
available.\1282\ However, market participants cannot always use these 
voluntary disclosures to systematically compare NMS Stock ATSs, because 
the disclosures are not standardized.\1283\ Additionally, subscribers 
might have access to more information about the NMS Stock ATSs to which 
they subscribe than they might about others, and also might have more 
information about their NMS Stock ATSs than might non-subscribers. For 
example, subscribers might have access to the NMS Stock ATS's 
subscriber manual, other subscriber quotes, and, potentially, certain 
market quality statistics an NMS Stock ATS may publish or otherwise 
disclose to subscribers in addition to what is currently publicly 
disclosed under Exchange Act Rule 605.\1284\
---------------------------------------------------------------------------

    \1279\ See Proposal, supra note 2, at 81110-11.
    \1280\ See 17 CFR 242.301(b)(2)(vii).
    \1281\ See supra note 56.
    \1282\ On the other hand, some ATSs not only provide current 
Form ATS on their public websites, they also provide more 
information regarding their ATS operations. For instance, one 
commenter asks all their subscribers to consent to having their 
names publicly disclosed on their website so that all their 
subscribers know the universe of entities that they could be 
executing against. See Luminex Letter at 1.
    \1283\ The level of detail and the format in which information 
is presented on Form ATS varies among the NMS Stock ATSs. Several 
commenters agree with us that either there is a lack of disclosure 
about the operations of NMS Stock ATSs or that there is a need to 
standardize disclosures made by NMS Stock ATSs. See Fidelity Letter 
at 1; ICI Letter at 1; SIFMA Letter at 3. One commenter specifically 
states that opacity of venue matching logic ``increases costs for 
brokers connecting to venues, and they in turn pass these costs to 
clients.'' See AI Letter at 2.
    \1284\ 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. 
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. See Rule 
605(a)(8) for the definition of a covered order.
---------------------------------------------------------------------------

    Subscribers to an NMS Stock ATS might have varying access to the 
different services of the NMS Stock

[[Page 38886]]

ATS.\1285\ Those subscribers with greater access might obtain more 
knowledge and information about the operations of NMS Stock ATSs than 
the subscribers with less access. With this additional information, 
subscribers with greater access can make more nuanced decisions about 
which trading venue suits their trading purposes, and thus possess an 
informational advantage over other subscribers.
---------------------------------------------------------------------------

    \1285\ See Proposal, supra note 2, at 81111 (discussing the 
differential access of subscribers to NMS Stock ATSs).
---------------------------------------------------------------------------

    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, subscribers that do not have full access to 
services of the NMS Stock ATS, and the resulting additional 
information, might still want to trade on NMS Stock ATSs in spite of 
their relative informational disadvantage. Had these subscribers 
possessed more detailed information about the operations of the NMS 
Stock ATS, they might 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,\1286\ all ATSs 
must establish adequate safeguards and procedures to protect 
subscribers' confidential trading information, and, to ensure that 
those safeguards and procedures are followed, must also establish 
adequate oversight procedures.\1287\ Furthermore, all ATSs are required 
to preserve certain records pursuant to Rule 303(a)(1).\1288\ However, 
neither Rule 301(b)(10) nor Rule 303(a)(1) of Regulation ATS currently 
requires that an ATS maintain and preserve their safeguards and 
procedures to protect subscribers' confidential trading information, or 
their related oversight procedures in writing.
---------------------------------------------------------------------------

    \1286\ 17 CFR 242.301(b)(10).
    \1287\ 17 CFR 242.301(b)(10).
    \1288\ See Proposal, supra note 2, at 81087; see also supra 
Section III.B.6 (discussing amendments to Exchange Act Rule 303).
---------------------------------------------------------------------------

    As discussed in the Proposal,\1289\ we believe 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. One commenter agrees that 
significant ATSs have largely reduced to writing their safeguards and 
procedures to protect subscribers' confidential trading 
information.\1290\ Additionally, this commenter also states these 
written safeguards and procedures are likely to occur in multiple 
formats and in different forms within the same broker-dealer. We 
acknowledge that, to the extent an ATS broker-dealer operator currently 
maintains written safeguards and written procedures to protect 
subscribers' confidential trading information, the written safeguards 
and written procedures might exist in multiple formats or differing 
forms within the same broker-dealer operator. Nevertheless, under the 
current regulatory environment for ATSs, absent specific questions in 
an examination by the Commission or its staff, we are not able to 
determine whether all ATSs currently have written safeguards and 
written procedures to protect subscribers' confidential trading 
information or, if an ATS does possess written safeguards and written 
procedures, to what extent they exist in multiple formats or differing 
forms.
---------------------------------------------------------------------------

    \1289\ See Proposal, supra note 2, at 81111.
    \1290\ See HMA Letter at 23.
---------------------------------------------------------------------------

5. Competition
    The current market for trading NMS stocks is served by national 
securities exchanges, ATSs, and liquidity providers (including broker-
dealers who internalize), who compete to supply investors with 
execution services at efficient prices. These trading venues, which 
compete to match orders, provide a framework for price negotiation and 
disseminate trading information. The sections below discuss the current 
state of competition between NMS Stock ATSs and national securities 
exchanges; competition among NMS Stock ATSs; and competition between 
broker-dealers that operate NMS Stock ATSs and broker-dealers that do 
not operate NMS Stock ATSs.
a. 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, they also compete with national 
securities exchanges. As discussed in the Proposal,\1291\ NMS Stock 
ATSs have grown in complexity and sophistication. Some NMS Stock ATSs 
now offer features similar to those offered by national securities 
exchanges, including, among other things, anonymous order submission, 
limit order book matching systems, a wide range of order types, and 
high-speed connectivity options. However, unlike national securities 
exchanges, most NMS Stock ATSs have adopted a dark trading model, and 
do not display any quotations in the consolidated quotation data.\1292\ 
Two commenters state that NMS Stock ATSs also compete with national 
securities exchanges for order flow by offering features that are not 
readily available on national securities exchanges.\1293\ For example, 
while most national securities exchanges match trades via a price/time 
priority limit order book, some NMS Stock ATSs may match trades via 
auctions or block crossing mechanisms.\1294\
---------------------------------------------------------------------------

    \1291\ See Proposal, supra note 2, 80 FR at 81009.
    \1292\ See id.
    \1293\ See Consumer Federation of America Letter at 4; ICI 
Letter at 3.
    \1294\ See Proposal, supra note 2, 80 FR at 81009; see also ICI 
Letter at 3.
---------------------------------------------------------------------------

    As discussed above and explained in more detail in the 
Proposal,\1295\ NMS Stock ATSs and national securities exchanges are 
subject to different regulatory regimes, including different 
obligations to disclose information about their trading operations and 
activities. This has resulted in differences in operational 
transparency between national securities exchanges and NMS Stock ATSs, 
which limits the ability of market participants to compare the 
operations and execution quality of NMS Stock ATSs and national 
securities exchanges.
---------------------------------------------------------------------------

    \1295\ See supra Sections II.B-C (discussing the different mix 
of obligations and benefits applicable to ATSs and registered 
national securities exchanges). See also Proposal, supra note 2, at 
81111-12.
    \1296\ See supra Section II.B.
    \1297\ See Proposal, supra note 2, at 81111-12
    \1298\ See, e.g., Section 19(g) of the Exchange Act, 15 U.S.C. 
78s(g), and Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b). For 
further discussion of the costs and benefits of registering as a 
national securities exchange, see Proposal, supra note 2, at 81111-
12.
---------------------------------------------------------------------------

    In addition to the burdens discussed above,\1296\ and as discussed 
in more detail in the Proposal,\1297\ 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 ATSs.\1298\ However, national securities 
exchanges also enjoy certain benefits that are not afforded to NMS 
Stock ATSs, such as establishing norms regarding conduct, trading, and 
fee structures. ATSs, on the other hand, are regulated as broker-
dealers, and must comply with the rules of FINRA. Trading venues that 
elect to register as national securities exchanges can gain

[[Page 38887]]

added prestige by establishing listing standards for their securities. 
Additionally, national securities exchanges can be direct participants 
in NMS plans, which provide additional sources of revenue and input 
into the operation of the national market system that is not available 
to NMS Stock ATSs.\1299\
---------------------------------------------------------------------------

    \1299\ See Regulation ATS Adopting Release, supra note 3, at 
70880, 70902-70903 (Section discussing generally some of the 
obligations and benefits of registering as a national securities 
exchange).
---------------------------------------------------------------------------

    As discussed in more detail in the Proposal, since the adoption of 
Regulation NMS in 2005, the market for NMS stock execution services has 
become more fragmented and the number of national securities exchanges 
and NMS Stock ATSs has increased.\1300\ 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.\1301\ The number of active dark pools trading 
NMS stocks has increased from approximately 10 in 2002,\1302\ to 33 
today.\1303\ The market share of total NMS stock share volume that is 
attributable to dark pools has increased from 7.9% in 2009 \1304\ to 
11.4% during the first quarter of 2018.\1305\ 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.\1306\
---------------------------------------------------------------------------

    \1300\ See Proposal, supra note 2, at 81112. For a list of 
current national securities exchanges, see https://www.sec.gov/rules/sro.shtml.
    Although there are 12 national securities exchanges that trade 
NMS stocks, they are currently controlled by 5 exchange groups, 
namely, CBOE Global Markets, Inc. (which controls BZX, BYX, EDGA, 
and EDGX), CHX Holdings, Inc. (which controls CHX), Intercontinental 
Exchange, Inc. (which controls NYSE American, NYSE, and NYSE Arca), 
IEX Group Inc. (which controls IEX), and NASDAQ, Inc. (which 
controls Nasdaq, BX, and PHLX).
    \1301\ For further discussion see Proposal, supra note 2, at 
81112.
    \1302\ See Regulation of Non-Public Trading Interest at 61209 
n.9, and accompanying text (proposing rules and amendment to joint 
industry plans describing the term dark pool).
    \1303\ See supra notes 11-12 and accompanying text.
    \1304\ See supra notes 13-14 and accompanying text.
    \1305\ See supra Section X.B.1.
    \1306\ Several commenters also stated that ever since the 
inception of Regulation ATS, the market for trading NMS stocks has 
become more fragmented, and the number of NMS Stock ATSs and the 
trading volume executed on these venues has increased, but they did 
not provide quantitative estimates of the number of ATSs or the 
fraction of trading volume executed on different venues. See CFA 
Institute Letter at 2; Consumer Federation of America Letter at 4; 
Fidelity Letter at 3; LeveL ATS Letter at 2; Schneiderman Letter at 
1, SIFMA Letter at 2.
---------------------------------------------------------------------------

    Several commenters state that since the inception of Regulation 
ATS, ATSs have operated at a competitive advantage relative to national 
securities exchanges, because they operate with lower transparency and 
greater opacity relative to national securities exchanges.\1307\ 
Another commenter states that ``ATSs are competitors to exchanges, but 
do not have the same oversight, transparency requirements or 
responsibilities.'' \1308\ This commenter also states that ``It is 
clearly unfair competition for ATSs to be subject to far less 
requirements than exchanges while executing a large percentage of the 
market volume.'' \1309\ We agree that NMS Stock ATSs face lower 
regulatory burdens than national securities exchanges, including 
differences in the obligations to publicly disclose information about 
their trading operations and activities. This has resulted in 
differences between the operational transparency of NMS Stock ATSs and 
national securities exchanges and made it more difficult for market 
participants to evaluate how their orders interact, match, and execute 
on the NMS Stocks ATSs than on national security exchanges. As 
discussed in the Proposal,\1310\ the growth in the number of NMS Stock 
ATSs may be driven by these less stringent regulatory obligations. 
However, national securities exchanges also enjoy certain advantages 
which are not available to NMS Stock ATSs, such as the ability to list 
securities and share in market data revenue generated by the CTA.
---------------------------------------------------------------------------

    \1307\ See CBOE Letter at 1; CFA Institute Letter at 2; Consumer 
Federation of America Letter at 1-2, 4; ICI Letter at 3.
    \1308\ See Anonymous at 1.
    \1309\ See id.
    \1310\ See Proposal, supra note 2, at 81112.
---------------------------------------------------------------------------

b. Competition Among NMS Stock ATSs
    NMS Stock ATSs also compete with 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, which is based on aggregated trade data reported by ATSs 
to the FINRA equity trade reporting facilities for 13 weeks of trading 
from January 1, 2018, to March 30, 2018, depicts the market share of 
total dollar volume for NMS stocks, and the total share volume for NMS 
stocks for individual ATSs.\1311\ 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 7 NMS Stock ATSs ranked 
by dollar volume accounted for 63.4% of total dollar volume transacted 
on ATSs and 59.2% of total share volume transacted on ATSs from January 
1, 2018, to March 30, 2018.
---------------------------------------------------------------------------

    \1311\ See supra note 15.

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

[[Page 38888]]

[GRAPHIC] [TIFF OMITTED] TR07AU18.000

Table 1: NMS Stock ATSs Ranked by Dollar Trading Volume

(January 1, 2018--March 30, 2018) \1314\
---------------------------------------------------------------------------

    \1312\ Total Consolidated Volume includes all trading in NMS 
stocks on all national securities exchanges, ATSs, and non-ATS OTC 
trading.
    \1313\ See supra note 2 for definition of ``dark pool''.
    \1314\ Table 1 Data Sources: (1) FINRA Alternative Trading 
System (ATS) Transparency Data is aggregated trade data reported by 
ATSs to the FINRA equity trade reporting facilities and made 
available on FINRA's website as part of the OTC Transparency Data. 
The OTC Transparency Data is provided via https://www.finra.org/industry/OTC-Transparency and is copyrighted by FINRA 2018. (2) NYSE 
Trade and Quote Database (TAQ).
---------------------------------------------------------------------------

    This table shows the 33 ATSs that effected transactions in NMS 
stocks from January 1, 2018--March 30, 2018, ranked in descending order 
by dollar volume transacted. ATS data is reported weekly, and these 
dates approximately correspond to the first quarter of 2018. 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 aggregated trade data reported by ATSs 
to the FINRA equity trade reporting facilities

[[Page 38889]]

for 13 weeks of trading from January 1, 2018, to March 30, 2018, 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. Eight NMS Stock ATSs had average trade sizes in 
excess of 10,000 shares. This suggests that some NMS Stock ATSs receive 
large block orders and execute large trades.\1315\ One of the 
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.\1316\
---------------------------------------------------------------------------

    \1315\ 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 Proposal, supra note 2, at 81008. 
See also Rule 600(b)(9) of Regulation NMS (defining block size with 
respect to an order), 17 CFR 242.600(b)(9).
    \1316\ See Proposal, supra note 2, at 81008 n.126, 127.
---------------------------------------------------------------------------

    While these NMS Stock ATSs on average execute large size trades, 
the combined market share of these NMS Stock ATSs is only 12.6% when 
measured in dollar volume, and 6.0% when measured in share volume. The 
vast majority of NMS Stock ATSs have average trade sizes between 100 
and 460 shares. The average trade size across all 33 NMS Stock ATSs is 
204 shares, while the two NMS Stock ATSs with the highest market shares 
(measured either in dollar volume or share volume) have average trade 
sizes of 155 and 163 shares, respectively. These trade sizes are not 
significantly different from the average trade size of 146 shares on 
national securities exchanges,\1317\ which suggests that the niche 
market NMS Stock ATSs serve is not very different from the market as a 
whole.\1318\
---------------------------------------------------------------------------

    \1317\ Tuttle (2013) also found that trade sizes on ``lit'' 
national securities exchanges are similar to those taking place on 
``dark ATSs.'' However, Tuttle (2013) did not include odd lot trades 
when calculating trade sizes for ``lit'' national securities 
exchanges or ``dark ATSs.'' See Laura Tuttle, Alternative Trading 
Systems: Description of ATS Trading in National Market System Stocks 
(October 2013), https://www.sec.gov/marketstructure/research/alternative-trading-systems-march-2014.pdf (``Tuttle: ATS Trading in 
NMS Stocks''). Unlike ``lit'' national securities exchanges, dark 
ATSs do not publicly disseminate top of the limit-order book 
information. See id.
    Table 2 in the Proposal reports that between March 30, 2015, and 
June 26, 2015, the average trade size on NMS Stock ATSs was 214 
shares and the average trade size on national securities exchanges 
was 181 shares. Calculations for both of the average trade size 
metrics reported in the Proposal include odd lots trades. However, 
calculations for the average trade size on national securities 
exchanges reported in the Proposal also include TAQ trade volume 
reported from bulk trades, opening and closing trades, and intraday 
crosses. See Proposal, supra note 2, at 81114.
    \1318\ One commenter conducted similar analysis, computing 
average trade sizes in ``top volume ATSs'' for three time periods: 
May 12, 2014-May 16, 2014; March 30-June 26, 2015; and January 11, 
2016-January 15, 2016 and reached similar conclusions. See Anonymous 
Letter at 4.

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

[[Page 38890]]

[GRAPHIC] [TIFF OMITTED] TR07AU18.001

Table 2: NMS Stock ATSs Ranked by Average Trade Size

(January 1, 2018-March 30, 2018) \1320\
---------------------------------------------------------------------------

    \1319\ National securities exchanges that transacted in NMS 
stocks during the period January 1, 2018 to March 30, 2018 included 
NYSE MKT LLC, Cboe BZX Exchange, Inc.; Cboe BYX Exchange, Inc.; Cboe 
EDGA Exchange, Inc.; Cboe EDGX Exchange, Inc.; Chicago Stock 
Exchange, Inc.; The Investors Exchange LLC; NASDAQ OMX BX, Inc.; 
NASDAQ OMX PHLX, Inc.; The Nasdaq Stock Market LLC; New York Stock 
Exchange LLC; and NYSE Arca, Inc. NYSE National, Inc. (f.k.a. 
National Stock Exchange, Inc.) was not trading, but on May 17, 2018 
the Commission approved a proposed rule change in connection with 
its relaunch. See supra note 9.
    \1320\ Table 2 Sources: (1) FINRA Alternative Trading System 
(ATS) Transparency Data is aggregated trade data reported by ATSs to 
the FINRA equity trade reporting facilities and made available on 
FINRA's website as part of the OTC Transparency Data. The OTC 
Transparency data is provided via https://www.finra.org/industry/OTC-Transparency and is copyrighted by FINRA 2018. (2) NYSE Trade and 
Quote Database (TAQ).
---------------------------------------------------------------------------

    This table shows 33 ATSs that effected transactions in NMS stocks 
from January 1, 2018-March 30, 2018, ranked in descending order by 
average trade size. ATS data is reported weekly, and these dates 
correspond approximately to the fourth quarter of 2017. 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

[[Page 38891]]

aggregated across all NMS stocks that traded on the given ATS in that 
week. Average trade size on national securities exchanges is calculated 
from TAQ data using intraday trades that took place between 9:30 a.m. 
and 4:00 p.m. Bulk trades and trades during the opening and close and 
intraday crosses are excluded from the calculation.
    One commenter mentions that because the difference in average trade 
size between national securities exchanges and NMS Stock ATSs is small, 
this is evidence that ``these venues are no longer beneficial for 
executing block size trades between large traders.'' \1321\ We do not 
agree with the comment that NMS Stock ATSs are no longer beneficial for 
executing block size trades. As can be seen in Table 2, eight ATSs have 
average trade sizes in excess of 10,000 shares, indicating that these 
ATSs are attractive venues for crossing block orders. Based on this, we 
believe that some ATSs--particularly ones which have average trade 
sizes in excess of 10,000 shares--are beneficial for certain market 
participants wanting to trade large block sizes.
---------------------------------------------------------------------------

    \1321\ See Anonymous Letter at 3.
---------------------------------------------------------------------------

    As discussed in more detail in the Proposal,\1322\ while many NMS 
Stock ATSs operating today are similar with respect to the limited 
transparency they provide with respect to their trading model, we 
understand that the services offered vary significantly across NMS 
Stock ATSs.\1323\ Even though NMS Stock ATSs may not be privy to 
detailed information about the operations of other NMS Stock ATSs, they 
are able to garner information about the differential services offered 
by their competitors through various means,\1324\ enabling ATSs to 
modify their products and services to better compete within the market 
for NMS stock execution services. Thus, as explained in more detail in 
the Proposal,\1325\ an NMS Stock ATS may not be incented to fully 
reveal how orders interact, match and execute on its platform, because 
revealing such information adversely impacts the ATS's position within 
the market by also informing its competitors.
---------------------------------------------------------------------------

    \1322\ Proposal, supra note 2, at 81115.
    \1323\ Two commenters agree with us. These commenters mention 
that some ATSs offer subscribers the ability to customize trading 
parameters, including price instructions and counterparty selection, 
while others offer subscribers different methods of accessing the 
ATS, such as FIX connections or trading through the broker-dealer's 
smart order router. See Consumer Federation of America Letter at 4; 
ICI Letter at 2-3.
    \1324\ These are discussed in more detail in the Proposal. See 
Proposal, supra note 2, at 81115.
    \1325\ See id.
---------------------------------------------------------------------------

c. Competition Between Broker-Dealers That Operate NMS Stock ATSs And 
Broker-Dealers That Do Not Operate NMS Stock ATSs
    As explained in more detail in the Proposal, competition for NMS 
stock order flow also exists between the broker-dealers that operate 
NMS Stock ATSs and broker-dealers that do not operate NMS Stock ATSs 
but otherwise effect transactions in NMS stocks.\1326\ Some broker-
dealers who operate their own NMS Stock ATS(s) may provide their 
affiliates with access to certain services that are not afforded to 
broker-dealers that do not have their own ATS platform,\1327\ which may 
result in trading advantages.\1328\
---------------------------------------------------------------------------

    \1326\ See id.
    \1327\ A number of commenters state that broker-dealer operators 
and their affiliates may have access to certain features of an ATS 
that are not available to other subscribers. See Better Markets 
Letter at 4-6; Consumer Federation of America Letter at 7-10; HMA 
Letter at 13-15; Liquidnet Letter at 11. One of these commenters 
states that broker-dealer operators and their affiliates may receive 
preferential treatment or access to the ATS, such as faster or more 
direct access to the ATS, priority status to execute their orders 
over those of other subscribers, or the ability to further customize 
with whom their order flow interacts. See Consumer Federation of 
America Letter at 8.
    \1328\ For further explanation, see Proposal, supra note 2, at 
81115.
---------------------------------------------------------------------------

6. 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.\1329\ This section specifically 
discusses the impact that this current market structure 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.
---------------------------------------------------------------------------

    \1329\ See supra Section X.B.5.
---------------------------------------------------------------------------

a. Trading Costs
    As described in detail in the Proposal,\1330\ some academic 
research has suggested that the decline in trading costs since the 
adoption of Regulation ATS in 1998 and Regulation NMS in 2005 could, 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.\1331\ Trading on NMS Stock ATSs may also 
benefit institutional investors \1332\ by providing a useful tool 
whereby they may be able to reduce the ``price impact'' of their trades 
and obtain enhanced execution quality for their orders.\1333\ Five 
commenters also express the belief that the increase in trading on ATSs 
has contributed to a competitive marketplace that has led to improved 
costs and liquidity, and that this has benefitted both retail and 
institutional investors.\1334\
---------------------------------------------------------------------------

    \1330\ See Proposal, supra note 2, at 81115-16.
    \1331\ Other academic literature has suggested that the increase 
in fragmentation has had a counteracting effect and has increased 
bid-ask spreads. This literature, however, has focused on small 
stocks, and fragmentation across exchanges, rather than 
fragmentation across exchanges and between exchanges and NMS Stock 
ATSs. See Haslag, Peter and Matthew Ringgenberg, 2016, ``The Causal 
Impact of Market Fragmentation on Market Liquidity,'' working paper, 
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2591715; Baldauf, Markus and Joshua Mollner, 
2017, ``Trading in Fragmented Markets,'' working paper, available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2782692.
    \1332\ See Proposal, supra note 2, at 81115 (discussing the 
impact of NMS Stock ATSs on institutional investor trading costs).
    \1333\ One commenter agreed that NMS Stock ATSs, specifically 
dark pools, serve a ``useful purpose to those wishing to trade large 
blocks of shares at lower cost without moving the public price as a 
result of other market participants identifying and trading ahead of 
their interest.'' Barnard Letter at 1.
    \1334\ See Fidelity Letter at 3; LeveL ATS Letter at 2; Morgan 
Stanley Letter at 4; STANY Letter at 2; UBS Letter at 8.
---------------------------------------------------------------------------

    Another element that may affect trading costs is order 
internalization by broker-dealers. As described detail in the 
Proposal,\1335\ some academic literature has found that internalization 
of order flow increases trading costs and reduces market depth and 
price informativeness. In the current operational environment of NMS 
Stock ATSs, subscribers' orders or other trading interests 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 ATSs, and yet internalize some 
order flow rather than executing it on their own NMS Stock ATS, may 
have a deleterious effect on market quality.
---------------------------------------------------------------------------

    \1335\ See Proposal, supra note 2, at 81117.
---------------------------------------------------------------------------

    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 operating as ATSs, market participants might incur 
costs associated with not being able to find an adequate trading venue 
that offers benefits similar to those that NMS Stock ATSs provide. To 
the extent that market participants value these ATS-specific features, 
the decision of certain NMS

[[Page 38892]]

Stock ATSs to cease operating as ATSs could increase the trading costs 
of these market participants and impact whether and how they affect 
certain trading strategies.
    While the existence of NMS Stock ATSs has reduced the trading costs 
on average for market participants, the lack of transparency regarding 
ATS operations and the ATS-related activities of the ATS broker-dealer 
operator and its affiliates has contributed to higher search costs for 
market participants to find a trading venue that serves their investing 
or trading objectives. A by-product of these higher search costs is 
uncertainty pertaining to how their orders will be handled, 
particularly for subscribers to NMS Stock ATSs that have not made their 
Form ATS public.\1336\
---------------------------------------------------------------------------

    \1336\ Several commenters agree with our analysis that the 
differences have resulted in higher search costs for market 
participants. See Better Markets Letter at 2; CFA Institute Letter 
at 2; Consumer Federation of America Letter at 2-4.
---------------------------------------------------------------------------

b. Price Discovery
    While the increased fragmentation of trading volume associated with 
the current market for NMS stock execution services has been a factor 
in lowering trading costs for market participants, the academic 
literature has found that it has had a mixed impact on price discovery.
    As described in more detail in the Proposal,\1337\ some academic 
studies have suggested that the market segmentation caused by the 
coexistence of national securities exchanges and NMS Stock ATSs can 
improve price discovery.\1338\ They suggest that price discovery can 
improve either as a result of more aggressive competition among market 
participants in providing liquidity or as a result of the segmentation 
of informed and uninformed market participants.\1339\ These academic 
studies predict that because the orders of informed market participants 
are more likely to execute on national securities exchanges, they will 
be more likely to trade on national securities exchanges and uninformed 
market participants will be more likely to trade on NMS Stock 
ATSs.\1340\ Because 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.\1341\
---------------------------------------------------------------------------

    \1337\ See Proposal, supra note 2, at 81116-17.
    \1338\ See Boulatov, Alex, and Thomas George, 2013, ``Hidden and 
Displayed Liquidity in Securities Markets with Informed Liquidity 
Providers,'' Review of Financial Studies 26, 2095-2137; Comerton-
Forde, Carole and Talis Putnins, 2015, ``Dark Trading and Price 
Discovery,'' Journal of Financial Economics 118, 70-92.; and Zhu, 
Haoxiang, 2014, ``Do Dark Pools Harm Price Discovery?'' Review of 
Financial Studies 27, 747-789. Comerton-Forde and Putnins (2015) and 
Zhu (2014) specifically examine dark pools.
    \1339\ 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.
    \1340\ See Proposal, supra note2, at 81116 (discussing the 
segmentation of trading by informed and uninformed market 
participants between national securities exchanges and ATSs).
    \1341\ See Comerton-Forde and Putnins (2015) and Zhu (2014), 
supra note 1338.
---------------------------------------------------------------------------

    Other academic studies suggest that the presence of NMS Stock ATSs 
in the current trading environment can harm price discovery.\1342\ 
These 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.\1343\ When trading, 
informed market participants often balance two types of costs, namely 
price impact costs and execution costs. In comparison to NMS Stock 
ATSs, on national securities exchanges an informed market participant's 
order experiences lower execution risk but higher price impact costs. 
However, since NMS Stock ATSs often match orders at prices derived from 
national securities exchanges, and if trading on national securities 
exchanges generates worse prices due to price impact, this could 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.\1344\ One academic study finds, while low levels of 
trading on NMS Stock ATSs are not harmful, price discovery is harmed 
when levels of trading on NMS Stock ATSs are high (i.e., they estimate 
that this occurs when trading on NMS Stock ATSs in a given NMS stock 
exceeds approximately 10% of dollar volume).\1345\
---------------------------------------------------------------------------

    \1342\ See Ye, Mao, 2011, ``A Glimpse into the Dark: Price 
Formation, Transaction Cost and Market Share of the Crossing 
Network,'' working paper, available at 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; 
Comerton-Forde and Putnins (2015), supra note1338. These studies 
specifically examine dark pools.
    \1343\ One commenter agrees with the conclusions from these 
studies and remarked that trading on NMS Stock ATSs ``reduces the 
information that could assist the transparent market in determining 
an accurate fair price'' and that prices quoted on transparent 
markets may no longer be efficient or informative. See Barnard 
Letter at 1-3.
    \1344\ See Ye (2011), supra note1342.
    \1345\ See Comerton-Forde and Putnins (2015), supra note 1338.
---------------------------------------------------------------------------

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 beneficial 
to market efficiency.\1346\ If NMS Stock ATSs were not a viable trading 
venue for market participants, some 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, which can improve market efficiency.\1347\ The same study 
also suggests that small trades that execute on NMS Stock ATSs are 
beneficial in that they also generate market efficiency.\1348\
---------------------------------------------------------------------------

    \1346\ See id.
    \1347\ A number of academic studies have found that increased 
liquidity can improve market efficiency by reducing the limits to 
arbitrage or increasing the incentives to produce costly 
information. See Chordia, Tarun, Richard Roll and Avanidhar 
Subrahmanyam, 2008, ``Liquidity and market efficiency,'' Journal of 
Financial Economics 97, 249-268; Kyle, Albert, 1984, ``Market 
structure, information, futures markets, and price formation,'' Gary 
G. Storey, Andrew Schmitz, and Alexander H. Sarris (Editors.), 
International Agricultural Trade: Advanced Readings in Price 
Formation, Market Structure, and Price Instability, Westview Press, 
Boulder and London (1984), pp. 45-64.
    \1348\ See Comerton-Forde and Putnins (2015), supra note 1338.
---------------------------------------------------------------------------

    Several commenters assert that the lack of transparency of NMS 
Stock ATSs has resulted in a decrease in market efficiency because more 
order flow executed on NMS Stock ATSs increases the difficulty 
investors face when identifying which venues offer them the best 
execution quality.\1349\ As discussed above, increased market 
fragmentation could increase search costs by making it more difficult 
for market participants to find liquidity to execute their 
orders.\1350\ Increased search costs could reduce competition between 
liquidity suppliers, which could increase trading costs.\1351\ These 
increased trading costs could reduce the incentives for market 
participants to acquire costly information, which could in turn result

[[Page 38893]]

in a reduction in market efficiency.\1352\ However, as discussed above, 
the increased market fragmentation caused by NMS Stock ATSs could also 
improve market efficiency by allowing institutional investors a viable 
way to trade and reduce price impact costs.\1353\ The commenters did 
not provide any analysis to support their claims that the increase in 
order flow executed on NMS Stock ATSs has decreased market efficiency. 
As such, we continue to believe that the current market for NMS stock 
execution services, consisting of national securities exchanges, ATSs 
and other off-exchange venues, has together resulted in an improvement 
to market efficiency.
---------------------------------------------------------------------------

    \1349\ See Barnard Letter at 1-3; Better Markets Letter at 2.
    \1350\ See supra Section X.B.6.a.
    \1351\ See Yin, Xiangkang, 2005, ``A Comparison of Centralized 
and Fragmented Markets with Costly Search,'' Journal of Finance, 60, 
1567-1590.
    \1352\ See Kyle, Albert, 1989, ``Information speculation with 
imperfect competition,'' Review of Economic Studies 56, 317-356.
    \1353\ See supra Section X.B.6.a.
---------------------------------------------------------------------------

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

    We have considered the economic effects of new Rule 304, Form ATS-N 
and the amendments to Rule 3a1-1(a) and Regulation ATS. This section 
provides an overview of the economic effects of new Rule 304, Form ATS-
N, and the amendments to Rule 3a1-1(a) and Regulation ATS, including 
the costs, benefits, and the effects on efficiency, competition, and 
capital formation. This section also discusses additional economic 
effects, including benefits and costs related to specific requirements 
of new Rule 304, Form ATS-N and the amendments to Rule 3a1-1(a) and 
Regulation ATS.
    We believe that the amendments will improve Commission oversight 
and thereby improve investor protection and generate greater 
transparency about the operations of NMS Stock ATSs and the ATS-related 
activities of their broker-dealer operators and their affiliates.\1354\ 
As explained below, through these effects, the adopted amendments may 
promote greater competition for order flow, which could result in 
enhanced execution quality, and we believe that this could result in 
improvements to efficiency and capital formation.
---------------------------------------------------------------------------

    \1354\ See supra Sections V.C-D.
---------------------------------------------------------------------------

    We have attempted, where possible, to quantify the benefits and 
costs and impacts on efficiency, competition, and capital information 
that may result from new Rule 304, Form ATS-N, and the amendments to 
Rule 3a1-1(a) and Regulation ATS. However, as we discussed in the 
Proposal and as explained more fully below,\1355\ it is difficult to 
quantify many of the economic effects of the new rule and amendments 
due to the complexity of the market for NMS execution services and our 
lack of certain relevant information. For instance, it is difficult to 
determine what fraction of order flow will be internalized or routed to 
national securities exchanges or to non-ATS trading centers if NMS 
Stock ATSs are required to publicly disclose information about their 
operations on Form ATS-N. Additionally, we do not have certain 
information, such as information on market participant routing 
agreements or fee arrangements that may influence future order routing 
decisions.
---------------------------------------------------------------------------

    \1355\ See Proposal, supra note 2, at 81118.
---------------------------------------------------------------------------

    As we further noted in the Proposal, it is similarly difficult to 
determine whether NMS Stock ATSs will continue or cease operating as 
ATSs in light of the new rule and amendments,\1356\ as that decision 
depends on numerous factors and we lack information about many of those 
factors. For example, we do not have information on the extent to which 
existing NMS Stock ATSs or potentially new ATSs rely on a competitive 
advantage, such as a unique matching methodology or other operational 
characteristics, to attract order flow, or the extent to which the new 
disclosure requirements will impact those competitive advantages and 
thus drive decisions on operating status. Moreover, we lack information 
on how many NMS Stock ATSs may decide to register as national 
securities exchanges, as some ECNs have in previous years, as a result 
of new Rule 304, Form ATS-N and the amendments to Rule 3a1-1(a) and 
Regulation ATS.\1357\
---------------------------------------------------------------------------

    \1356\ For the purposes of the PRA, we estimate the annual 
average number of NMS Stock ATSs that file Cessation of Operation 
notices on Form ATS-N. See supra Section IX.D.2.b.ii.C. This 
estimate is based on the historical number of cessations per year 
and, while recognizing that the amendments may result in cessations, 
does not attempt to predict the effect of the amendments on the 
number of cessations.
    \1357\ See Proposal, supra note 2, at 81109 (discussing ATSs 
that previously operated as ECNs and subsequently registered as 
national securities exchanges).
---------------------------------------------------------------------------

    Commenters did not provide any additional information or analysis 
that would allow us to estimate the impacts on order flow or the 
continued operation of NMS Stock ATSs under the new rule and 
amendments. In light of the complexities of the market and the lack of 
currently available information, we are unable to quantify many of the 
economic effects of new Rule 304, Form ATS-N, and the amendments to 
Rule 3a1-1(a) and Regulation ATS. Therefore, much of the discussion 
below is qualitative in nature, although we try to describe, where 
possible, the direction of these effects.
1. Economic Effects of Enhanced Filing Requirements of Form ATS-N
    As discussed above, we are amending Rule 3a1-1(a) and Regulation 
ATS to require ATSs that transact in NMS stocks to comply with the 
requirements of Rule 304 to operate pursuant to the exemption from the 
definition of ``exchange.'' \1358\ The amendments would require an NMS 
Stock ATS to file reports pursuant to Rule 304, which includes the 
requirement to file Form ATS-N, in lieu of current Form ATS, to 
disclose information about its operations and the ATS-related 
activities of its broker-dealer operator and its affiliates.\1359\ We 
believe that these disclosures will help market participants assess 
whether the ATS's mode of operation is consistent with their ability to 
obtain the best executions and also help them assess potential 
conflicts of interest that might adversely impact their trading on the 
NMS Stock ATS.
---------------------------------------------------------------------------

    \1358\ See supra Section III.A. See also Rules 3a1-1(a)(2) and 
(3), 300, 301, and 304.
    \1359\ See supra Section V for information disclosed on Form 
ATS-N.
---------------------------------------------------------------------------

    Rule 304 will also provide a process by which the Commission will 
review initial Forms ATS-N and Form ATS-N amendments and declare them 
ineffective if it finds that such action is necessary or appropriate in 
the public interest, and is consistent with the protection of 
investors. We are also adopting 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).\1360\ An NMS 
Stock ATS could not operate pursuant to the exemption from the 
definition of ``exchange'' unless the NMS Stock ATS files Form ATS-N 
with the Commission and the Form ATS-N has become effective.\1361\
---------------------------------------------------------------------------

    \1360\ See supra Section IV.E (discussing the public posting 
requirements of Form ATS-N).
    \1361\ See supra Section IV.A.3.
---------------------------------------------------------------------------

a. Benefits
    As described in detail in the Proposal,\1362\ we believe that new 
Rule 304, Form ATS-N and the amendments to Rule 3a1-1(a) and Regulation 
ATS would result in better regulatory oversight of NMS Stock ATSs and 
increased investor protection by providing the Commission and relevant 
SROs with information about NMS Stock ATSs that currently may only be 
available during an examination process. In comparison to Form

[[Page 38894]]

ATS,\1363\ Form ATS-N will contain more detailed information about the 
operations of NMS Stock ATSs, including information about the ATS-
related activities of the broker-dealer operator and its 
affiliates.\1364\ The Commission and SROs could utilize this 
information to help prioritize examinations and possibly help identify 
potential issues. Additionally, the enhanced disclosure requirements 
under Form ATS-N will provide market participants with significantly 
more detailed information with which to analyze and evaluate how orders 
are handled and executed on NMS Stock ATSs, which could allow them to 
better assess an NMS Stock ATS as a potential trading venue.\1365\
---------------------------------------------------------------------------

    \1362\ See Proposal, supra note 2, at 81119-20.
    \1363\ See supra Section II.C (discussing the Form ATS filing 
requirements).
    \1364\ See supra Section V for information disclosed on ATS-N.
    \1365\ Three commenters agreed with our assessment that the 
enhanced disclosure requirements under Form ATS-N would result in 
improved regulatory oversight by the Commission. See Fidelity Letter 
at 1; SIFMA Letter at 3; Virtu Letter at 2.
---------------------------------------------------------------------------

    We are also adopting a requirement that Form ATS-N and Form ATS-N 
amendments be filed electronically in a XML text-searchable format. We 
believe that requiring Form ATS-N and Form ATS-N amendments to be filed 
in a XML text-searchable format, coupled with the enhanced disclosure 
requirements, 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 ATS-related 
activities of their broker-dealer operators and their affiliates. Such 
benefits could increase investor protection by improving the 
effectiveness and efficiency of the examination process.
    We believe that the process of reviewing an initial Form ATS-N or 
Form ATS-N amendments will allow the Commission to evaluate, among 
other things, the completeness and comprehensibility of the NMS Stock 
ATSs' disclosures and, if necessary, declare the Form ATS-N 
ineffective.\1366\ We believe that the review and public disclosure 
process will improve the quality of information the Commission receives 
from NMS Stock ATSs, which will allow the Commission to better protect 
investors from potentially incomprehensible or incomplete disclosures 
that would misinform market participants about the operations of an NMS 
Stock ATS or the ATS-related activities of its broker-dealer 
operator.\1367\
---------------------------------------------------------------------------

    \1366\ See supra Section IV.A.4 (describing the effectiveness 
process for initial Form ATS-N filings).
    \1367\ One commenter agrees that our enhanced regulatory 
oversight can help ensure consistency of disclosures provided by 
ATSs and their broker-dealer operators. See Fidelity Letter at 1.
---------------------------------------------------------------------------

    We received several comment letters regarding whether the proposed 
amendments would adequately protect investors. One commenter was 
optimistic, stating the amendments are aimed at ``bolstering 
transparency in capital markets, which should enable and enhance 
investor protections.'' \1368\ Three commenters were not as optimistic. 
One commenter states that the Commission review process for Form ATS-N 
``will very quickly devolve into an unreasonably burdensome exercise 
for Commission staff while providing little benefit to market integrity 
or investor protection.'' \1369\ Another commenter mentions that ``no 
amount of required public disclosure can cure the problem presented by 
an ATS that makes inaccurate disclosures to subscribers.'' \1370\ A 
third states that no amount of disclosure can provide the necessary 
protection against broker-dealer conflicts of interest, and that more 
needs to be done to protect investors.\1371\ We continue to believe 
that increased regulatory oversight and disclosure of NMS Stock ATS 
operations and activities would help protect investors. We expect that 
the quality of the information the Commission receives from NMS Stock 
ATSs will improve as a result of the incentives created by the 
procedure to review their filings and declare them ineffective, if 
necessary, and that the incidences of incomplete and incomprehensible 
disclosures would be mitigated. As market participants will not be able 
to trade on NMS Stocks ATSs that do not comply with Form ATS-N 
requirements, the review process will protect investors from events 
that may have transpired if ATSs, whose Forms ATS-N have been declared 
ineffective, were allowed to trade NMS stocks. Additionally, we 
continue to believe that the disclosure of broker-dealer conflicts of 
interest will allow market participants to better assess an NMS Stock 
ATS as a potential trading venue and thus better protect their 
interests.\1372\
---------------------------------------------------------------------------

    \1368\ See CFA Institute Letter at 6.
    \1369\ See Consumer Federation of America Letter at 10.
    \1370\ See Fidelity Letter at 4.
    \1371\ See Better Markets Letter at 1, 5-6.
    \1372\ See infra Section X.C.2.a (``Economic Effects of Public 
Disclosure of Form ATS-N--Benefits'').
---------------------------------------------------------------------------

b. Costs
    As described in detail in the Proposal,\1373\ we believe that the 
filing requirements of Form ATS-N could impose costs on NMS Stock ATSs. 
We recognize that an ineffectiveness declaration could impose costs on 
an NMS Stock ATS--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 individual market participants and 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.\1374\ 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. We believe 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, we 
believe that NMS Stock ATSs would be incentivized to submit Form ATS-N 
disclosures that are complete and comprehensive to avoid bearing the 
costs of resubmitting a Form ATS-N filing or of having their Form ATS-N 
declared ineffective.
---------------------------------------------------------------------------

    \1373\ See Proposal, supra note 2, at 81120-21.
    \1374\ See infra Section X.C.4.a (``Impact on Efficiency, 
Competition, and Capital Formation--Competition'').
---------------------------------------------------------------------------

    We also understand that both new and existing NMS Stock ATSs will 
incur implementation costs in order to comply with the amendments to 
Regulation ATS. NMS Stock ATSs will need to 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 will fall more heavily on 
lower-dollar volume NMS Stock ATSs (as opposed to ATSs transacting 
greater dollar volume), because these ATSs have a smaller revenue base 
to accommodate the largely 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 will likely incur lower implementation 
costs because certain sections of Form ATS-N (such as

[[Page 38895]]

several items of Part II) will not be applicable to these NMS Stock 
ATSs.
    In addition to affecting NMS Stock ATSs, the implementation costs 
could also indirectly affect market participants by potentially causing 
some NMS Stock ATSs to alter or reduce the services they offer to 
certain subscribers. For example, the adopted amendments might cause 
some NMS Stock ATSs to reduce or stop offering customized reports to 
certain subscribers in order to redirect resources to support the 
standardized reports.
    Relative to the baseline, the amendments to Regulation ATS will 
also impose implementation costs for all NMS Stock ATSs, including 
Legacy NMS Stock ATSs, in that they will require NMS Stock ATSs to 
adhere to heightened disclosure and reporting requirements regarding 
their operations. Legacy NMS Stock ATSs should already comply with the 
current requirements of Regulation ATS. Therefore, the compliance costs 
of the amendments should be incremental relative to the costs 
associated with the existing requirements. Specifically, we believe 
that the incremental costs will consist largely of providing new 
disclosures and updating records and retention policies necessary to 
comply with the amendments. Based on the analysis for purposes of the 
PRA,\1375\ we estimate that the amendments to Regulation ATS relating 
to Rules 301(b)(2)(viii) and 304 of Regulation ATS, including Form ATS-
N, will result in a one-time burden of 127.4 hours for each NMS Stock 
ATS,\1376\ which will result in an estimated one-time paperwork 
compliance cost to an NMS Stock ATS of approximately $41,689.10.\1377\ 
This will result in an aggregate estimated initial hour burden for all 
NMS Stock ATSs to complete Form ATS-N and comply with Rules 
301(b)(2)(viii) and 304 of Regulation ATS of 5,223.4 hours at an 
estimated cost of $1,709,253.10.\1378\
---------------------------------------------------------------------------

    \1375\ See supra Section IX (estimating burden hours). We 
estimate the wage rate associated with these burden hours based on 
salary information for the securities industry compiled by SIFMA. 
The estimated wage figure for attorneys, for example, is based on 
published rates for attorneys, modified to account for a 1,800-hour 
work-year and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits, and overhead, yielding an effective hourly rate 
for 2013 of $380 for attorneys. See Securities Industry and 
Financial Markets Association, Management & Professional Earnings in 
the Securities Industry--2013, available at: https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/. These estimates are adjusted for an 
inflation rate of 6.85% based on the Bureau of Labor Statistics data 
on CPI-U between October 2013 and March 2018. Therefore, the current 
inflation-adjusted effective hourly wage rates for attorneys are 
estimated at $406 ($380 x 1.0685). We discuss other costs of 
compliance with the proposed rule below.
    \1376\ See supra note 1228 and accompanying text.
    \1377\ (Attorney at $406 x 54.1 hours) + (Chief Compliance 
Manager at $518 x 0.5 hours) + (Compliance Manager at $302 x 33.9 
hours) + (Senior Systems Analyst at $278 x 30.25 hours) + (Senior 
Marketing Manager at $298 x 1 hour) + (Compliance Clerk at $68 x 
7.65 hours) = $41,689.10. This compliance cost estimate for a Form 
ATS-N includes the estimated costs associated with completing Part 
III Items 24 and 25 of Form ATS-N, but as explained above, we 
believe that the majority of NMS Stock ATSs would not be required to 
complete those items of the form. See supra Section IX.D.2.b.i.C.
    \1378\ 127.4 burden hours x 41 NMS Stock ATSs = 5,223.4 burden 
hours. $41,689.10 x 41 NMS Stock ATSs = $1,709,253.10. This 
preliminary aggregate compliance cost estimate assumes that all NMS 
Stock ATSs would be required to complete Part III Items 24 and 25 of 
Form ATS-N. However, as noted above, we estimate that 1 NMS Stock 
ATS would be required to complete Part III, Item 24, see supra 
Section IX.D.2.b.i.C, and 2 NMS Stock ATSs would be required to 
complete Part III, Item 25, see id.
---------------------------------------------------------------------------

    In addition to the implementation costs mentioned above, there are 
also expected ongoing costs for NMS Stock ATSs to comply with the 
amendments to Rule 3a1-1(a) and Regulation ATS. For instance, NMS Stock 
ATSs will incur ongoing costs associated with amending their Form ATS-N 
prior to material changes in their operations, or to correct any 
material information that has become inaccurate. Regardless of the 
reason for filing a Form ATS-N amendment, we estimate for the purposes 
of the PRA that it will take an NMS Stock ATS approximately 28.2 hours 
annually \1379\ to prepare and file its Form ATS-N amendments at an 
estimated annual cost of $8,898.60 per ATS.\1380\ This will result in 
an estimated aggregate ongoing hour burden for all NMS Stock ATSs to 
amend their Forms ATS-N and comply with Rules 301(b)(2)(viii) and 304 
of Regulation ATS of 1,156.2 hours at an estimated cost of $364,842.60 
annually.\1381\
---------------------------------------------------------------------------

    \1379\ See supra Section IX.D.2.b.ii.B. As explained above, we 
estimate that each NMS Stock ATS would file 3 Form ATS-N amendments 
per year, and the hourly burden per amendment would be 9.4 hours.
    \1380\ (Attorney at $406 x 16.5 hours) + (Compliance Manager at 
$302 x 6 hours) + (Compliance Clerk at $68 x 5.7 hours) = $8,898.60.
    \1381\ 28.2 hours x 41 NMS Stock ATSs = 1,156.2 hours. $8.898.60 
x 41 NMS Stock ATSs = $364,842.60.
---------------------------------------------------------------------------

    Some existing NMS Stock ATSs that also trade non-NMS stocks might 
incur additional costs due to the amendments. As discussed above,\1382\ 
pursuant to the amendments to Regulation ATS, an ATS that trades both 
NMS stocks and non-NMS stocks will 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 will 
incur additional implementation costs when compared to ATSs that only 
trade NMS stocks, because the former group will 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 will also be required to file a pair of Forms ATS-R four 
times annually. For the purposes of the PRA, we estimate that the 
aggregate initial burden for those ATSs to separately file an initial 
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 will be 
1,774 hours \1383\ at an aggregate estimated cost of $474,431.\1384\ We 
also estimate 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 will be 180 hours \1385\ at an aggregate estimated cost 
of $59,560.\1386\ Furthermore, we estimate that these ATSs that 
facilitate transactions in both NMS stocks and non-NMS stocks will 
incur an additional estimated recordkeeping burden of 3 hours annually 
per ATS, resulting in an estimated cost of $333.96 per ATS \1387\ and 
an aggregate estimated hour burden of 30 hours at an estimated cost of 
$3,339.60, due to the amendments to Rule 303(a)(2)(ii).\1388\
---------------------------------------------------------------------------

    \1382\ See supra Section IX.D.2.b.iii.
    \1383\ See supra note 1255 and accompanying text.
    \1384\ ((Attorney for Form ATS at $406 x 13 hours) + (Attorney 
for Form ATS-N at $406 x 54.1 hours) + (Chief Compliance Manager for 
Form ATS-N at $518 x 0.5 hours) + (Compliance Manager for Form ATS-N 
at $302 x 33.9 hours) + (Senior Systems Analyst for Form ATS-N at 
$278 x 30.25 hours) + (Senior Marketing Manager for Form ATS-N at 
$298 x 1 hour) + (Compliance Clerk for Form ATS at $68 x 7 hours) + 
(Compliance Clerk for Form ATS-N at $68 x 7.65 hours)) x 10 ATSs = 
$474,431. This aggregate compliance cost estimate includes the 
estimated costs associated with completing Part III, Items 24 and 25 
of Form ATS-N, but as explained above, we believe that the majority 
of NMS Stock ATSs would not be required to complete those items of 
the form. See supra Section IX.D.2.b.i.C.
    \1385\ See supra note 1258 and accompanying text.
    \1386\ ((Attorney at $406 x 3.5 hours) + (Compliance Clerk at 
$68 x 1 hours) x (4 filings annually)) x 10 ATSs = $59,560.
    \1387\ At an average cost per burden hour of $111.32, see supra 
note 1265, the resultant total related cost of compliance for each 
ATS would be $333.96 ((3 burden hours) x $111.32/hour).
    \1388\ 3 hours x 10 ATSs = 30 burden hours. $333.96 x 10 ATSs = 
$3,339.60. See supra Section IX.D.2.b.vi.
---------------------------------------------------------------------------

    The amendments to Regulation ATS will require Form ATS-N be filed 
electronically in a structured format

[[Page 38896]]

through EDGAR.\1389\ Based on the widespread use and availability of 
the internet, we believe that filing Form ATS-N in an electronic format 
will 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.
---------------------------------------------------------------------------

    \1389\ See supra Section VII (Section in the front-end which 
specifically discusses structured disclosure aspects of Form ATS-N).
---------------------------------------------------------------------------

    In order to electronically file a Form ATS-N, a broker-dealer 
operator of an NMS Stock ATS will need to access the EDGAR system. As 
discussed above,\1390\ a broker-dealer that has not previously received 
access to EDGAR would need to submit a Form ID.\1391\ For the purposes 
of the PRA, we estimate that each ATS that needs to submit a Form ID to 
gain access to EDGAR will incur a one-time burden of 0.15 hours, which 
would result in each ATS incurring a one-time estimated cost of 
$45.30.\1392\ Based on analysis in the PRA, we estimate that each year 
1 new NMS Stock ATS will be operated by an entity that needs to submit 
a Form ID to gain access to EDGAR.\1393\ This would result in an 
aggregate estimated initial burden of 0.15 hours at an estimated cost 
of $45.30.\1394\
---------------------------------------------------------------------------

    \1390\ See supra Section IX.D.2.b.iv.
    \1391\ See id (discussing Central Index Key (``CIK'') numbers).
    \1392\ Compliance Manager at $302 x 0.15 hours = $45.30.
    \1393\ Because all ATSs, regardless of whether they trade NMS 
stocks, are operated by registered broker-dealers who have been 
assigned a CIK number, for the purposes of the PRA, we estimate that 
Legacy NMS Stock ATSs or non-NMS Stock ATSs that later decide to 
trade NMS stocks will not incur any costs associated with gaining 
access to EDGAR. See supra Section IX.D.2.b.iv.
    \1394\ 0.15 burden hours x 1 NMS Stock ATS = 0.15 burden hours. 
$45.30 x 1 NMS Stock ATS = $45.30.
---------------------------------------------------------------------------

    Rule 304(b)(3) will require each NMS Stock ATS to make public via 
posting on the NMS Stock ATS's website, a direct URL hyperlink to the 
Commission's website that contains the documents enumerated in Rule 
304(b)(2). For the purposes of the PRA, we estimate that each NMS Stock 
ATS will incur an initial, one-time burden of approximately 2 hours to 
program and configure its website in order to post the required direct 
URL hyperlink pursuant to Rule 304(b)(3),\1395\ which will result in 
each NMS Stock ATS incurring an estimated one-time cost of 
approximately $556.\1396\ This will result in an aggregate estimated 
initial, one-time hour burden for all NMS Stock ATSs to comply with 
Rule 304(b)(3) of approximately 82 hours at an estimated cost of 
approximately $22,796.\1397\
---------------------------------------------------------------------------

    \1395\ See supra Section IX.D.2.b.v.
    \1396\ Senior Systems Analyst at $278 x 2 hours = $556.
    \1397\ 2 hours x 41 NMS Stock ATSs = 82 hours. $556 x 41 NMS 
Stock ATSs = $22,796.
---------------------------------------------------------------------------

2. Economic Effects of Public Disclosure of Form ATS-N
    We believe that the amendments requiring public disclosure of Form 
ATS-N will improve the information available to market participants and 
make that information consistent, which would assist market 
participants in evaluating and choosing the NMS Stock ATSs to which 
they may route orders or become a subscriber due to the enhanced 
disclosure requirements. Requiring such public disclosure will increase 
the operational transparency requirements of NMS Stock ATSs to bring 
those requirements more in line with the operational transparency 
requirements of national securities exchanges.\1398\
---------------------------------------------------------------------------

    \1398\ See supra Section III.A.
---------------------------------------------------------------------------

a. Benefits
    We believe that the public disclosure of Form ATS-N will generate 
greater transparency about the operations of NMS Stock ATSs and the 
ATS-related activities of their broker-dealer operators and their 
affiliates. This will aid market participants by reducing search costs 
when evaluating potential NMS stock trading venues to decide which 
venue best suits their trading purposes. This section discusses 
specific economic benefits of the public disclosure of Form ATS-N 
including: The economic benefits of public disclosure of standardized 
information about the operations of NMS Stock ATSs; the economic 
benefits of public disclosure of the ATS-related activities of the 
broker-dealer operator and its affiliates; the economic benefits of 
public disclosure of aggregate platform-wide order flow and execution 
statistics regarding the NMS Stock ATS; and the economic benefits of 
filing Form ATS-N in a structured format.
(i) Benefits of Public Disclosure of Standardized Information of 
Operations of NMS Stock ATSs
    We believe that requiring detailed, public disclosures about the 
operations of NMS Stock ATSs will, among other things, better 
standardize the type of information market participants receive about 
those operations. As a result, search costs for market participants 
will be lower relative to the baseline, as homogenous disclosure 
requirements for all NMS Stock ATSs as part of the amendments to 
Regulation ATS should facilitate market participants' comparison of NMS 
Stock ATSs when deciding which venue most suits their trading purposes. 
Accordingly, as described in detail in the Proposal,\1399\ we believe 
the enhanced operational transparency resulting from the public 
disclosures on Form ATS-N should aid market participants when 
evaluating potential trading venues, and that the 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.\1400\ Beyond providing 
benefits to market participants, the enhanced disclosure requirements 
for NMS Stock ATSs could provide benefits to certain NMS Stock ATSs or 
national securities exchanges.\1401\ 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 first quarter of 2018, trading 
volume of NMS stocks on ATSs accounted for 11.4% of total share 
volume.\1402\ As they are expected to calibrate the level of 
transparency between NMS Stock ATSs and national securities exchanges, 
the amendments could foster greater competition for order flow of NMS 
stocks between these trading platforms. This greater competition for 
order flow could 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.
---------------------------------------------------------------------------

    \1399\ See Proposal, supra note 2, at 81123-24.
    \1400\ See Proposal, supra note 2, at 81123 (discussing the 
effects of the increased public disclosures about the operations of 
NMS Stock ATSs on market participant search costs).
    \1401\ See id (discussing the effects of the increased public 
disclosures about the operations of NMS Stock ATSs on certain NMS 
Stock ATSs).
    \1402\ See supra Section X.B.1.
---------------------------------------------------------------------------

    One commenter states that ``[f]ailing to extend enhanced 
transparency requirements to Exchanges for activities commensurate with 
those of ATSs would result in an incomplete picture of market quality, 
making it difficult for investors to conduct meaningful comparisons to 
inform their decisions and protect their own interests.'' \1403\ As 
discussed above,\1404\ national securities exchanges are already 
subject to more stringent public disclosure requirements than NMS Stock 
ATSs. For example,

[[Page 38897]]

national securities exchanges are required to publicly file proposed 
rule changes with the Commission to disclose, among other things, their 
manner of operations and fees.\1405\ These proposed rules changes are 
subject to notice and comment from the public, as well as Commission 
consideration, pursuant to Section 19(b) and Rule 19b-4.\1406\ 
Therefore, we continue to believe that the adopted amendments would 
reduce the discrepancy in the level of transparency between NMS Stock 
ATSs and national securities exchanges, thereby assisting market 
participants in making more informed trading decisions and providing 
them with a clearer understanding about where to route their orders in 
order to receive best execution.
---------------------------------------------------------------------------

    \1403\ See Markit Letter at 4.
    \1404\ See supra Section X.B.5.a.
    \1405\ See Proposal, supra note 2, at 81011.
    \1406\ See id.
---------------------------------------------------------------------------

    The adopted amendments modify the process for publicly disclosing a 
material amendment to a Form ATS-N from the process originally detailed 
in the Proposal.\1407\ We proposed in Rule 304(b)(2)(iv) making all 
amendments to Form ATS-N, including material amendments, public upon 
filing.\1408\ In response to commenters' concerns that making public 
Form ATS-N material amendments before expiration of the Commission's 
30-day calendar review period could stifle innovation or be confusing 
or misleading to the public,\1409\ we are modifying the proposed rules 
for making Form ATS-N material amendments public. Under the adopted 
amendments, the cover page of the filed material amendment will be made 
public by the Commission upon filing and, unless the Commission 
declares the material amendment ineffective, the entirety of the 
material amendment, as amended, will be made public by the Commission 
following the expiration of the Commission's 30-calendar day review 
period.\1410\ The cover page would provide a brief narrative about the 
content of the amendment including: The Part and Item number of Form 
ATS-N that is subject to the change, whether or not such change will 
apply to all subscribers and the broker-dealer operator, and a brief 
summary of the change. Although the adopted process for material 
amendments would not provide market participants with as much 
transparency about a forthcoming material change to the operations of 
the NMS Stock ATS as the proposed process, we believe that the adopted 
process will provide increased transparency, relative to the baseline, 
to market participants about a material change during the Commission 
review period.
---------------------------------------------------------------------------

    \1407\ See supra Section IV.B.1.a (discussing Form ATS-N 
material amendments).
    \1408\ See Proposal, supra note 2, at 81034.
    \1409\ See supra Section IV.E.2.c.
    \1410\ See id.
---------------------------------------------------------------------------

(ii) Benefits of Public Disclosure of the ATS-Related Activities of the 
Broker-Dealer Operator and Its Affiliates
    Most NMS Stock ATSs are operated by broker-dealers that also engage 
in other brokerage and dealing activities.\1411\ A broker-dealer 
operator of an NMS Stock ATS, or its affiliates, could have business 
interests that conflict with the interests of its ATS's 
subscribers,\1412\ or customers of its subscribers.\1413\ As described 
in more detail in the Proposal,\1414\ we believe that public disclosure 
of detailed information about the ATS-related activities of the broker-
dealer operator and its affiliates on Form ATS-N will allow market 
participants to better evaluate any conflicts of interest that may 
arise from such activities, allowing market participants to better 
determine whether submitting order flow to a particular NMS Stock ATS 
aligns with their business interests.\1415\ Further, the enhanced 
disclosure requirements could discourage broker-dealer operators from 
trading internally as principal in their NMS Stock ATS under 
circumstances where the trading might raise conflict of interest 
concerns, because those operations will be subject to public scrutiny 
by market participants.\1416\
---------------------------------------------------------------------------

    \1411\ See supra Section II.A.2.
    \1412\ Based on information provided on Form ATS, a small number 
of ATSs solely limit their broker-dealer business to the operation 
of an ATS.
    \1413\ One commenter states that unavoidable conflicts of 
interest arise if an operator (or its affiliates) engages in 
principal trading activities within the ATS or if it is informed by 
others' trading activities within the ATS. See HMA Letter at 13. 
Another commenter states ``conflicts of interest arising from the 
operational complexities of ATSs, including the dual roles of the 
broker-dealer as ATS operators and as brokers, proliferated, all 
while remaining invisible to investors.'' Better Markets Letter at 
2.
    \1414\ See Proposal, supra note 2, at 81124-25.
    \1415\ A number of commenters generally agree with us that 
increased standardized information about the manner of operations of 
the broker-dealer that operates the NMS Stock ATS and potential 
conflicts of interest that may arise with its affiliates may better 
enable market participants to evaluate the extent to which 
individual trading venues align with their investment and trading 
decisions. See Fidelity Letter at 1; ICI Letter at 3; KCG Letter at 
1; MFA/AIMA Letter at 2; PDQ Letter at 2; SIFMA Letter at 4-8.
    \1416\ See Proposal, supra note 2, at 81124 (discussing the 
effects of the public disclosure of the ATS-related activities of 
the broker-dealer operator and its affiliates).
---------------------------------------------------------------------------

    The adopted amendments modify the requests for information on Form 
ATS-N regarding the activities of the NMS Stock ATS broker-dealer 
operator and its affiliates from those in Proposed Form ATS-N.\1417\ In 
response to commenters' concerns that the scope of the requests in Part 
III of proposed Form ATS-N are too broad (especially for large, 
multiservice broker-dealers) and might require information about the 
broker-dealer operator's and its affiliates' activities that do not 
directly relate to the NMS Stock ATS, we are modifying certain requests 
on proposed Form ATS-N to solicit information from NMS Stock ATSs that 
focus on (1) the ability of the business units or affiliates of the 
broker-dealer operator to enter, or direct the entry of, orders into 
the NMS Stock ATS; and (2) whether those business units and affiliates 
receive any preferential treatment with respect to the services offered 
by the NMS Stock ATS, including any special access to information about 
trading interest.\1418\ This differs from the Proposal primarily with 
regard to the proposed requests for information about the trading 
centers of the broker-dealer operator and its affiliates that did not 
transact on the NMS Stock ATS. For example, Part III, Item 1 of 
proposed Form ATS-N would have required 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) 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''), 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.\1419\ We have modified this disclosure 
to omit from Form ATS-N a list of non-ATS trading centers of the 
broker-dealer operator or its affiliates that cannot trade on the NMS 
Stock ATS.
---------------------------------------------------------------------------

    \1417\ See Proposal, supra note 2, at 81043.
    \1418\ See supra Section V.C.
    \1419\ See Proposal, supra note 2, at 81045.
---------------------------------------------------------------------------

    This modification means that, relative to the disclosures on 
proposed Form ATS-N, market participants will receive less information 
concerning the non-ATS related operations of the NMS Stock ATS broker-
dealer operator and its affiliates. However, we believe that the 
disclosures in adopted Form ATS-N concerning the ATS-related activities 
of the broker-dealer operator or its affiliates will still allow market 
participants to better evaluate any potential conflicts of interest 
that may arise on the NMS Stock ATS. Therefore, we do not believe that 
the benefits from the public disclosure of the ATS-related

[[Page 38898]]

activities of the broker-dealer operator or its affiliates on adopted 
Form ATS-N will vary significantly from the benefits described in the 
Proposal.\1420\
---------------------------------------------------------------------------

    \1420\ See Proposal, supra note 2, at 81122.
---------------------------------------------------------------------------

(iii) Benefits of Public Disclosure of Aggregate Platform-Wide Order 
Flow and Execution Statistics
    Part III, Item 26 of adopted Form ATS-N requests that an NMS Stock 
ATS explain and provide the most recent disclosure of 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 and that the NMS Stock ATS provided to 
one or more subscribers by the NMS Stock ATS at the end of calendar 
quarter. As described in detail in the Proposal, this disclosure 
request could benefit market participants.\1421\
---------------------------------------------------------------------------

    \1421\ See Proposal, supra note 2, at 81124.
---------------------------------------------------------------------------

    NMS Stock ATSs that currently provide these aggregate platform-wide 
order flow and execution statistics to one or more subscribers could 
continue to provide their subscribers with these market quality 
statistics, in which case, the NMS Stock ATS will publicly disclose 
these statistics and how they are calculated in Form ATS-N, and all 
market participants, not just subscribers, would have access to the 
information. We believe this would reduce the discrepancy in 
information that subscribers receive and provide the opportunity for 
more market participants to benefit from this information which may be 
useful to market participants when evaluating an NMS Stock ATS as a 
possible venue to which to route orders in order to accomplish their 
investing or trading objectives.\1422\ Further, 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, adopted Form ATS-N would help these subscribers better 
understand the statistics.
---------------------------------------------------------------------------

    \1422\ See id (discussing how the disclosure of aggregate 
platform-wide order flow and execution statistics might help NMS 
Stock ATSs attract order flow).
---------------------------------------------------------------------------

    Two commenters agree with us that the requirement to disclose 
aggregate platform-wide order flow and execution statistics on Form 
ATS-N, if they are otherwise disclosed to subscribers, could cause NMS 
Stock ATSs to stop providing these statistics to their 
subscribers.\1423\ If some NMS Stock ATSs cease disclosing these market 
quality statistics to subscribers, it 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. One commenter 
agrees and states the elimination of this flow of information from the 
NMS Stock ATSs would have a deleterious effect on subscriber knowledge 
and understanding of a given ATS's operations, and negatively affect 
the availability of information that some subscribers consider 
important for their best execution determinations.\1424\
---------------------------------------------------------------------------

    \1423\ See MFA/AIMA Letter at 5; SIFMA Letter at 27. One of 
these commenters suggests that these NMS Stock ATSs could begin to 
direct parties requesting statistics and analysis to order 
information available on FINRA's website or through third-party 
vendors. See SIFMA Letter at 27.
    \1424\ See SIFMA Letter at 27.
---------------------------------------------------------------------------

(iv) Benefits of Filing Form ATS-N in a Structured Format
    We believe that benefits will accrue to both the Commission and 
market participants as a result of having a structured format for Form 
ATS-N. Specifically, having Form ATS-N filed in the XML text-searchable 
format will allow the Commission and its staff and market participants 
to efficiently review and analyze information provided on Form ATS-N. 
In particular, the XML format will allow the Commission and the public 
to better gather, analyze, aggregate, compare, and use the Form ATS-N 
data. Requiring XML should result in the Form ATS-N data being provided 
in a consistent, structured format. XML is an open standard that 
defines, or ``tags,'' data using standard definitions. The tags 
establish a consistent structure of identity and context. This 
consistent structure can be automatically recognized and processed by a 
variety of software applications such as databases, financial reporting 
systems, and spreadsheets, and then made immediately available to the 
end user to search, aggregate, compare, and analyze.
    We believe that requiring Form ATS-N be provided in an XML format 
will provide the Commission and the public with data about NMS Stock 
ATSs in a format that facilitates search capabilities, and comparative 
analyses across NMS Stock ATSs and across filings, including more 
advanced text analytics for the more narrative responses of Form ATS-N. 
Absent this requirement of a specified format, users of the Form ATS-N 
data that wanted to aggregate the data or search across filings or 
filers would need to spend additional time transferring the data into a 
consistent format before it could be analyzed, or incur the cost of a 
service provider that specializes in this data aggregation and 
comparison process. Further, unrestricted manual entry of data could 
lead to errors, thereby potentially reducing data quality and 
usability.
    Commenters who supported the standardization of Form ATS-N 
information also underscored the importance of making the information 
comparable.\1425\ While the commenters did not make specific reference 
to the structured format, having the Form ATS-N information submitted 
using the Commission's XML schema will enhance the comparability of the 
Form ATS-N data by ensuring that the information has been submitted 
completely and consistently. Two commenters addressed the importance of 
completeness to Form ATS-N filings.\1426\ With the Commission's XML 
schema, the restrictions incorporated into the schema (and 
consequently, also reflected in the web-fillable form) will help test 
for completeness of the data before submission and reduce filer 
uncertainty on the completeness and consistency of their filing. One 
commenter recommended that we consider ways to present information that 
would improve the readability and navigability of disclosure through 
the use of technology such as hyperlinks and/or XBRL technology.\1427\ 
The XML format selected by us is a technology format that presents the 
data consistently, which improves the readability and navigability of 
the data. In fact, XBRL is an XML-based technology, but, as discussed 
later, we do not think that XBRL is the appropriate format for this 
form.\1428\ While hyperlinks may be useful in some situations to cross-
reference information, it does not by itself enhance the comparability 
of the underlying data, but can be incorporated within the XML format, 
as permitted.
---------------------------------------------------------------------------

    \1425\ See Fidelity Letter at 1; Morgan Stanley Letter at 2; 
SIFMA Letter at 3; UBS Letter at 2-3.
    \1426\ See MFA/AIMA Letter at 4; SIFMA Letter at 32-33.
    \1427\ See Fidelity Letter at 5.
    \1428\ See infra Section X.D.11.
---------------------------------------------------------------------------

b. Costs
    We recognize that the filing and public disclosure of Form ATS-N 
and Form ATS-N amendments could impose costs on NMS Stock ATSs as well 
as costs on market participants. This section discusses specific costs 
associated with the filing and public disclosure of Form ATS-N 
including: the costs to NMS Stock ATSs; the effects of public 
disclosure of Form ATS-N on

[[Page 38899]]

the price impact costs of market participants; and the costs associated 
with filing Form ATS-N and Form ATS-N amendments in a structured 
format.
(i) Costs to NMS Stock ATSs
    We recognize that there would be costs that accrue to NMS Stock 
ATSs as a result of the adopted amendments. For NMS Stock ATSs, 
disclosure of previously non-public information could have some impact 
on the direction of order flow in the market. If this previously non-
public information is valuable to certain NMS Stock ATSs--to the extent 
that it drives its revenues--disclosure of this information on Form 
ATS-N could be costly for these NMS Stock ATSs. For instance, 
disclosure of an NMS Stock ATS's innovations could potentially result 
in other ATSs implementing similar methodologies, which could cause the 
NMS Stock ATS to lose its technological advantage. Such an ATS may need 
to engage in costly research in order to develop new innovations to 
stay profitable in the market. If an ATS cannot innovate fast enough to 
regain its competitive advantage in the market, order flow may then 
potentially migrate to other NMS Stock ATSs, broker-dealers that 
operate non-ATS trading centers, or to national securities 
exchanges.\1429\ Additionally, some order flow could be directed away 
from an NMS Stock ATS and towards one of these other trading centers if 
the disclosure of previously non-public information, such as aggregate 
platform-wide order flow and execution statistics or information about 
the ATS related activities of the broker-dealer operator and its 
affiliates, causes some market participants to discover that their 
orders would have a greater likelihood of receiving lower execution 
quality on the NMS Stock ATS relative to these other trading centers. 
As such, this may result in lower revenues for some NMS Stock ATSs. 
These ATSs may then find it unprofitable to continue operating as ATSs 
and could exit the market for stock execution services or switch their 
business strategies to increase market share or profitability, possibly 
by continuing to operate as non-ATS OTC execution venues, such as OTC 
trading venues in which the broker-dealer operator internalizes order 
flow.\1430\
---------------------------------------------------------------------------

    \1429\ See infra Section X.C.4.a for a discussion of the 
competitive effects of these costs (``Impact on Efficiency, 
Competition, and Capital Formation--Competition'').
    \1430\ See infra Section X.C.4.a.i.
---------------------------------------------------------------------------

    However, as discussed above,\1431\ we lack certain information 
necessary to quantify the extent to which entities that operate as ATSs 
for NMS Stocks would be dissuaded from doing so. Specifically, as 
discussed in the Proposal,\1432\ the decision for an NMS Stock ATS to 
continue operating or to cease operating as an ATS depends on numerous 
factors and we lack information about many of those factors. Commenters 
did not provide any additional information or analysis that would allow 
us to quantify the impact on Legacy NMS Stocks ATSs or other entities 
that may otherwise seek to operate a new NMS Stock ATS. Therefore, 
while we continue to believe that the costs of the adopted amendments 
could cause some Legacy NMS Stock ATSs to cease operating as ATSs and 
could dissuade some entities who would seek to operate as ATSs for NMS 
Stocks from doing so, we remain unable to quantify that impact. 
Furthermore, we do not have information to make reasonable assumptions 
about the fraction of displaced volume--from NMS Stock ATSs that would 
cease operations--that would be internalized by broker-dealer operator 
or its affiliates or directed towards national securities exchanges, 
NMS Stock ATSs, or non-ATS OTC trading centers.
---------------------------------------------------------------------------

    \1431\ See supra Section X.C and supra note 1356.
    \1432\ See Proposal, supra note 2, at 81118.
---------------------------------------------------------------------------

(ii) Price Impact Costs
    We recognize that heightened disclosure requirements pertaining to 
the public disclosure of Form ATS-N could increase market participants' 
trading costs relative to the baseline if some ATSs cease operating as 
ATSs or if there is reduced entry of new NMS Stock ATSs. Institutional 
investors can elect to 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.\1433\ 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.
---------------------------------------------------------------------------

    \1433\ See Tuttle: ATS Trading in NMS Stocks, supra note 1317.
---------------------------------------------------------------------------

    If there is reduced entry of new NMS Stock ATSs or some NMS Stock 
ATSs cease operating as ATSs and shut down their ATSs as a result of 
the 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, might now have to trade on other trading venues, such 
as other NMS Stock ATSs, non-ATS OTC execution venues, or national 
securities exchanges. If institutional investors execute their orders 
on a national securities exchange, they might have to absorb price 
impact costs, because national securities exchanges may not offer a 
means for reducing these costs.
    Additionally, if some NMS Stock ATSs cease operating as ATSs and 
begin operating as non-ATS OTC execution venues, such as an OTC trading 
venue in which the broker-dealer operator internalizes order flow, 
there could be an increase in the internalization of order flow. 
Increased internalization could reduce market depth and price 
informativeness and increase spreads and price impact costs.\1434\ 
However, as discussed above,\1435\ we do not know the extent to which 
the adopted amendments would affect an NMS Stock ATS's decision to 
continue operations or cease operating as an ATS, and, therefore, 
cannot estimate the number of ATSs that would cease operating as ATSs. 
Nor do we have information in order for us to make reasonable 
assumptions about the fraction of displaced volume--from NMS Stock ATSs 
that would cease operations--that would be internalized by a broker-
dealer operator or its affiliates or directed towards national 
securities exchanges, NMS Stock ATSs, or non-ATS OTC trading centers. 
Commenters did not provide any additional information or analysis that 
would allow us to quantify the number of Legacy NMS Stocks ATSs that 
would cease operating as ATSs or estimate the impacts on 
internalization or order flow. Therefore, we cannot estimate the impact 
that the adopted amendments would have on an NMS Stock ATS's price 
impact costs.
---------------------------------------------------------------------------

    \1434\ See supra Section X.B.6.a.
    \1435\ See supra Section X.C and supra note 1356.
---------------------------------------------------------------------------

    As described in detail in the Proposal,\1436\ 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.\1437\ Because NMS Stock ATSs

[[Page 38900]]

trade larger dollar volume in small capitalization, low-priced stocks, 
the price impact costs for institutional investors that trade in such 
stocks could in fact increase significantly if many NMS Stock ATSs 
decide to exit the market. However, as discussed above,\1438\ we cannot 
estimate what price market participants would receive in these stocks 
and, thus, we cannot estimate the price impact costs associated with 
the adopted amendments.
---------------------------------------------------------------------------

    \1436\ See Proposal, supra note 2, at 81127-28.
    \1437\ 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.
    \1438\ See supra Section X.C and supra note 1356.
---------------------------------------------------------------------------

(iii) Filing in Structured Format
    We understand that there are also costs associated with varying 
degrees of structuring Form ATS-N. By offering two options for filers 
to submit Form ATS-N in EDGAR, filers will be able to select the method 
best suited to their situation.\1439\ We believe that the XML format of 
Form ATS-N has enhanced benefits for the Commission's and market 
participants' use of Form ATS-N while minimizing costs relative to 
filers having to file Form ATS-N using other structured formats.\1440\ 
By requiring the XML format, the Form ATS-N data must be structured to 
conform to incorporated validations. As stated previously, the 
validations will not test for the underlying accuracy of the data, but 
it will test for consistency and completeness.\1441\ For the NMS Stock 
ATSs that file Form ATS-N, the validations will help ensure that the 
form they submit is complete and appropriately formatted so that 
additional time will not have to be spent on subsequent Form ATS-N 
filings to correct for those errors. By comparison, the EFFS system 
originally proposed does not support the open-source XML format, but 
rather a proprietary XML implementation called XFDL. As a result, the 
EFFS system has fewer validation capabilities and cannot test for 
consistency and completeness as broadly as the XML format, in 
particular, at the element level. In addition, as proposed, filers 
would have been required to individually upload each narrative response 
as a separate exhibit, whereas EDGAR permits filers to provide all of 
their narrative responses within one structured XML file, which will 
slightly diminish their time spent in filing in the Form ATS-N 
information.
---------------------------------------------------------------------------

    \1439\ See supra Section VII.
    \1440\ See infra Section X.D.11.
    \1441\ See supra Section VII (discussing structured disclosure 
aspects of Form ATS-N).
---------------------------------------------------------------------------

3. Economic Effects of Written Safeguards and Written Procedures To 
Protect Subscribers' Confidential Trading Information, and 
Recordkeeping Requirements
a. Benefits
    As explained above, we believe that the amendments to Rules 
301(b)(10) \1442\ and 303(a)(1) \1443\ of Regulation ATS could increase 
investor protection by strengthening the effectiveness of NMS Stock 
ATSs' safeguards and procedures to better protect confidential 
subscriber trading information and improving those ATSs' ability to 
implement and monitor the adequacy of, and the ATSs' compliance with, 
their safeguards and procedures.\1444\ Furthermore, as discussed 
above,\1445\ we believe that requiring ATSs to memorialize their 
safeguards and procedures in writing will improve Commission oversight 
by helping the Commission better understand, monitor, and evaluate how 
each NMS Stock ATS protects subscribers' confidential trading 
information from unauthorized disclosure and access, which in turn 
could increase investor protection.\1446\ We also expect that this 
requirement will help oversight by the SRO of which the NMS Stock ATS's 
broker-dealer operator is a member.
---------------------------------------------------------------------------

    \1442\ 17 CFR 242.301(b)(10).
    \1443\ 17 CFR 242.303(a).
    \1444\ See supra Section VI.
    \1445\ See id.
    \1446\ Three commenters agree with us that requiring ATSs to 
adopt written safeguards and written procedures would be beneficial 
to Commission oversight by helping the Commission better understand, 
monitor, and evaluate how each ATS protects subscribers' 
confidential trading information from unauthorized disclosure and 
access. See HMA Letter at 17-18; ICI Letter at 10-11; MFA/AIMA 
Letter at 6.
---------------------------------------------------------------------------

b. Costs
    We believe that there would be implementation costs for NMS Stock 
ATSs that have not preserved in 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.\1447\ Based on the analysis for purposes of the PRA, we estimate 
that, in order to comply with the amendments to Rules 301(b)(10) and 
303(a)(1)(v) of Regulation ATS,\1448\ it could take up to 87 ATSs an 
estimated one-time burden of up to 8 hours each, resulting in an 
estimated one-time paperwork cost of $2,910 for each ATS.\1449\ This 
would result in an aggregate estimated initial hour burden of 696 hours 
at an estimated cost of $253,170.\1450\
---------------------------------------------------------------------------

    \1447\ 17 CFR 242.301(b)(10).
    \1448\ See supra Section VI.
    \1449\ (Attorney at $406 x 7 hours) + (Compliance Clerk at $68 x 
1 hour) = $2,910. As explained in the PRA, we believe that the 
majority of ATSs already maintain their written safeguards and 
procedures in writing, so most ATSs would not incur this initial 
cost. See supra Section IX.D.1.b. For purposes of this economic 
analysis, however, we assume that the initial cost of this new 
requirement would be imposed on all ATSs.
    \1450\ 8 hours x 87 ATSs = 696 hours. $2,910 x 87 ATSs = 
$253,170.
---------------------------------------------------------------------------

    Furthermore, the 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 NMS Stock ATSs. For the purposes of the PRA, we estimate 
it could take approximately 4 hours annually for each ATS to update and 
maintain these safeguards and procedures,\1451\ resulting in an 
estimated annual paperwork cost for each ATS of $948.\1452\ This would 
result in an estimated aggregate ongoing hour burden for all ATSs to 
maintain and update their safeguards and procedures pursuant to Rules 
301(b)(10) and 303(a)(1)(v) of 348 hours at an estimated cost of 
$82,476 annually.\1453\
---------------------------------------------------------------------------

    \1451\ See supra note 1116 and accompanying text.
    \1452\ (Attorney at $406 x 2 hours) + (Compliance Clerk at $68 x 
2 hours) = $948 annual paperwork cost per ATS.
    \1453\ 4 annual burden hours x 87 ATSs = 348 annual burden 
hours. $948 annual paperwork cost per ATS x 87 NMS Stock ATSs = 
$82,476 aggregate annual paperwork cost.'
---------------------------------------------------------------------------

    We are also amending the recordkeeping rules relevant to the 
amendments to Rule 301 and new Rule 304. 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) \1454\ of Regulation ATS.\1455\ We are also amending 
Rule 303(a)(1) \1456\ 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 
amendments to Rule 301(b)(10). We understand that these amendments 
regarding recordkeeping requirements will require NMS Stock ATSs to set 
up systems and procedures, and these are expected to account for a 
portion of the implementation costs

[[Page 38901]]

related to Rules 301(b)(2)(viii) and 304 of Regulation ATS \1457\ and 
the amendments to Rules 301(b)(10) and 303(a)(1)(v) of Regulation ATS 
discussed above.
---------------------------------------------------------------------------

    \1454\ 17 CFR 242.303(a)(2).
    \1455\ 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.
    \1456\ 17 CFR 242.303(a)(1).
    \1457\ See supra Section X.C.1.b.
---------------------------------------------------------------------------

4. Impact on Efficiency, Competition, and Capital Formation
    We have considered the effects of the amendments on efficiency, 
competition, and capital formation. We believe that the amendments will 
help market participants make better informed decisions about where to 
route their orders in order to achieve their trading or investment 
objectives, enhance execution quality, and improve efficiency and 
capital allocation.
    We understand that the amendments to Regulation ATS could affect 
the competitive dynamics in the market for NMS stock execution 
services.\1458\ These disclosure requirements for NMS Stock ATSs could 
create a disincentive for entities to become ATSs in the market for NMS 
stock execution services and also result in some stand-alone ATSs 
exiting the market and some multi-service broker-dealers electing to 
cease operating their NMS Stock ATSs and instead initiate or increase 
operations as non-ATS OTC execution venues. However, in spite of these 
costs, and as discussed in more detail below, we believe that the NMS 
Stock ATSs that remain 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 
will be disclosed in Form ATS-N will impact how market participants 
react in terms of their trading, which could improve market 
efficiency.\1459\
---------------------------------------------------------------------------

    \1458\ See infra Section X.C.4.a (``Impact on Efficiency, 
Competition, and Capital Formation--Competition'').
    \1459\ See infra Section X.C.4.b (``Impact on Efficiency, 
Competition, and Capital Formation--Efficiency'').
---------------------------------------------------------------------------

    Moreover, increased transparency regarding the operations of NMS 
Stock ATSs could 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, such as internalizers. Because broker-dealers 
who transact in NMS stocks but do not operate ATSs are not subject to 
the operational transparency requirements, these broker-dealers could 
obtain 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.
a. Competition
    The adopted amendments could impact 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.
    As discussed above,\1460\ we believe that the public disclosure of 
Form ATS-N could appropriately calibrate the level of transparency 
between NMS Stock ATSs and national securities exchanges, which could 
foster even greater competition for order flow of NMS stocks between 
those trading platforms. However, the increased public disclosure 
requirements associated with adopted Form ATS-N along with the 
uncertainty as to whether a Form ATS-N will be declared ineffective may 
raise the barriers to entry for new entities seeking to act as ATSs in 
the market for NMS stock execution services and may cause some existing 
Legacy NMS Stock ATSs to cease operating as ATSs. This could affect 
competition in the market for NMS stock execution services, which could 
in turn affect market participants. Additionally, the public disclosure 
of some previously non-public information about the manner of 
operations of the ATS, such as information on certain matching 
methodologies or order types, along with the greater competition for 
order flow, could affect the incentives of NMS Stock ATSs to innovate.
---------------------------------------------------------------------------

    \1460\ See supra Section X.C.2.a.
---------------------------------------------------------------------------

    The sections below discuss specific impacts of the adopted 
amendments on the competitive dynamics in the market for NMS stock 
execution services, including: Their impact on the entry of new NMS 
Stock ATSs and the continuation of existing Legacy NMS Stock ATSs, the 
impact of changes in the number of NMS Stock ATSs on market participant 
trading costs, and their impact on the incentives of ATSs to innovate.
(i) Entry of New and Continuation of Legacy NMS Stock ATSs
    We believe that the adopted amendments could potentially raise the 
barriers to entry for new entities seeking to act as ATSs in the market 
for NMS stock execution services and could also affect the decision of 
Legacy NMS Stock ATSs to continue operating as ATSs. As discussed in 
more detail below, the uncertainty surrounding whether Form ATS-N and 
Form ATS-N amendment filings will be declared ineffective, the 
increased implementation and ongoing compliance costs associated with 
the adopted amendments, and the effects of public disclosure of 
previously non-public information required on Form ATS-N might dissuade 
some potential new ATSs from entering the market and could cause some 
Legacy NMS Stock ATSs to cease operating as ATSs.\1461\
---------------------------------------------------------------------------

    \1461\ Several commenters agreed that the disclosure 
requirements associated with Form ATS-N could act as a barrier to 
entry for new NMS Stock ATSs in the market; dissuade some existing 
ATSs from continuing to operate as ATSs; and force some smaller NMS 
Stock ATSs out of business. See Fidelity Letter at 10; Luminex 
Letter at 1-2; STANY Letter at 2.
---------------------------------------------------------------------------

    If the costs of the adopted amendments make it unprofitable for the 
broker-dealer operator of a Legacy NMS Stock ATS to continue operating 
the ATS,\1462\ the broker-dealer operator could sell the ATS to another 
broker-dealer or shut down the ATS. Alternatively, a multi-service 
broker-dealer operator could cease operating the Legacy NMS Stock ATS 
as an ATS and instead initiate operations as a non-ATS OTC execution 
venue, such as an OTC trading venue in which the broker-dealer operator 
internalizes order flow.\1463\ If a Legacy NMS Stock ATS that ceases 
operations is operated by a multi-service broker-dealer operator that 
also operates, or has affiliates that operate, other non-ATS OTC 
execution venues, the multi-service broker-dealer operator or its 
affiliates could increase operations at one of these venues instead of 
choosing to operate the Legacy NMS Stock ATS as a non-ATS OTC execution 
venue. If a Legacy NMS Stock ATS ceases to operate as an ATS, the 
broker-dealer operator or its affiliates might internalize the order 
flow that would have typically been sent to the ATS or they might send 
that order flow to a third-party broker-dealer to internalize.\1464\ 
Alternatively, the displaced order flow could be sent to one of the 
remaining NMS Stock ATSs

[[Page 38902]]

or to a national securities exchange for execution.
---------------------------------------------------------------------------

    \1462\ See supra Section X.C.1.b, Section X.C.2.b, and Section 
X.C.3.b.
    \1463\ One commenter said that the disclosure obligations that 
only apply to broker-dealer ATS operators may incentivize broker-
dealer ATS operators to seek alternatives other than operating an 
ATS. See Morgan Stanley Letter at 3.
    \1464\ One commenter said the disclosure requirements could 
result in ATSs closing down their NMS Stock ATS operations and 
increase the use of broker-dealer internalized executions. See 
Fidelity Letter at 4, 5, 9, 10-11.
---------------------------------------------------------------------------

    If increased barriers to entry cause fewer ATSs to enter the market 
or the increased costs of the adopted amendments cause some 
unprofitable Legacy NMS Stock ATSs to shut down operations, there could 
be fewer trading venues in the market for NMS Stock execution services. 
We believe that if the adopted amendments result in fewer trading 
venues in the market or cause some Legacy NMS Stock ATSs to operate as 
non-ATS OTC execution venues, it could affect 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.\1465\
---------------------------------------------------------------------------

    \1465\ See infra Section X.C.4.a.ii.
---------------------------------------------------------------------------

    While we believe that the adopted amendments could act as a barrier 
to entry or dissuade some existing ATSs from continuing to operate as 
ATSs, we reiterate that we lack certain information necessary to 
quantify the extent to which entities that otherwise would seek to 
operate as ATSs for NMS Stocks would be dissuaded from doing so.\1466\ 
Specifically, as discussed in the Proposal,\1467\ the decision for an 
NMS Stock ATS to continue operating or to cease operating as an ATS 
depends on numerous factors and we lack information about many of those 
factors. For example, we do not have information on the extent to which 
existing NMS Stock ATSs or potentially new ATSs rely on a competitive 
advantage, such as a unique matching methodology, to attract order flow 
or the extent to which the new rule and amendments would impact that 
competitive advantage. Furthermore, the decision to cease operating as 
an ATS is idiosyncratic to the particular NMS Stock ATS and we cannot 
ascertain the extent to which small (or in fact large) ATSs may be more 
prone to cease operating as ATSs.\1468\
---------------------------------------------------------------------------

    \1466\ See supra Section X.C and supra note 1356.
    \1467\ See Proposal, supra note 2, at 81118.
    \1468\ See id.
---------------------------------------------------------------------------

    Commenters did not provide any additional information or analysis 
that would allow us to quantify the impact on Legacy NMS Stocks ATSs or 
other entities that might otherwise seek to operate a new NMS Stock 
ATS. Therefore, while we continue to believe that the costs of the 
adopted amendments could cause some Legacy NMS Stock ATSs to cease 
operating as ATSs and could dissuade some entities who would seek to 
operate as ATSs for NMS Stocks from doing so, we remain unable to 
quantify that impact.
    The subsections below discuss how various elements of the adopted 
amendments could potentially affect the barriers to entry for new 
entities seeking to act as ATSs and the decision of Legacy NMS Stock 
ATSs to continue or cease operating as ATSs in the market for NMS stock 
execution services, including: The enhanced filing requirements of Form 
ATS-N, the implementation and ongoing compliance costs associated with 
the adopted amendments, and the public disclosure of previously non-
public information required on Form ATS-N.
(a) Enhanced Filing Requirements of Form ATS-N
    The filing requirements of Form ATS-N will impose costs on NMS 
Stock ATSs. An ineffectiveness declaration would impose costs on an NMS 
Stock ATS--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. The adopted 
amendments to Regulation ATS might beget uncertainty as to whether an 
NMS Stock ATS's Form ATS-N will be declared ineffective.\1469\ Greater 
uncertainty surrounding this process might act as a deterrent for 
potential ATSs wishing to effect transactions in NMS stocks, which 
could raise barriers for potential new entrants to the market for NMS 
stock execution services.
---------------------------------------------------------------------------

    \1469\ See supra Section X.C.1.b.
---------------------------------------------------------------------------

    The amendments we are adopting permit a Legacy NMS Stock ATS to 
continue its operations, on a provisional basis, pursuant to the filed 
initial Form ATS-N, and any amendments thereto, during 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 its activities relating to NMS stocks. The NMS Stock ATS would 
then have the opportunity to address deficiencies in the previously 
filed form by filing a new Form ATS-N.\1470\
---------------------------------------------------------------------------

    \1470\ See supra Section IV.A.3.
---------------------------------------------------------------------------

    The Commission could also declare amendments to an effective Form 
ATS-N ineffective. In particular, the adopted amendments require an NMS 
Stock ATS to file amendments on Form ATS-N to notice a material change 
to its operations at least 30 days prior to implementing that material 
change.\1471\ If the Commission declares a material amendment 
ineffective before 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. The NMS Stock 
ATS could, however, continue to operate pursuant to a Form ATS-N that 
had become effective.\1472\ Given the additional uncertainty introduced 
by the possibility that the Commission could declare a Form ATS-N or a 
Form ATS-N amendment ineffective, coupled with the number and 
complexity of the new disclosures that would be required under Form 
ATS-N, some broker-dealer operators of Legacy NMS Stock ATSs might find 
that the costs of compliance 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, some NMS Stock ATSs might elect to cease operating 
as an ATS.
---------------------------------------------------------------------------

    \1471\ The amendments to Rule 301(a)(5) could, under exceptional 
circumstances such as to prevent substantial harm to market 
participants, allow an NMS Stock ATS to implement a material change 
more quickly by seeking an exemption from the Commission from the 
30-calendar day advance notice requirements of Rule 304(a)(2)(i)(A). 
See supra Section III.B.3.
    \1472\ Nothing would preclude the NMS Stock ATS from later 
submitting a new or revised Form ATS-N amendment for consideration 
by the Commission.
---------------------------------------------------------------------------

    The adopted amendments might also potentially raise the barriers to 
entry for new entities seeking to act as ATSs in the market for NMS 
stock execution service by delaying the start of operations for new NMS 
Stock ATSs. Currently, to comply with Regulation ATS, an entity seeking 
to operate as an ATS must, among other things, file an initial 
operation report with the Commission on Form ATS at least 20 days 
before commencing operations.\1473\ Under the adopted amendments, an 
entity seeking to operate as an ATS in the market for NMS stock 
execution services could not commence operations until its initial Form 
ATS-N became effective, which could occur 120 calendar days after 
initially filing Form ATS-N with the Commission or at the end of the 
extended Commission review period.\1474\ Additionally, the disclosures 
required by Form ATS-N would be more comprehensive and require

[[Page 38903]]

significantly more detail than those required on current Form ATS, 
which in turn could also delay the start of operations for new NMS 
Stock ATSs.
---------------------------------------------------------------------------

    \1473\ See supra Section II.C.
    \1474\ Our review period could last less than 120 days. 
Alternatively, we could extend the review period an additional 90 
calendar days, if the Form ATS-N is unusually lengthy or raises 
novel or complex issues that require additional time for review. See 
supra Section IV.A.2.
---------------------------------------------------------------------------

(b) Implementation and Ongoing Compliance Costs
    As explained above, NMS Stock ATSs will incur both implementation 
and ongoing costs to meet the regulatory requirements under Rule 
304.\1475\ On the margin, if these costs outweigh the benefits of 
operating an NMS Stock ATS, they could act as a deterrent for potential 
ATSs wishing to effect transactions in NMS stocks or cause some Legacy 
NMS Stock ATSs to cease operating as an ATS. However, we do not believe 
that the implementation and ongoing costs are significant enough to 
make this a likely possibility.
---------------------------------------------------------------------------

    \1475\ See supra Section X.C.1.b (``Economic Effects of Enhanced 
Filing Requirements of Form ATS-N--Costs'').
---------------------------------------------------------------------------

    The implementation and ongoing costs associated with filing Form 
ATS-N could also differentially affect small and large NMS Stock ATSs. 
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. We 
believe 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. If the costs 
associated with filing Form ATS-N become disproportionately greater for 
smaller volume NMS Stock ATSs, some of these Legacy NMS Stock ATSs 
might be more likely to cease operating as ATSs. However, if the NMS 
Stock ATSs that decide to cease operating as ATSs due to this fixed 
implementation cost only transact small dollar (or share) volume, there 
may not be a large impact on the overall competitive structure for 
remaining NMS Stock ATSs. Moreover, the order flow that was being 
traded on these small NMS Stock ATSs might be absorbed and 
redistributed amongst these larger remaining NMS Stock ATSs. On the 
other hand, if the implementation costs cause a small NMS Stock ATS 
that is the sole provider of a niche service to cease operating as an 
ATS, it could affect market participants by requiring them to seek 
execution on other NMS stock trading venues that do not minimize their 
trading costs to the same extent.\1476\
---------------------------------------------------------------------------

    \1476\ See infra Section X.C.4.a.ii.
---------------------------------------------------------------------------

(c) Public Disclosure of Form ATS-N
    Once an NMS Stock ATS's initial Form ATS-N has become effective, 
the information disclosed on Form ATS-N will be made available to the 
broader investing public.\1477\ Updating and correcting amendments to 
Form ATS-N, as well as the cover page of material amendments, would be 
made public upon filing and the entirety of material amendments to Form 
ATS-N would be made public following the expiration of the review 
period.\1478\
---------------------------------------------------------------------------

    \1477\ See supra Section V for information contained on Form 
ATS-N.
    \1478\ See supra Section IV.E. See also Rule 304(b)(2).
---------------------------------------------------------------------------

    While the information elicited on Form ATS-N is similar to the 
information that national securities exchanges are required to publicly 
disclose, we believe that the disclosure of this previously non-public 
information could have some impact on the competition for 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 might 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 would have a greater likelihood of receiving lower 
execution quality on an NMS Stock ATS relative to these other trading 
centers. As such, this could result in lower revenues for some NMS 
Stock ATSs. Those ATSs might then find it unprofitable to continue 
operating as ATSs. This might cause the broker-dealer operator to sell 
the ATS to another broker-dealer or shut down the ATS. It could also 
cause the broker-dealer operator to switch its business strategies to 
increase market share or profitability, possibly by continuing to 
operate as a non-ATS OTC execution venue, such as OTC trading venue in 
which the broker-dealer operator internalizes order flow. The 
disclosure of previously non-public operational information required 
under initial Form ATS-N could erode a new NMS Stock ATS's competitive 
advantage and prevent it from attracting order flow. This could 
potentially raise the barriers to entry for new entities seeking to act 
as ATSs in the market for NMS stock execution services and dissuade 
some entities that would potentially seek to operate as ATSs for NMS 
stocks from doing so. We believe that a reduction in the entry of new 
ATSs or some Legacy NMS Stock ATSs electing to cease operating as ATSs 
could affect competition in the market for NMS Stock execution 
services, which could 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.\1479\ We believe that the disclosure of an NMS Stock 
ATS's innovations in 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, those trading venues may choose to cease 
operating as ATSs if operating the ATS becomes unprofitable for the 
broker-dealer operator.
---------------------------------------------------------------------------

    \1479\ See infra X.C.4.a.iii.
---------------------------------------------------------------------------

    Both large and small NMS Stock ATSs could be affected by the 
detailed disclosures required under Rule 304 and Form ATS-N, though, 
the adopted amendments could 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 might result in 
lower revenue for the NMS Stock ATS. If public disclosure reduces 
revenue for a small NMS Stock ATS, or a large ATS without a substantial 
profit margin, the broker-dealer operator might no longer view the ATS 
as being profitable and cease operating it as an ATS. The broker-dealer 
operator of a large ATS that ceases operating as an ATS might be more 
likely to continue to operate the system as a non-ATS OTC execution 
venue. However, the broker dealer of a small ATS that ceases to operate 
as an ATS could potentially shutdown the ATS altogether. Alternatively, 
if public disclosure reduces revenue for a large NMS Stock ATS or a 
smaller NMS Stock ATS with large profit margins, such an ATS may

[[Page 38904]]

continue operating as an ATS but may need to engage in costly research 
in order to develop new methodologies or enhancements that are less 
likely to be affected by the public disclosure requirements in order 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 could potentially cease operating as an ATS.\1480\ As discussed in 
detail above,\1481\ the effect on market participants if an ATS ceases 
operating as an ATS could vary based on the size (dollar volume) of the 
ATS. If the NMS Stock ATSs that cease operating as ATSs transact only 
small dollar (or share) volumes, we might not expect to see a large 
impact on the overall competitive structure of the NMS Stock ATSs that 
would remain in the market. Many smaller NMS Stock ATSs might not 
engage in other brokerage or dealing activities in addition to the 
operation of their NMS Stock ATS. Therefore, certain aspects of Form 
ATS-N (such as several items of Part II) might not be applicable to 
smaller NMS Stock ATSs, which would reduce the burdens and mitigate the 
effects of the disclosure requirements on these smaller NMS Stock ATSs.
---------------------------------------------------------------------------

    \1480\ See Singhvi, Surrendra S. and Harsha B. Desai, 1971, ``An 
Empirical Analysis of the Quality of Corporate Financial 
Disclosure,'' Accounting Review 46, 129-138.
    \1481\ See supra Section X.C.4.a.i.B.
---------------------------------------------------------------------------

    The increased transparency regarding the operations of NMS Stock 
ATSs might 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, such as internalizers. Because broker-dealers who 
transact in NMS stocks but do not operate ATSs are not subject to the 
operational transparency requirements, these broker-dealers could be at 
a competitive advantage and attract and internalize order flow that 
would otherwise be entered and executed on NMS Stock ATSs.\1482\ These 
disclosure requirements could also influence a broker-dealer operator's 
decisions with respect to its operations of the NMS Stock ATS. Given 
the disclosure requirements regarding the ATS-related activities of 
broker-dealer operators and their affiliates, a multi-service broker-
dealer operator of an NMS Stock ATS might cease operating its NMS Stock 
ATS as an ATS and instead internalize the order flow or send that order 
flow to a third-party broker-dealer that executes it.\1483\ 
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, which 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. While we 
cannot quantify how much order flow from these displaced multi-services 
broker-dealers that operate NMS Stock ATSs would be routed back to 
national securities exchanges,\1484\ we believe that routing order flow 
to lit venues could potentially have some positive effects on price 
discovery and transparency.\1485\
---------------------------------------------------------------------------

    \1482\ Four commenters assert that the enhanced filing 
requirements under the amendments to Regulation ATS would 
disproportionately impact multi-service broker-dealers who operate 
NMS Stock ATSs relative to other broker-dealers. These commenters 
state that these broker-dealers are held to a higher disclosure 
standard than broker-dealers that do not operate ATSs. See Fidelity 
Letter at 4, 9, 11; Liquidnet Letter at 9; Morgan Stanley Letter 2; 
STA Letter at 2.
    \1483\ One commenter agrees that the enhanced disclosure 
requirements may incentivize multi-service broker-dealer ATS 
operators to seek alternatives other than operating an ATS. See 
Morgan Stanley Letter at 3. Another commenter states that the 
enhanced disclosure requirements could result in ATSs closing down 
their NMS Stock ATS operations and increase the use of broker-dealer 
internalized executions. See Fidelity Letter at 4, 9, 10-11.
    \1484\ See supra Section X.C.
    \1485\ See infra Section X.4.b (``Impact on Efficiency, 
Competition, and Capital Formation--Efficiency'').
---------------------------------------------------------------------------

    In response to commenters' concerns that proposed Form ATS-N would 
have required the public disclosure of proprietary or commercially 
sensitive information, we have revised the adopted Form ATS-N requests 
to not seek disclosure of certain information that could be proprietary 
or commercially sensitive, such as routing tables or numerical order 
flow segmentation metrics.\1486\ Additionally, we have revised the 
disclosures concerning the broker-dealer operator and its affiliates to 
focus on (1) the ability of the business units or affiliates of the 
broker-dealer operator to enter, or direct the entry of, orders into 
the NMS Stock ATS; and (2) whether those business units and affiliates 
receive any preferential treatment with respect to the services offered 
by the NMS Stock ATS, including any special access to information about 
trading interest.\1487\ We believe these changes should reduce the 
costs of the public disclosure of Form ATS-N for a NMS Stock ATS 
relative to what they were in the Proposal.\1488\ Additionally, these 
changes, because of the decreased costs of public disclosure relative 
to the Proposal, should reduce the barriers to entry and also reduce 
the likelihood that a Legacy NMS Stock ATS ceases operating as an ATS 
compared to the Proposal.
---------------------------------------------------------------------------

    \1486\ See supra Section IV.E.2.a.
    \1487\ See supra Section V.C.
    \1488\ See Proposal, supra note 2, at 81125.
---------------------------------------------------------------------------

(ii) Effects of Changes in Number of NMS Stock ATSs on Market 
Participant Trading Costs
    Overall, we believe that the possible decision of entities that 
currently are NMS Stock ATSs to cease operating as ATSs, or the reduced 
entry of new NMS Stock ATSs, due to the requirements under Rule 304 and 
Form ATS-N could affect competition in the market for NMS stock 
execution services and could impact market participants by reducing the 
number of entities that are willing to act as NMS Stock ATSs and 
publicly disclose how they operate. If there is a reduction in the 
number of trading venues, either from some Legacy NMS Stock ATSs 
shutting down their operations or reduced entry into the market by 
prospective NMS Stock ATSs, it could impact market participants by 
reducing the number of NMS stock trading venues and, thus, reducing 
market participants' opportunities to minimize its trading costs by 
sending orders to different trading platforms. Additionally, if some 
Legacy NMS Stock ATSs cease operating as ATSs and begin to operate as 
non-ATS OTC execution venues, there might be an increase in the 
internalization of order flow. Increased internalization could reduce 
market depth and price informativeness and increase spreads,\1489\ 
which could increase market participant trading costs. Therefore, the 
possible decision of NMS Stock ATSs to cease operating as ATSs and 
lower rate of entry for new NMS Stock ATSs could result in greater 
costs relative to the baseline cost savings that NMS Stock ATSs 
currently afford market participants.
---------------------------------------------------------------------------

    \1489\ See supra Section X.A.6.a.
---------------------------------------------------------------------------

    However, as discussed above and in the Proposal,\1490\ we lack 
information to determine the extent to which the increased public 
disclosure requirements associated with adopted Form ATS-N or the 
uncertainty as to whether a Form ATS-N will be declared ineffective 
would affect a Legacy NMS Stock ATS's decision to continue operations 
or cease operating as an ATS or the decision of potential ATSs to enter 
the market. Therefore, we cannot

[[Page 38905]]

estimate the number of ATSs that would cease operating as ATSs or the 
number of potential new ATSs that would be dissuaded from entering the 
market. Furthermore, we do not have information in order for us to make 
reasonable assumptions about the fraction of displaced volume--from NMS 
Stock ATSs that would cease operating as ATSs--that would be 
internalized by a broker-dealer operator or its affiliates or directed 
towards national securities exchanges, NMS Stock ATSs, or non-ATS OTC 
trading centers. Commenters did not provide any additional information 
or analysis that would allow us to estimate the impacts on order flow 
or the continued operation of NMS Stock ATSs under the new rule and 
amendments. Therefore, we cannot quantify the ultimate effect that this 
will have on competition and market participant trading costs.
---------------------------------------------------------------------------

    \1490\ See supra Section X.C and supra note 1356; see also 
Proposal, supra note 2, at 81118.
---------------------------------------------------------------------------

(iii) Innovation
    As discussed above, the public availability of effective Form ATS-N 
and Form ATS-N amendments could result in the disclosure of an NMS 
Stock ATS's previously non-public operational information.\1491\ These 
disclosures could potentially affect the incentives of NMS Stocks ATSs 
to innovate.
---------------------------------------------------------------------------

    \1491\ See supra Section X.C.2.
---------------------------------------------------------------------------

    The disclosure of an NMS Stock ATS's innovations in its Form ATS-N 
or Form ATS-N amendments could potentially result in certain NMS Stock 
ATSs losing their technological advantage. For example, to the extent 
that an NMS Stock ATS's competitive advantage in the market is driven 
by its matching methodology, the disclosure of this information could 
result in other NMS Stock ATSs implementing similar methodologies. On 
the one hand, this could potentially reduce the incentives for ATSs to 
innovate. For instance, if publicly disclosing an NMS Stock ATS's new 
technological innovations results in the ATS earning less revenue from 
new innovations it develops, relative to the baseline, the ATS might 
lose its incentives to innovate.
    On the other hand, the increase in transparency resulting from the 
public disclosure of Form ATS-N could foster greater competition for 
order flow in the market for NMS Stock ATS execution services. This 
greater competition for order flow could 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. For example, if 
the public disclosure of technology giving an NMS Stock ATS a 
competitive advantage results in the ATS losing that competitive 
advantage, the ATS could be forced to innovate and develop new 
technology or enhancements in order to attract more trading volume to 
its venue. However, if some NMS Stock ATSs cannot innovate fast enough 
to regain their competitive advantage in the market, orders might also 
flow away from these NMS Stock ATSs, and as a result, these ATSs may 
choose to cease operating as ATSs.\1492\
---------------------------------------------------------------------------

    \1492\ See supra Section X.C.4.a.i.
---------------------------------------------------------------------------

    We do not have information on the extent to which existing NMS 
Stock ATSs or potentially new ATSs rely on a technological advantage, 
such as a unique matching methodology, to attract order flow. Nor do we 
have information regarding the ability of NMS Stock ATSs to innovate 
and replace a competitive advantage it might lose. Additionally, 
commenters did not provide any further information or analysis that 
would allow us to estimate at what rate NMS Stock ATSs innovate. 
Therefore, we cannot quantify the ultimate effect the adopted 
amendments will have on innovation.
    As discussed above, we have revised the adopted Form ATS-N requests 
to not seek disclosure of certain information that could be proprietary 
or commercially sensitive, such as routing tables or numerical order 
flow segmentation metrics.\1493\ Additionally, in response to 
commenters' concerns that making Form ATS-N material amendments public 
before the expiration of the Commission's 30-day calendar review 
period, at which point material changes could be implemented, could 
reduce the incentives for ATSs to innovate or be confusing or 
misleading to the public,\1494\ we are modifying the proposed rules for 
making Form ATS-N material amendments public. Under the adopted 
amendments, the entirety of the material amendment, as amended, will be 
made public by the Commission following the Commission's 30-calendar 
day review period.\1495\ We believe that these changes, relative to the 
Proposal, will reduce the likelihood that details concerning an NMS 
Stock ATS's technological innovations are disclosed to competitors 
before the ATS has a chance to implement them. Relative to the 
Proposal, the ATS might be able to derive greater benefits from new 
innovations, which could increase the incentives for NMS Stock ATSs to 
innovate.
---------------------------------------------------------------------------

    \1493\ See supra Section IV.E.2.a.
    \1494\ See supra Section IV.E.2.c.
    \1495\ The cover page of the filed material amendment will be 
made public by the Commission upon filing. See id.
---------------------------------------------------------------------------

    Four commenters state that the proposed process for declaring a 
Form ATS-N ineffective would reduce the incentives to develop new 
technological innovations.\1496\ One of these commenters expresses 
concern that the process will be used to delay the effectiveness of NMS 
Stock ATSs whose features, while meeting regulatory requirements, do 
not meet current industry norms.\1497\ The Commission's review process 
for declaring a Form ATS-N ineffective could affect the incentives of 
an existing or potentially new NMS Stock ATS to innovate. As discussed 
above,\1498\ an ineffectiveness declaration could impose costs on an 
NMS Stock ATS--such as costs from having to cease operations, roll back 
a change in operations, or delay the start of operations. The 
uncertainty regarding whether a Form ATS-N featuring a new innovation 
will be declared ineffective could discourage or delay existing and 
potentially new NMS Stock ATSs from developing or introducing new 
technological innovations. Additionally, the extended review for an 
initial Form ATS-N could raise the barriers to entry for new NMS Stock 
ATSs and reduce the incentives for potentially new ATSs to bring new 
innovations to the market.\1499\ However, as discussed in detail 
above,\1500\ the Commission's review of Form ATS-N disclosures will not 
focus on the merits of the Form ATS-N disclosures. Therefore, to the 
extent the disclosures are complete and comprehensible, the 
Commission's review process for a Form ATS-N filing that contains 
innovative features that do not meet current industry norms should not 
take longer or result in an increased chance of the Form ATS-N being 
declared ineffective.
---------------------------------------------------------------------------

    \1496\ See Fidelity Letter at 2-3, 8; KCG Letter at 5, 8; 
Luminex Letter at 1; STANY Letter at 2.
    \1497\ See Fidelity Letter at 9.
    \1498\ See supra Section X.C.1.b.
    \1499\ See supra Section X.C.4.a.i.A.
    \1500\ See supra Section IV.A.3.b.
    \1501\ See supra Section X.C.4.a (``Impact on Efficiency, 
Competition, and Capital Formation--Competition'').
---------------------------------------------------------------------------

b. Efficiency
    As discussed above, the heightened disclosure requirements for NMS 
Stock ATSs might cause some NMS Stock ATSs to cease operating as ATSs 
and either shut down their operation or instead operate as non-ATS OTC 
execution venues, such as an OTC trading venue in which the broker-
dealer operator internalizes order flow. This could affect competition 
in the market for NMS Stock execution services.\1501\ If it is the case 
that the NMS Stock ATSs that cease operating as

[[Page 38906]]

ATSs are the ones that have worse execution quality, the surviving NMS 
Stock ATSs might enhance execution quality and allow market 
participants to transact at lower prices. If more order flow is 
directed towards these remaining NMS Stock ATSs, there could be a 
higher likelihood that the orders of buyers and sellers on an NMS Stock 
ATS would interact and execute, which could improve liquidity. It is 
also possible that the enhanced disclosure from NMS Stock ATSs might 
result in more order flow migrating towards national securities 
exchanges, which might foster greater order interaction between buyers 
and sellers on a national securities exchange, 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 
will be publicly disclosed on Form ATS-N and that trading in the market 
by NMS Stock ATSs might in fact be concentrated on fewer NMS Stock ATSs 
as a result of the amendments, market participants might 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 amendments to Regulation ATS might improve market efficiency.
c. Capital Formation
    Under the adopted amendments, market participants would be aware of 
which NMS Stock ATSs offer better execution services or better 
protection against the dissemination of their non-public trading 
information, and as a result, these NMS Stock ATSs could attract even 
more order flow. Furthermore, to the extent the adopted amendments 
appropriately calibrate the level of transparency between NMS Stock 
ATSs and national securities exchanges, this would foster greater 
competition for order flow of NMS stocks between those trading 
platforms. Even if some NMS Stock ATSs cease operating as ATSs, we 
believe the enhanced disclosure requirements of the adopted amendments 
will assist market participants in obtaining best execution of their 
orders. This could lead to lower spreads and thereby foster greater 
capital formation and increased market liquidity relative to the 
baseline.

D. Reasonable Alternatives

1. Require NMS Stock ATSs to Publicly Disclose Current Form ATS
    We could allow NMS Stock ATSs to continue to describe their 
operations on current Form ATS, but make Form ATS public either by 
posting it on the Commission's website or requiring 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.
    As described in detail in the Proposal, this alternative would 
lower the cost of compliance for current and future NMS Stock ATSs 
compared to the adopted amendments, but market participants would 
continue to receive limited information regarding how orders interact, 
match, and execute on NMS Stock ATSs and the ATS-related activities of 
NMS Stock ATSs' broker-dealer operators and their affiliates.\1502\ 
Public disclosure of Form ATS could have some harmful effects on the 
competitive dynamics of NMS Stock ATSs; however, such effects would 
likely be smaller than those expected under the adopted amendments. 
Regulators' oversight of NMS Stock ATSs under this alternative would 
not be improved compared to the baseline, as it would under the adopted 
amendments.
---------------------------------------------------------------------------

    \1502\ See Proposal, supra note 2, at 81128-29.
---------------------------------------------------------------------------

    Six commenters disagree with our analysis of this 
alternative.\1503\ These commenters suggest that we could achieve our 
transparency goals by requiring all ATS operators to publicly disclose 
Form ATS. For the reasons discussed above and in the Proposal, we 
continue to believe that this alternative would reduce the benefits 
that would accrue to market participants as compared to the adopted 
amendments.
---------------------------------------------------------------------------

    \1503\ See Luminex Letter at 2-5; MFA/AIMA Comment Letter at 2; 
Morgan Stanley Letter at 2; PDQ Letter at 2; SIFMA Comment Letter at 
3; STANY Letter at 3.
---------------------------------------------------------------------------

2. Require Form ATS-N But Deem Information Confidential
    We could require NMS Stock ATSs to file Form ATS-N with the 
Commission, but not make it publicly available. Form ATS-N would 
include detailed disclosures about the NMS Stock ATS's operations and 
the ATS-related activities of its broker-dealer operator and its 
affiliates, and the Commission could declare filings on Form ATS-N 
ineffective. As described in detail in the Proposal,\1504\ we believe 
that this alternative would improve the quality of NMS Stock ATSs' 
disclosures and strengthen the Commission's oversight of NMS Stock 
ATSs. However, this alternative would not make NMS Stock ATSs' 
operations more transparent for market participants.
---------------------------------------------------------------------------

    \1504\ See Proposal, supra note 2, at 81129.
---------------------------------------------------------------------------

    No commenters directly remarked on this alternative, and we 
continue to believe that this alternative would entail fewer benefits 
to market participants as compared to the adopted amendments, because 
it would not make NMS Stock ATSs' operations more transparent for 
market participants. However, a number of commenters suggest we take a 
tiered public disclosure approach and not publicly disclose certain 
information on Form ATS-N that is potentially sensitive and of a 
proprietary nature.\1505\ We believe that a tiered public disclosure 
system for Form ATS-N would still produce the benefits from the 
improved quality of NMS Stock ATSs' disclosures and the information 
about the ATS-related activities of the broker-dealer operator and its 
affiliates described above. Additionally, the public disclosure of a 
portion of Form ATS-N could improve transparency and provide market 
participants with more information about an NMS Stock ATS's operations, 
which would lower search costs relative to the baseline. Because all of 
the information on Form ATS-N would not be made public, the benefits of 
increased transparency could be lower under a tiered public disclosure 
approach than they would be under the adopted amendments. Therefore, 
search costs may be higher and market participants may make less 
informed decisions regarding where to route their orders and therefore 
result in lower execution quality under a tiered public disclosure 
approach than they would obtain under the adopted amendments. However, 
the public disclosure costs to ATSs may be lower under a tiered public 
disclosure approach, which could result in lower barriers to entry for 
new NMS Stock ATSs and fewer Legacy NMS Stock ATSs ceasing to operate 
at ATSs than under the adopted amendments.
---------------------------------------------------------------------------

    \1505\ See Liquidnet Letter at 8; Luminex Letter at 2; Morgan 
Stanley at 2; SSGA Letter at 2; STANY Letter at 3; UBS Letter at 7.
---------------------------------------------------------------------------

3. Require NMS Stock ATSs to Publicly Disclose Form ATS-N But Not 
Declare Form ATS-N Ineffective
    We could require NMS Stock ATSs to file Form ATS-N and make it 
public, but continue to use the current notice regime instead of the 
process for declaring Form ATS-N ineffective. As described in detail in 
the Proposal,\1506\

[[Page 38907]]

relative to the adopted rule, the alternative of maintaining the 
current notice regime would lower demand for Commission and staff 
resources, could reduce costs for NMS Stock ATSs, and could lower the 
barriers to entry for new NMS Stock ATSs. However, it would be more 
difficult for the Commission to exercise its oversight responsibilities 
and the alternative would not provide the same level of protection to 
market participants as the adopted amendments.
---------------------------------------------------------------------------

    \1506\ See Proposal, supra note 2, at 81129.
---------------------------------------------------------------------------

    Two commenters disagree with our analysis of this alternative, and 
expressed concerns that the effectiveness determination of Form ATS-N 
would be a burdensome process for the Commission.\1507\ They suggest 
that these potential costs outweigh the benefits of the review process 
under the adopted amendments. We believe that the review process will 
contribute towards costs in terms of Commission resources. However, for 
the reasons discussed above, we continue to believe that the review 
process will provide benefits in terms of mitigating inaccurate and 
incomplete disclosures, which could improve investor protection.\1508\
---------------------------------------------------------------------------

    \1507\ See Consumer Federation of America Letter at 2, 10-11; 
Fidelity Letter at 9.
    \1508\ See supra Section IV.A.2 (``Rule 304(a)(1)(ii): 
Commission Review Period'')
---------------------------------------------------------------------------

4. Initiate Differing Levels of Public Disclosure Depending on NMS 
Stock ATS Characteristics
    We could require different levels of disclosure among NMS Stock 
ATSs based on dollar trading volume. As described in detail in the 
Proposal,\1509\ this could reduce compliance costs relative to the 
adopted amendments. However, because a portion of the implementation 
costs are fixed and because certain sections of Form ATS-N would not be 
applicable to smaller NMS Stock ATSs that are not operated by multi-
service broker-dealer operators and do not engage in other brokerage or 
dealing activities, any reduction in compliance costs smaller NMS Stock 
ATSs might experience under this alternative could be small.
---------------------------------------------------------------------------

    \1509\ See Proposal, supra note 2, at 81129.
---------------------------------------------------------------------------

    At the same time, this alternative could result in a competitive 
advantage for small NMS Stock ATSs, because it could give them more 
time to innovate without having to disclose such innovation to 
competitors.\1510\ This could give small NMS Stock ATSs an advantage in 
attracting order flow relative to large NMS Stock ATSs, which could 
spill over to market participants that execute on these ATSs, by 
increasing the execution quality of their trades. Nonetheless, because 
broker-dealer operators could have the incentive to allocate order flow 
to multiple NMS Stock ATSs to avoid reaching threshold volumes, this 
alternative could create some information opacity in the market, which 
could lead to lower execution quality for market participants relative 
to the adopted amendments.
---------------------------------------------------------------------------

    \1510\ See id.
---------------------------------------------------------------------------

    One commenter expressed concerns about applying different levels of 
disclosure based on metrics such as trading volume, mentioning that 
Form ATS-N is not sufficiently onerous relative to Form ATS to justify 
small-scale exemptions.\1511\ Contrary to this concern, another 
commenter stated that the disclosure requirements should apply to 
larger ATSs with a ``substantial market footprint'' to avoid 
discouraging competitive innovations among NMS Stock ATSs.\1512\ 
Although compliance costs may be lessened if small stock ATSs are 
required to provide less disclosure on Form ATS-N, (i.e., ATSs with 
lower trading volume), this reduction in compliance costs could be 
small.
---------------------------------------------------------------------------

    \1511\ See CFA Institute Letter at 3.
    \1512\ See STANY Letter at 2.
---------------------------------------------------------------------------

    Requiring less disclosure from small NMS Stock ATSs might also 
result in greater innovation relative to the adopted amendments. 
However, we continue to believe that requiring less disclosure from 
low-volume NMS Stock ATSs could reduce the benefits market participants 
receive from the greater transparency about the operations of NMS Stock 
ATSs and the ATS-related activities of their broker-dealer operators 
and their affiliates. This could increase market participant search 
costs when evaluating potential NMS stock trading venues, which could 
result in market participants making less informed decisions about 
which trading venue aligns with their investing or trading objectives.
5. Require NMS Stock ATSs To Register as National Securities Exchanges 
and Become SROs
    We could 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. While commenters did not remark 
on this alternative, we continue to believe that, as described in 
detail in the Proposal,\1513\ this alternative would provide market 
participants with more information about priority, order interaction, 
display, and execution procedures, which would help them make better 
informed decisions about where to route their orders for best 
execution. Competition among and between trading venues could increase, 
leading to greater market liquidity and market efficiency. Further, 
this alternative could strengthen Commission oversight, thus 
benefitting market participants.
    However, this alternative would create high startup costs and high 
ongoing operational costs for NMS Stock ATSs compared to the adopted 
amendments.\1514\ We continue to believe that these costs to NMS Stock 
ATSs would be significant.
---------------------------------------------------------------------------

    \1513\ See Proposal, supra note 2, at 81129-30.
    \1514\ 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 3, at 70907. 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.
---------------------------------------------------------------------------

6. Discontinue Quarterly Volume Reports on Form ATS-R
    We could amend Regulation ATS so that NMS Stock ATSs would no 
longer be required to file quarterly volume reports on Form ATS-R. As 
described in detail in the Proposal,\1515\ we believe this alternative 
could result in reduced costs for NMS Stock ATSs, because they would no 
longer be required to prepare a quarterly Form ATS-R in addition to 
their Form ATS-N. However, some competitively sensitive information 
contained on Form ATS-R, such as the ATS's subscriber list and the list 
of persons granted, denied, or limited access during the reporting 
period--which is not solicited under adopted Form ATS-N, would be made 
public on Form ATS-N. Making such information public could harm the NMS 
Stock ATS as well as persons denied access.
---------------------------------------------------------------------------

    \1515\ See Proposal, supra note 2, at 81130.
---------------------------------------------------------------------------

    One commenter suggested that in light of information on FINRA's 
website regarding ATSs,\1516\ and the detailed disclosures in periodic 
disclosures that would be required by proposed Form ATS-N, we should no 
longer require an NMS Stock ATS to file Form ATS-R.\1517\ However, this 
commenter did not suggest that the information that is contained on 
Form ATS-R and not included on FINRA's website or Form ATS-N,\1518\ 
such as the ATS's subscriber list and the list of persons granted, 
denied, or limited access during the reporting period, should be

[[Page 38908]]

included in Form ATS-N. If ATSs were no longer required to file Form 
ATS-R and this information was not made available in Form ATS-N, then 
the Commission could lose efficient access to information available in 
the form that helps it oversee and monitor the trading activity of NMS 
Stock ATSs.\1519\ This loss of efficiency could reduce the benefits of 
Commission oversight, which could reduce investor protection relative 
to today.
---------------------------------------------------------------------------

    \1516\ See supra note 15.
    \1517\ See SIFMA Letter at 8 n.16.
    \1518\ See supra note 259.
    \1519\ See supra Section III.B.5 (``Rule 301(b)(9): Form ATS-R 
Quarterly Reports'').
---------------------------------------------------------------------------

7. Require NMS Stock ATSs To Operate as Limited Purpose Entities
    We could 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 Form 
ATS-N, Form ATS-N amendments, and notices of cessation on 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.
    While commenters did not remark on this alternative, we continue to 
believe that, as described in detail in the Proposal,\1520\ the benefit 
of this alternative would be to eliminate potential conflicts of 
interest, but that this alternative might 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, many broker-dealers 
might choose to file a cessation of operations report and shut down the 
operations of their NMS Stock ATS,\1521\ resulting in similar (though 
potentially more severe) effects on the competitive dynamics of the ATS 
market as under the adopted amendments.
---------------------------------------------------------------------------

    \1520\ See Proposal, supra note 2, at 81130.
    \1521\ 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. Prohibit Broker-Dealer Operators and Affiliates From Trading on the 
NMS Stock ATS
    Several commenters believe that the increased disclosure 
requirements on Form ATS-N concerning the ATS-related activities of the 
broker-dealer operator and its affiliates do not do enough to reduce 
conflicts of interest and suggested that we prohibit conflicts of 
interest altogether on NMS Stock ATSs.\1522\ Under this alternative, 
the broker-dealer operator could continue to act as a broker-dealer 
operator of an NMS Stock ATS and engage in non-ATS functions, but would 
be subject to new requirements designed to limit potential conflicts of 
interest. These requirements would include a prohibition on trading on 
the NMS Stock ATS by the broker-dealer operator and its affiliates.
---------------------------------------------------------------------------

    \1522\ See Better Markets Letter at 5-6; Consumer Federation of 
America Letter at 7-8; HMA Letter at 1.
---------------------------------------------------------------------------

    We believe that banning conflicts of interest, as opposed to 
increasing disclosure of relationships between the ATS and the broker-
dealer operator and the broker-dealer operator's affiliates, could be 
potentially harmful. Multi-service broker-dealers, that is, broker-
dealers who have operations and activities in addition to the ATS may 
be more prone to having conflicts of interest, and therefore, banning 
conflicts of interest could result in these broker-dealers ceasing to 
operate their ATSs.\1523\ Therefore, we believe that this approach 
suggested by these commenters could have substantially deleterious 
effects on liquidity provision, and for this reason, we are maintaining 
our approach in the adopted amendment.
---------------------------------------------------------------------------

    \1523\ See supra Section X.C.4.a.i.
---------------------------------------------------------------------------

9. Lower the Fair Access Threshold for NMS Stock ATSs
    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.\1524\ We could lower the fair access threshold under Rule 
301(b)(5) of Regulation ATS \1525\ for NMS Stock ATSs to a level 
sufficiently low that most NMS Stock ATSs would be prohibited from 
engaging in many discriminatory practices.\1526\
---------------------------------------------------------------------------

    \1524\ See supra Section II.C.
    \1525\ 17 CFR 242.301(b)(5).
    \1526\ As discussed above in Section II.C, 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.
---------------------------------------------------------------------------

    As described in detail in the Proposal,\1527\ we believe that there 
would be fewer benefits under this alternative because the fair access 
requirements would apply only to the NMS stocks for which the NMS Stock 
ATS had crossed the fair access threshold. We could address that 
situation by proposing further amendments to the fair access 
requirements. However, we believe that the disclosures that would be 
required by 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.
---------------------------------------------------------------------------

    \1527\ See Proposal, supra note 2, at 81131.
---------------------------------------------------------------------------

    No commenters directly commented on this alternative, and we 
continue to believe it would result in fewer benefits than the adopted 
amendments. However, one commenter recommended as an alternative that, 
in addition to the adopted amendments, we should also eliminate the 5% 
fair access threshold for NMS Stock ATSs, i.e., reduce the fair access 
threshold to zero, because the current volume threshold creates a 
competitive imbalance between exchanges--which are subject to fair 
access requirements--and NMS Stock ATSs.\1528\ Under the commenter's 
alternative, if the fair access threshold were eliminated, then all NMS 
Stock ATSs would need to meet the requirements of Rule 301(b)(5) that 
prohibit or limit discriminatory practices of ATSs.\1529\ Because the 
commenter's alternative would include the adopted amendments and the 
public disclosure of Form ATS-N, the operational transparency for NMS 
Stock ATSs would still increase, bringing it more in line with the 
operational transparency for national securities exchanges. In 
addition, imposing fair access requirements on all NMS Stock ATSs could 
further reduce conflicts of interest on ATSs, relative to the adopted 
amendments, because an ATS might not be able to offer preferential 
treatment to certain subscribers. However, the increased costs of fair 
access compliance could cause more ATSs to cease operating as ATSs. 
More ATSs ceasing to operate as ATSs may cause an increase in the 
internalization of order flow, which could reduce price informativeness 
and increase trading costs.\1530\
---------------------------------------------------------------------------

    \1528\ See Citadel Letter at 2-3.
    \1529\ See supra Section II.C.
    \1530\ See supra Section X.B.6.a.

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

[[Page 38909]]

10. Requirements To Disclose Aggregate Platform-Wide Order Flow and 
Execution Statistics to all Subscribers
    We could eliminate the requirement for NMS Stock ATSs to disclose 
aggregate platform-wide order flow and execution statistics that the 
ATS publishes or otherwise provides to one or more subscribers that are 
not disclosed pursuant to Rule 605 of Regulation NMS from Form ATS-N. 
An advantage of this approach is that NMS Stock ATSs may be motivated 
to continue to provide order flow and execution statistics to 
subscribers under this alternative.\1531\ However, relative to the 
adopted amendments, this approach may fail to mitigate the problem of 
differential access to information about ATS operations and activities 
across market participants, resulting in some market participants 
making less-informed decisions about how to obtain best execution for 
themselves and their clients.
---------------------------------------------------------------------------

    \1531\ Two commenters agree with our assessment under this 
alternative that eliminating the requirement for NMS Stock ATSs to 
disclose aggregate platform-wide order flow and execution statistics 
that the ATS publishes or otherwise provides to one or more 
subscribers that are not disclosed pursuant to Rule 605 of 
Regulation NMS could be beneficial to subscribers because it may 
motivate NMS Stock ATSs to continue to provide order flow and 
execution statistics to subscribers. See MFA/AIMA Letter at 5; SIFMA 
Letter at 27.
    The same commenters also suggest that eliminating these 
requirements could result in ATSs continuing to send customized 
reports and bespoke statistics to their clients. See MFA/AIMA Letter 
at 5; SIFMA Letter at 27. Under the adopted amendments disclosure 
requirements under Part III, Item 26 would not apply when an NMS 
Stock ATS provides a participant with individualized or custom 
reports containing data relating to that participant's specific 
usage of the ATS.
---------------------------------------------------------------------------

11. Specify Alternative Structured Formats for Form ATS-N
    We could specify alternative structured formats such as Inline 
XBRL, or FIXML.\1532\ The benefit of Inline XBRL is that it provides 
more sophisticated validation, presentation and reference features for 
filers and users. However, we do not believe that Inline XBRL is yet in 
common use by all entities that would be filing Form ATS-N. To use 
Inline XBRL with Form ATS-N, the Commission would have to design a new 
Commission-specific taxonomy for the Form ATS-N disclosures. While the 
Inline XBRL, FIXML, and XML formats would all require the use of an 
XML-based schema, Inline XBRL would require the additional familiarity 
with the Commission-specific taxonomy that is not necessary for the 
relatively simple disclosure requirements of Form ATS-N. FIXML is a 
format designed and used for expressing trading information, and while 
familiar to NMS Stock ATSs, it is not widely used by the public. The 
end users of Form ATS-N data will likely incur upfront costs to learn 
and use FIXML, unlike the widely used and freely available XML format. 
For these reasons, we believe that the XML format would minimize costs 
relative to filers having to file Form ATS-N using these other 
structured formats.
---------------------------------------------------------------------------

    \1532\ One commenter recommends that we structure Form ATS-N so 
that it breaks out the required information on NMS Stock ATS 
operations in a format that is comparable across ATSs. It also 
suggests we might also consider ways to present information that 
would improve the readability and navigability of disclosure through 
the use of technology such as hyperlinks and/or XBRL technology. See 
Fidelity Letter at 5.
---------------------------------------------------------------------------

12. Specify Other Filings Methods for Form ATS-N
    We could require NMS Stock ATSs to use the EFFS/SRTS system 
currently used for other NMS filings instead of EDGAR. While commenters 
did not remark on this alternative, the primary benefit of this 
alternative approach would be that ATSs would likely be familiar with 
the web fillable forms and related filing process on EFFS/SRTS. 
Relative to the adopted amendments, learning the EDGAR filing process 
may pose an initial transition burden, although the larger NMS Stock 
ATSs may already be familiar with the EDGAR filing process, and the 
completion of web fillable forms in EDGAR would be very similar to the 
EFFS/SRTS experience without the additional burden of an annual digital 
signature certification. Finally, the time and effort of filing as 
proposed would be incrementally more costly to NMS Stock ATSs because 
each narrative response would have to be individually uploaded as a 
separate exhibit, as opposed to providing all of their narrative 
responses within one structured XML file or completing all narrative 
responses in one web-fillable form. Moreover, because the EFFS system 
does not support the open-source XML format, but rather a proprietary 
XML implementation called XFDL, the EFFS system has fewer validation 
capabilities than EDGAR, particularly at the element level. As a 
result, some NMS Stock ATSs might inadvertently submit incomplete or 
inconsistently formatted information that is not discovered until after 
Commission staff review, which would then require the NMS Stock ATS to 
spend additional time to refile the information. We believe this would 
result in extra costs in filing Form ATS-N through EFFS/SRTS relative 
to requiring NMS Stock ATSs to filing Form ATS-N through EDGAR.

XI. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \1533\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. We certified in the Proposal, pursuant to Section 
605(b) of the RFA,\1534\ that the amendments to Regulation ATS would 
not, if adopted, have a significant economic impact on a substantial 
number of small entities. We included this certification in Section XV 
of the Proposing Release. Although we encouraged written comments 
regarding this certification, no commenters responded to this request.
---------------------------------------------------------------------------

    \1533\ 5 U.S.C. 601 et seq.
    \1534\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the 
RFA,\1535\ 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,\1536\ 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.\1537\
---------------------------------------------------------------------------

    \1535\ Although Section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. We have adopted definitions for the term ``small 
entity'' for the purposes of Commission rulemaking in accordance 
with the RFA. Those definitions, as relevant to this 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).
    \1536\ 17 CFR 240.17a-5(d).
    \1537\ 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).
---------------------------------------------------------------------------

    All ATSs, including NMS Stock ATSs, would continue to have to

[[Page 38910]]

register as broker-dealers.\1538\ We examined recent FOCUS data for the 
41 broker-dealers that currently operate ATSs that trade NMS stocks and 
concluded that no more than 5 of the broker-dealer operators of ATSs 
that currently trade NMS stocks 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) and were not affiliated with any 
person that is not a small business or small organization. Three of 
these five entities, however, never reported transactions in any 
security, including NMS stocks, to the Commission since filing an 
initial operations report on Form ATS. Therefore, we believe that it is 
unlikely that these three entities would complete a Form ATS-N to 
operate as an NMS Stock ATS pursuant to Rule 304.
---------------------------------------------------------------------------

    \1538\ 17 CFR 242.301(b)(1).
---------------------------------------------------------------------------

    The remaining two entities include one broker-dealer that operates 
an ATS pursuant to an active Form ATS on file with the Commission and 
has reported transactions in NMS stocks to the Commission. The other 
broker-dealer has filed an initial operation report on Form ATS with 
the Commission and noticed its intention to trade NMS stocks; however, 
this ATS has not yet commenced operations. We do not believe that Rule 
304, including the requirement for NMS Stock ATSs to file a Form ATS-N, 
will represent a significant economic impact on these two entities. 
Stand-alone broker-dealers that operate an ATS, such as these two 
entities, will have less complex ATS operations than multi-service 
broker-dealers that operate an ATS. For example, we believe that these 
two entities would not need to respond to all requests in Part II of 
Form ATS-N because they are not likely to engage in the same ATS-
related activities as multi-service broker-dealers that operate an ATS. 
As a result, we expect that the burden associated with completing the 
form would be substantially lower for these two ATS.\1539\ In addition, 
because we believe that the two ATSs are operationally less complex 
than ATSs operated by multi-service broker-dealer operators, the burden 
to respond to the items under Part III of Form ATS-N (Manner of ATS 
Operations) \1540\ would be lower than for the average NMS Stock ATS 
operated by a multi-service broker-dealer operator.\1541\
---------------------------------------------------------------------------

    \1539\ As estimated in the PRA, we estimate an average total 
cost of $41,689.10 for the initial hour burden of complying with 
Rules 301(b)(2)(viii) and 304 of Regulation ATS (including 
completing Form ATS-N). The burden hours associated with Part II of 
Form ATS-N is 29 hours. See supra note 1228. We estimate that ATSs 
that are small entities would likely need to complete approximately 
half of Part II. Thus, the reduction of 14.5 burden hours (29 hours 
x 0.5 = 14.5 hours) would result in a cost savings of $5,155 for 
each small entity compared to the average total cost estimate. 
(Attorney 7.5 hours x $406) + (Compliance Manager 6.0 hours x $302) 
+ (Senior Marketing Manager 1 hour x $298) = $5,155.
    \1540\ For example, based on Commission experience, less 
operationally complex ATS may not need to respond to all or part of 
the requests in Part III of Form ATS-N, such as Item 5 (Means of 
Entry), Item 6 (Connectivity and Co-location), Item 7 (Order Types 
and Attributes), Item 9 (Conditional Orders and Indications of 
Interest), Item 13 (Segmentation; Notice), Item 14 (Counter-Party 
Selection), among others. In addition, a smaller NMS Stock ATS is 
unlikely to exceed the volume thresholds that would subject the ATS 
to the requirements of Rule 301(b)(3) and 301(b)(5) of Regulation 
ATS, and therefore, Part III, Items 24 and 25 would be inapplicable. 
These items represent 36 burden hours above the current baseline for 
an initial operation report on current Form ATS. These 36 burden 
hours represent a cost of approximately $11,846 for each ATS that 
would likely be substantially reduced for these two small entities. 
(Attorney 12.25 hours x $406) + (Compliance Manager 11.25 hours x 
$302) + (Senior Systems Analyst 12.5 hours x $278) = $11,846. As 
noted above, the we estimate an average total cost of $41,689.10 for 
the initial hour burden of complying with Rules 301(b)(2)(viii) and 
304 of Regulation ATS (including completing Form ATS-N).
    \1541\ If the three inactive ATSs discussed above in this 
section (which we expect would not complete a Form ATS-N) were to 
complete a Form ATS-N, they would experience a substantially reduced 
burden in completing Form ATS-N given that they also are not multi-
service broker-dealers, and their systems are less complex than 
other NMS Stock ATSs.
---------------------------------------------------------------------------

    We are also amending Rule 301(b)(10) to require that all ATSs 
reduce to writing their safeguards and procedures to protect 
subscribers' confidential trading information and their oversight 
procedures to ensure that such safeguards and procedures are followed. 
The amendment to Rule 301(b)(10) would thus apply to the 15 small 
entities that are ATSs (including NMS Stock and non-NMS Stock ATSs), 
but we believe that there would not be significant economic impact on 
these entities because, based on our experience, most of these ATSs 
already maintain their Rule 301(b)(10) safeguards and procedures in 
writing, and to the extent they do not, any resulting burden is 
small.\1542\
---------------------------------------------------------------------------

    \1542\ In the Proposal, we estimated that 15 of the 84 ATS at 
that time might not have these procedures in writing. See Proposal, 
supra note 2, at 81093. We did not receive any comments on this 
estimate. The PRA burden for an ATS to put in writing its procedures 
protect subscribers' confidential trading information, and the 
oversight procedures to ensure such safeguards and procedures are 
followed, would be approximately 8 hours, which represents $2,910 in 
costs for each ATS. (Attorney 7 hours x $406) + (Compliance Clerk 1 
hour x $68) = $2,910.
---------------------------------------------------------------------------

    Consequently, for these reasons, for purposes of the RFA, we 
certify that the amendments to Regulation ATS would not have a 
significant economic impact on a substantial number of small entities.

XII. Statutory Authority and Text of Amendments

    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 adopts Form ATS-N under the Exchange Act, to amend Rule 3a1-
1(a) and Regulation ATS under the Exchange Act, and to amend 17 CFR 
200.30-33.

List of Subjects in 17 CFR Parts 232, 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 amended as follows:

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
1. The general authority citation for part 232 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *

0
2. Amend Sec.  232.101 by adding paragraph (a)(1)(xxi) to read as 
follows:


Sec.  232.101  Mandated electronic submissions and exceptions.

    (a) * * *
    (1) * * *
    (xxi) Form ATS-N (Sec.  249.640 of this chapter).
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1934

0
3. The general 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, 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. 1887 (2010); and secs. 503 and 602, 
Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

[[Page 38911]]

Sec.  240.3a1-1  [Amended]

0
4. Amend Sec.  240.3a1-1 by removing ``242.303'' from paragraphs (a)(2) 
and (3) 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
5. 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
6. Amend Sec.  242.300 by:
0
a. In paragraph (f) introductory text, adding the phrase ``the broker-
dealer of'' before the phrase ``an alternative trading system'' 
wherever it occurs;
0
b. In paragraphs (f)(2) and (3), adding the phrase ``the broker-dealer 
of'' before the phrase ``the alternative trading system''; and
0
c. Adding paragraph (k) to read as follows:


Sec.  242.300  Definitions.

* * * * *
    (k) NMS Stock ATS means an alternative trading system, as defined 
in paragraph (a) of this section, that trades NMS stocks, as defined in 
paragraph (g) of this section.

0
7. Amend Sec.  242.301 by:
0
a. In paragraph (a)(5), adding the phrase ``or Sec.  242.304'' after 
the phrase ``paragraph (b) of this section'';
0
b. 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
c. In paragraph (b)(2)(vii), removing the phrase ``Market Regulation, 
Stop 10-2'' and in its place adding ``Trading and Markets'';
0
d. Adding paragraph (b)(2)(viii);
0
e. 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 paragraph (g) of this section, and transactions in 
securities other than NMS stocks'' after the phrase ``(Sec.  249.638 of 
this chapter)'';
0
f. 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
g. In the heading of 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
h. In paragraph (b)(10)(i) introductory text, 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
i. 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 NMS Stock ATS that is operating pursuant to an initial 
operation report on Form ATS on file with the Commission as of January 
7, 2019 (``Legacy NMS Stock ATS'') shall be subject to the requirements 
of paragraphs (b)(2)(i) through (vii) of this section until that ATS 
files an initial Form ATS-N with the Commission pursuant to Sec.  
242.304(a)(1)(iv)(A). Thereafter, the Legacy NMS Stock ATS shall file 
reports pursuant to Sec.  242.304. An alternative trading system that 
trades NMS stocks and securities other than 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. As of January 7, 2019, an entity seeking to operate as an NMS 
Stock ATS shall not be subject to the requirements of paragraphs 
(b)(2)(i) through (vii) of this section and shall file reports pursuant 
to Sec.  242.304.
* * * * *

0
8. Amend Sec.  242.303 by:
0
a. In paragraph (a) introductory text, removing ``(b)(9)'' and adding 
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
9. Add Sec.  242.304 under 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)(i) through (vii)) to be exempt pursuant to Sec.  240.3a1-
1(a)(2).
    (1) Initial Form ATS-N. (i) Filing and effectiveness requirement. 
No exemption is available to an NMS Stock ATS pursuant to Sec.  
240.3a1-1(a)(2) unless the NMS Stock ATS files with the Commission an 
initial Form ATS-N, in accordance with the conditions of this section, 
and the initial Form ATS-N is effective pursuant to paragraph 
(a)(1)(iii) or (a)(1)(iv)(A) of this section.
    (ii) Commission review period. (A) The Commission may, by order, as 
provided in paragraph (a)(1)(iii) of this section, declare an initial 
Form ATS-N filed by an NMS Stock ATS ineffective no later than 120 
calendar days from the date of filing with the Commission, or, if 
applicable, the end of the extended review period. The Commission may 
extend the initial Form ATS-N review period for:
    (1) An additional 90 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-calendar 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) During review by the Commission of the initial Form ATS-N, the 
NMS Stock ATS shall amend its initial Form ATS-N pursuant to the 
requirements of paragraphs (a)(2)(i)(B) and (C) of this section. To 
make material changes to its initial Form ATS-N during the Commission 
review period, the NMS Stock ATS shall withdraw its filed initial Form 
ATS-N and may refile an initial Form ATS-N pursuant to paragraph (a)(1) 
of this section.
    (iii) Effectiveness; Ineffectiveness determination. (A) An initial 
Form ATS-N, as amended, filed by an NMS Stock ATS will become 
effective, unless declared ineffective, upon the earlier of:
    (1) The completion of review by the Commission and publication 
pursuant to paragraph (b)(2)(i) of this section; or

[[Page 38912]]

    (2) The expiration of the review period, or, if applicable, the end 
of the extended review period, pursuant to paragraph (a)(1)(ii) of this 
section.
    (B) The Commission will, by order, declare an initial Form ATS-N 
ineffective if it finds, after notice and opportunity for hearing, that 
such action is necessary or appropriate in the public interest, and is 
consistent with the protection of investors. If the Commission declares 
an initial Form ATS-N ineffective, the NMS Stock ATS shall be 
prohibited from operating as an NMS Stock ATS pursuant to Sec.  
240.3a1-1(a)(2). An initial Form ATS-N declared ineffective does not 
prevent the NMS Stock ATS from subsequently filing a new Form ATS-N.
    (iv) Transition for Legacy NMS Stock ATSs. (A) Initial Form ATS-N 
filing requirements. A Legacy NMS Stock ATS shall file with the 
Commission an initial Form ATS-N, in accordance with the conditions of 
this section, no earlier than January 7, 2019, and no later than 
February 8, 2019. An initial Form ATS-N filed by a Legacy NMS Stock ATS 
shall supersede and replace for purposes of the exemption the 
previously filed Form ATS of the Legacy NMS Stock ATS. The Legacy NMS 
Stock ATS may operate, on a provisional basis, pursuant to the filed 
initial Form ATS-N, and any amendments thereto, during the review of 
the initial Form ATS-N by the Commission. An initial Form ATS-N filed 
by a Legacy NMS Stock ATS, as amended, will become effective, unless 
declared ineffective, upon the earlier of:
    (1) The completion of review by the Commission and publication 
pursuant to paragraph (b)(2)(i) of this section; or
    (2) The expiration of the review period, or, if applicable, the end 
of the extended review period, pursuant to paragraph (a)(1)(iv)(B) of 
this section.
    (B) Commission review period; Ineffectiveness determination. The 
Commission may, by order, as provided in paragraph (a)(1)(iii) of this 
section, declare an initial Form ATS-N filed by a Legacy NMS Stock ATS 
ineffective no later than 120 calendar days from the date of filing 
with the Commission, or, if applicable, the end of the extended review 
period. The Commission may extend the initial Form ATS-N review period 
for a Legacy NMS Stock ATS for:
    (1) An additional 120 calendar days if the initial 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 Legacy NMS Stock ATS in writing within the initial 120-calendar 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 Legacy NMS Stock ATS agrees in writing.
    (C) Amendments to initial Form ATS-N. During review by the 
Commission of the initial Form ATS-N filed by a Legacy NMS Stock ATS, 
the Legacy NMS Stock ATS shall amend its initial Form ATS-N pursuant to 
the requirements of paragraphs (a)(2)(i)(A) through (D) of this 
section.
    (2) Form ATS-N amendment. (i) Filing requirements. An NMS Stock ATS 
shall amend a Form ATS-N, in accordance with the conditions of this 
section:
    (A) At least 30 calendar days, except as provided by paragraph 
(a)(2)(i)(D) of this section, 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 (``Material Amendment'');
    (B) No later than 30 calendar days after the end of each calendar 
quarter to correct information that has become inaccurate or incomplete 
for any reason and was not required to be reported to the Commission as 
a Form ATS-N amendment pursuant to paragraphs (a)(2)(i)(A), (C), or (D) 
of this section (``Updating Amendment'');
    (C) Promptly, to correct information in any previous disclosure on 
Form ATS-N, after discovery that any information previously filed on 
Form ATS-N was materially inaccurate or incomplete when filed 
(``Correcting Amendment''); or
    (D) No later than seven calendar days after information required to 
be disclosed in Part III, Items 24 and 25 on Form ATS-N has become 
inaccurate or incomplete (``Order Display and Fair Access Amendment'').
    (ii) Commission review period; Ineffectiveness determination. The 
Commission will, by order, declare ineffective any Form ATS-N amendment 
filed pursuant to paragraphs (a)(2)(i)(A) through (D) of this section, 
no later than 30 calendar days from filing with the Commission, if the 
Commission finds that such action is necessary or appropriate in the 
public interest, and is consistent with the protection of investors. A 
Form ATS-N amendment declared ineffective shall prohibit the NMS Stock 
ATS from operating pursuant to the ineffective Form ATS-N amendment. A 
Form ATS-N amendment declared ineffective does not prevent the NMS 
Stock ATS from subsequently filing a new Form ATS-N amendment. During 
review by the Commission of a Material Amendment, the NMS Stock ATS 
shall amend the Material Amendment pursuant to the requirements of 
paragraphs (a)(2)(i)(B) through (C) of this section. To make material 
changes to a filed Material Amendment during the Commission review 
period, an NMS Stock ATS shall withdraw its filed Material Amendment 
and must file the new Material Amendment pursuant to (a)(2)(i)(A) of 
this section.
    (3) Notice of cessation. An NMS Stock ATS shall notice its 
cessation of operations on Form ATS-N at least 10 business days prior 
to the date the NMS Stock ATS will cease 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 the exemption for an NMS Stock ATS pursuant to 
Sec.  240.3a1-1(a)(2) of this chapter.
    (ii) If the exemption for an NMS Stock ATS 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 pursuant 
to Sec.  240.3a1-1(a)(2) of this chapter. If the exemption for an NMS 
Stock ATS 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 will make public via posting on the Commission's 
website, each:
    (i) Effective initial Form ATS-N, as amended;
    (ii) Order of ineffective initial Form ATS-N;
    (iii) Form ATS-N amendment to an effective Form ATS-N:
    (A) Material Amendments: The cover page of the Material Amendment 
will be made public by the Commission upon filing and, unless the 
Commission declares the Material Amendment

[[Page 38913]]

ineffective, the entirety of the Material Amendment, as amended, will 
be made public by the Commission following the expiration of the review 
period pursuant to paragraph (a)(2)(ii) of this section.
    (B) Updating, Correcting, and Order Display and Fair Access 
Amendments: The entirety of Updating, Correcting, and Order Display and 
Fair Access Amendments will be made public by the Commission upon 
filing. Notwithstanding the foregoing, an Updating or Correcting 
Amendment filed to a Material Amendment will be made public by the 
Commission following the expiration of the review period for such 
Material Amendment pursuant to paragraph (a)(2)(ii) of this section.
    (iv) Order of ineffective Form ATS-N amendment;
    (v) Notice of cessation; and
    (vi) Order suspending, limiting, or revoking the exemption for an 
NMS Stock ATS 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 website 
a direct URL hyperlink to the Commission's website that contains the 
documents enumerated in paragraph (b)(2) of this section.
    (c) Form ATS-N disclosure requirements. (1) An NMS Stock ATS must 
file a Form ATS-N in accordance with the instructions therein.
    (2) Any report required to be filed with the Commission under this 
section shall be filed on Form ATS-N, and include all information as 
prescribed in Form ATS-N and the instructions thereto. Such document 
shall be executed at, or prior to, the time Form ATS-N is filed and 
shall be retained by the NMS Stock ATS in accordance with Sec. Sec.  
242.303 and Sec.  232.302 of this chapter, and the instructions in Form 
ATS-N.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
10. The general authority citation for part 249 continues to read 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; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012); 
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001, 
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *

0
11. 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.

BILLING CODE 8011-01-P

[[Page 38914]]

[GRAPHIC] [TIFF OMITTED] TR07AU18.004


[[Page 38915]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.005


[[Page 38916]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.006


[[Page 38917]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.007


[[Page 38918]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.008


[[Page 38919]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.009


[[Page 38920]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.010


[[Page 38921]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.011


[[Page 38922]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.012


[[Page 38923]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.013


[[Page 38924]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.014


[[Page 38925]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.015


[[Page 38926]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.016


[[Page 38927]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.017


[[Page 38928]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.018


[[Page 38929]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.019


[[Page 38930]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.020


[[Page 38931]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.021


[[Page 38932]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.022


[[Page 38933]]


[GRAPHIC] [TIFF OMITTED] TR07AU18.023

FORM ATS-N INSTRUCTIONS

A. FILING FORM ATS-N:

    1. Form ATS-N is a public reporting form that is designed to 
provide market participants and the Commission with information about 
the operations of the NMS Stock ATS and the ATS-related activities of 
its Broker-Dealer Operator and its Affiliates. Among other things, an 
NMS Stock ATS must file Form ATS-N to be exempt from the definition of 
``exchange'' pursuant to Exchange Act Rule 3a1-1(a)(2).
    2. A separate Form ATS-N is required for each NMS Stock ATS 
operated by the same Broker-Dealer Operator.
    3. An NMS Stock ATS must provide all the information required by 
Form ATS-N, including responses to each Item, as applicable, and the 
Exhibits, and disclose information that is accurate, current, and 
complete.
    4. An NMS Stock ATS must respond to each request in detail unless 
otherwise provided (i.e., where the request indicates that the ATS is 
required to disclose ``summary'' information).
    5. Any report required to be submitted pursuant to Rule 304 of 
Regulation ATS shall be prepared, formatted, and submitted in 
accordance with Regulation S-T and the EDGAR Filer Manual. Filers have 
the option of submitting the information to EDGAR using the most recent 
version of the XML schema for Rule 304 as specified by the EDGAR Filer 
Manual, or submitting the information using the web-fillable form for 
Rule 304 in EDGAR.
    6. Initial Form ATS-N: Prior to commencing operations, an NMS Stock 
ATS shall file an initial Form ATS-N and the initial Form ATS-N must 
become effective. If an NMS Stock ATS is currently operating pursuant 
to a Form ATS it must indicate such on the Form ATS-N. If the NMS Stock 
ATS is operating pursuant to a previously filed initial operation 
report on Form ATS as of January 7, 2019, such NMS Stock ATS shall file 
with the Commission a Form ATS-N no earlier than January 7, 2019, and 
no later than February 8, 2019.
    7. Form ATS-N Amendment
    a. An NMS Stock ATS shall amend a Form ATS-N in accordance with the 
conditions of Rule 304.
    b. A Material Amendment, except as provided by Rule 304(a)(2)(i)(D) 
for an

[[Page 38934]]

Order Display and Fair Access Amendment, must be filed 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.
    c. An Updating Amendment must be filed no later than 30 calendar 
days after the end of each calendar quarter to correct any other 
information that has become inaccurate or incomplete for any reason and 
was not previously required to be reported to the Commission as a Form 
ATS-N Amendment pursuant to Rule 304(a)(2)(i)(A), Rule 304(a)(2)(i)(C), 
or Rule 304(a)(2)(i)(D).
    d. A Correcting Amendment must be filed promptly to correct 
information in any previous disclosure on Form ATS-N, after discovery 
that any information previously filed on Form ATS-N was materially 
inaccurate or incomplete when filed.
    e. An Order Display and Fair Access Amendment must be filed no 
later than seven calendar days after information required to be 
disclosed in Part III, Items 24 and 25 on Form ATS-N has become 
inaccurate or incomplete.
    f. An NMS Stock ATS must select only one ``Type of Amendment'' for 
each Form ATS-N Amendment filed with the Commission.
    g. For each Amendment, indicate the Part and Item number of the 
Form ATS-N that is the subject of the change, provide a brief summary 
of the changes, and state whether or not the changes apply to all 
Subscribers and the Broker-Dealer Operator.
    h. For each Amendment, provide the EDGAR accession number for the 
filing that is being amended.
    8. Notice of Cessation: An NMS Stock ATS shall notice its cessation 
of operations on Form ATS-N at least 10 business days prior to the date 
the NMS Stock ATS will cease to operate as an NMS Stock ATS.
    9. Withdrawal: If an NMS Stock ATS determines to withdraw a filing, 
it must check the ``Withdrawal of Form ATS-N filing'' check box for the 
type of filing and provide the EDGAR accession number of the Form ATS-N 
filing that is being withdrawn. An NMS Stock ATS may withdraw an 
initial Form ATS-N or an Amendment before the end of the applicable 
Commission review period. An NMS Stock ATS may withdraw a notice of 
cessation of operations at any time before the date that the NMS Stock 
ATS had indicated it intended to cease operating. A Legacy NMS Stock 
ATS may not withdraw its initial Form ATS-N at any time.
    10. A filing that is defective may be rejected and not be accepted 
by the EDGAR system. Any filing so rejected shall be deemed not to have 
been filed. See generally Regulation S-T (17 CFR part 232).

B. CONTACT INFORMATION

     The individual listed on the NMS Stock ATS's response to 
Part IV 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. 
The contact information provided in Part IV of Form ATS-N will not be 
made public.

C. RECORDKEEPING

     A copy of this Form ATS-N must be retained by the NMS 
Stock ATS in accordance with the EDGAR Filer Manual and Rule 303 of 
Regulation ATS and must be made available for inspection upon a 
regulatory request.

D. 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 ATS-related activities of the Broker-Dealer 
Operator and its Affiliates; (2) material and other changes to the 
operations and disclosures of the NMS Stock ATS; and (3) notice upon 
ceasing operation of the NMS Stock ATS. Form ATS-N is designed to 
provide the public with information to, among other things, help them 
make informed decisions about whether to participate on the NMS Stock 
ATS. In addition, the Form ATS-N is designed 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 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:
    [cir] File an initial Form ATS-N prior to commencing operations.
    [cir] File a Form ATS Amendment: (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 (Material Amendment); (2) no later than 30 calendar days 
after the end of each calendar quarter to correct any other information 
that has become inaccurate or incomplete for any reason and was not 
previously required to be reported to the Commission as a Form ATS-N 
amendment pursuant to Rule 304(a)(2)(i)(A), Rule 304(a)(2)(i)(C), or 
Rule 304(a)(2)(i)(D) (Updating Amendment); (3) promptly, to correct 
information in any previous disclosure on Form ATS-N, after discovery 
that any information previously filed on Form ATS-N was materially 
inaccurate or incomplete when filed (Correcting Amendment); or (4) no 
later than seven calendar days after information required to be 
disclosed in Part III, Items 24 and 25 on Form ATS-N has become 
inaccurate or incomplete (Order Display and Fair Access Amendment). 
During the Commission review period of an initial Form ATS-N filing, an 
NMS Stock ATS that is operating as of January 7, 2019 shall amend its 
filed Form ATS-N pursuant to these requirements, and an NMS Stock ATS 
that was not operating as of January 7, 2019 shall amend its filed Form 
ATS-N pursuant to the requirements for Updating and Correcting 
Amendments. During the Commission review period of an initial Form ATS-
N filing, an NMS Stock ATS shall amend a filed Material Amendment 
pursuant to the requirements for Updating and Correcting Amendments.
    [cir] 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. We estimate that 
an NMS Stock ATS will spend approximately 127.4 hours completing the 
Form ATS-N, approximately 9 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.

E. 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.

[[Page 38935]]

     ALTERNATIVE TRADING SYSTEM: Shall mean any organization, 
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. 17 CFR 242.300(f).
     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 trades NMS 
stocks, as defined in Rule 300(g) under the Exchange Act. 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).
     TRADING CENTER: Shall mean 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).

    By the Commission.

    Dated: July 18, 2018

Brent J. Fields,

Secretary.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix A

Key to Comment Letters Cited in Regulation of NMS Stock Alternative 
Trading Systems (File No. S7-23-15
Letter from Venu Palaparthi, Senior Vice President, Virtu Financial 
to Brent J. Fields, Secretary, Commission, dated December 2, 2015 
(``Virtu Letter'')
Letter from Clive Williams, Head of Global Equity Trading, Thea N. 
Williams, Head of Global Fixed Income Trading, and Jonathan D. 
Siegel, Senior Legal Counsel, T. Rowe Price Associates, Inc. to 
Brent J. Fields, Secretary, Commission, dated February 23, 2016 
(``T. Rowe Price Letter'')
Letter from Jonathan A. Clark, Chief Executive Officer, and James C. 
Dolan, Chief Compliance Office, Luminex Trading & Analytics LLC to 
Brent J. Fields, Secretary, Commission, dated February 23, 2016 
(``Luminex Letter'')
Letter from Eric T. Schneiderman, Attorney General, State of New 
York, to the Honorable Mary Jo White, Chair, and Brent J. Fields, 
Secretary, Commission, dated February 23, 2016 (``Schneiderman 
Letter'')
Letter from Scott Pintoff, General Counsel, MarketAxess Corporation, 
to Secretary, Commission, dated February 24, 2016 (``MarketAxess 
Letter'')
Letter from David W. Blass, General Counsel, Investment Company 
Institute, to Brent J. Fields, Secretary, Commission, dated February 
25, 2016 (``ICI Letter'')
Letter from Chris Barnard, to the Commission, dated February 25, 
2016 (``Barnard Letter'').
Letter from Stuart J. Kaswell, Executive Vice President & Managing 
Director, General Counsel, Managed Funds Association and 
Ji[rcaron][iacute] Kr[oacute]l, Deputy Chief Executive Officer, 
Global Head of Government Affairs, Alternative Investment Management 
Association, to Brent J. Fields, Secretary, Commission, dated 
February 26, 2016 (``MFA/AIMA Letter'')
Letter from Marcia E. Asquith, Senior Vice President and Corporate 
Secretary, Financial Industry Regulatory Authority, Inc., to Brent 
J. Fields, Secretary, Commission, dated February 26, 2016 (``FINRA 
Letter'')
Letter from Phillip S. Gillespie, General Counsel and Executive Vice 
President, State Street Global Advisors, to Brent J. Fields, 
Secretary, Commission, dated February 26, 2016 (``SSGA Letter'')
Letter from John Russell, Chairman of the Board and James Toes, 
President and Chief Executive Office, Securities Traders 
Association, to Brent J. Fields, Secretary, Commission, dated 
February 26, 2016 (``STA Letter'')
Letter from D. Keith Ross, Chief Executive Officer, PDQ Enterprises, 
LLC and Christopher Meade, Chief Compliance Officer, PDQ ATS, Inc., 
to Brent J. Fields, Secretary, Commission, dated February 26, 2016 
(``PDQ Letter'')
Letter from Howard Meyerson, General Counsel, Liquidnet, Inc., to 
Brent J. Fields, Secretary, Commission, dated February 26, 2016 
(``Liquidnet Letter'')
Letter from Denis Ignatovich, Co-Founder, and Grant Passmore, Ph.D., 
Co-Founder, Aesthetic Integration Ltd. (``AI Letter'')
Letter from Dave Lauer, Chairman, Healthy Markets Association, to 
Brent J. Fields, Secretary, Commission, dated February 26, 2016 
(``HMA Letter'')
Letter from Kurt N. Schacht, CFA, Managing Director, Standards & 
Advocacy, CFA Institute, and James C. Allen, CFA, Head, Capital 
Markets Policy, CFA Institute, to Brent J. Fields, Secretary, 
Commission, dated February 26, 2016 (``CFA Institute Letter'')
Letter from Micah Hauptman, Financial Services Counsel, Consumer 
Federation of America, to Brent J. Fields, Secretary, Commission, 
dated February 26, 2016 (``Consumer Federation of American Letter'')
Letter from Timothy J. Mahoney, Chief Executive Office, BIDS Trading 
L.P., to Brent J. Fields, Secretary, Commission, dated February 26, 
2016 (``BIDS Letter'')
Letter from Marc B. Bryant, Senior Vice President, Deputy General 
Counsel, Fidelity Investments, to Brent J. Fields, Secretary, 
Commission, dated February 26, 2016 (``Fidelity Letter'')
Letter from Angelo Evangelou, Deputy General Counsel, Legal 
Division, Chicago Board Options Exchange, Incorporated, to Brent J. 
Fields, Secretary, Commission, dated March 1, 2016 (``CBOE Letter'')
Letter from Adam C. Cooper, Senior Managing Director and Chief Legal 
Officer, Citadel LLC, to Brent J. Fields, Secretary,

[[Page 38936]]

Commission, dated March 1, 2016 (``Citadel Letter'')
Letter from Theodore R. Lazo, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association, to Brent J. Fields, Secretary, Commission, dated March 
7, 2016 (``SIFMA Letter'')
Letter from Kimberly Unger, Chief Executive Officer & Executive 
Director, The Security Traders Association of New York, Inc., to 
Brent J. Fields, Secretary, Commission, dated March 4, 2016 (``STANY 
Letter'')
Letter from Mark Holder, Managing Director, UBS Securities LLC, to 
Brent J. Fields, Secretary, Commission, dated March 21, 2016 (``UBS 
Letter'')
Letter from Anonymous to Commission, dated February 26, 2016 
(``Anonymous Letter'')
Letter from Dennis M. Kelleher, President and Chief Executive 
Officer, Stephen W. Hall, Legal Director & Securities Specialist, 
and Allen Dreschel, Attorney, Better Markets, Inc., to Brent J. 
Fields, Secretary, Commission, dated February 26, 2016 (``Better 
Markets Letter'')
Letter from John A. McCarthy, General Counsel, KCG Holdings, Inc., 
to Brent J. Fields, Secretary, Commission, dated March 15, 2016 
(``KCG Letter'')
Letter from David Weisberger, Managing Director, Markit, to Brent J. 
Fields, Secretary, Commission, dated April 15, 2016 (``Markit 
Letter'')
Letter from William Neuberger and Andrew F. Silverman, Managing 
Directors and Global Co-Heads, Morgan Stanley Electronic Trading, to 
Brent J. Fields, Secretary, Commission, dated May 19, 2016 (``Morgan 
Stanley Letter'')
Letter from John F. Linares, General Counsel, LeveL ATS, to Brent J. 
Fields, Secretary, Commission, dated September 7, 2016 (``LeveL ATS 
Letter'').
Letter from Rick A. Fleming, Investor Advocate, Office of the 
Investor Advocate, Commission, to Brent J. Fields, Secretary, 
Commission, dated September 9, 2016 (``Investor Advocate Letter'')
Letter from Stuart J. Kaswell, Executive Vice President & Managing 
Director, General Counsel, Managed Funds Association, to the 
Honorable Walter J. Clayton, Chairman, Commission, dated May 18, 
2017 (``MFA Letter 2'')

[FR Doc. 2018-15896 Filed 8-6-18; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.