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Regulation of NMS Stock Alternative Trading Systems

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Start Preamble Start Printed Page 38768

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.”

Start Further Info

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.

End Further Info End Preamble Start Supplemental Information

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

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 DefinitionsStart Printed 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-NStart Printed 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.

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.

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 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 Start Printed Page 38771pools 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.

2. Operational Complexity; Conflict of Interests

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

The relationships between broker-dealer operators [19] and the ATSs they operate have also become more complex and intertwined since the adoption of Regulation ATS.[20] The 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.

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.

B. Exemption for Alternative Trading Systems

Exchange Act Rule 3b-16(a) [29] provides a functional test to assess Start Printed Page 38772whether 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 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.

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 Start Printed Page 38773system: (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 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]

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 Start Printed Page 38774has 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 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 Start Printed Page 38775the 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] Commenters also concur with our belief that NMS Stock ATSs today play a significant role in equity market structure, and that their role has changed since Regulation ATS was adopted in 1998.[91] In addition, commenters reinforce our belief that NMS Stock ATSs have become more operationally complex, that the potential for conflicts of interest has risen as a result of that complexity, and that the conditions to the exemption for NMS Stock ATSs should be modified.[92] Commenters also express concern about the lack of operational transparency for NMS Stock ATSs.[93] Given the complexities of NMS Stock ATS operations, the lack of information about the ATS's order types, priority rules, segmentation procedures, use of market data, and fees, for example, may impede the ability of market participants to adequately understand how their orders in NMS stocks would interact, match, and execute.

We are also concerned that the lack of available information about the ATS-related activities of the broker-dealer operator and its affiliates may hinder the ability of market 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]

Start Printed 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.

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.

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 Start Printed Page 38777pursuant 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] 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 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 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]

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, Start Printed Page 38778including, 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

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

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

Based on Commission staff's experience reviewing disclosures made by ATSs on Form ATS over the past 19 years and as discussed in the Proposal, we have observed that ATSs have often provided minimal, rudimentary, and summary disclosures about their operations on Form ATS. One commenter agrees with our assessment, stating that based on its review of publicly available Forms ATS, the forms “often provide minimal and often generalized information” with respect to classification and segmentation of subscribers, means of access to the ATS, matching priority, order interaction, order types, and how the NBBO is calculated, and they are often missing “critical details” about their operations.[134] Further, this commenter states that “[r]arely do Form ATSs provide information relating to their fee structures and potential or actual conflicts of interest.” [135] According to another commenter, current Form ATS is “not adequate” to allow the Commission and market participants to “understand how NMS Stock ATSs operate in today's environment, given the complexity and the potential for significant conflicts of interest 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 Start Printed Page 38779disclosure 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.

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 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 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 Start Printed Page 38780fair 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 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.

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 Start Printed Page 38781market 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 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 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 Start Printed Page 38782Exchange 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]

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 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.

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.

Start Printed 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]

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

We also received several comments that specifically address enhancing operational transparency for, or extending Rule 304 to, Government Securities ATSs.[211] Several commenters support applying Rule 304 requirements to Government Securities ATSs,[212] while several state that Regulation ATS should be amended to include electronic platforms for U.S. Government securities.[213] Other commenters believe that the Commission should gather additional information on fixed income markets, which include U.S. Government securities 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]

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 Start Printed Page 38784platforms 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].”

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).

3. Rule 301(a)(5): Exemptions From Certain Requirements of Regulation ATS Pursuant to Application to the Commission

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

When adopting Rule 301(a)(5), we stated that while the requirements of Regulation ATS are appropriate for all ATSs, a system may develop in the future for which these requirements may not be appropriate. The Commission expected to issue such an order only under unusual circumstances, and only after making the applicable determination.[225] The requirements of Rule 304 were not part of Regulation ATS at the time the Commission adopted Rule 301(a)(5). We believe that, given the amendments to Regulation ATS that will require NMS Stock ATSs to comply with the filing requirements of Rule 304, including filing Form ATS-N, instead of the Form ATS filing requirements of Rules 301(b)(2)(i)-(vii), it may be appropriate under certain limited, unusual facts and circumstances for the Commission to exempt an NMS Stock ATS, 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 Start Printed Page 38785exempt an NMS Stock ATS, conditionally or unconditionally, by order, after application by the ATS from one or more of the requirements of Rule 304 of Regulation ATS provided that the Commission determines that such an exemption is consistent with the public interest, the protection of investors, and removal of impediments to, and perfection of the mechanisms of, a national market system.

We also received other comments regarding specific exceptions from the proposed requirements of Rule 304. Specifically, three commenters suggest providing an exception to the 30-calendar day advance notice requirement for material changes in case of exigent circumstances.[230] One commenter states that unless the Commission narrows the materiality standard for material amendments, the 30-calendar day advance notice requirement could affect an ATS operator's ability to take “decisive action.” [231] This commenter further believes that NMS Stock ATS operators often must take decisive action without time for a lengthy review and approval process, given that the speed of response to technical or operational issues (including cybersecurity) often is measured in seconds. This commenter believes there should be a 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]

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]

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.

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 Start Printed Page 38786for 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.

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 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 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 Start Printed Page 38787Rule 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]

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

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

We received two comments regarding Form ATS-R. One commenter states that in light of information on FINRA's website regarding ATSs,[257] and the detailed disclosures in periodic disclosures required by Form ATS-N, the Commission should no longer require an NMS Stock ATS to file Form ATS-R.[258] We are not amending Regulation ATS at this time to remove the requirement for NMS Stock ATSs to file Form ATS-R. Notwithstanding the disclosure on FINRA's website of certain volume information for ATSs that trade NMS stocks, we continue to 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 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, Start Printed Page 38788instead 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]

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]

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 “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 Start Printed Page 38789pursuant 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]

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 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]

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 Start Printed Page 38790forest 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.

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]

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]

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”) Start Printed Page 38791provided 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.

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 “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]

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.

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 Start Printed Page 38792a 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]

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]

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]

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 Start Printed Page 38793with 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

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]

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 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 Start Printed Page 38794declare 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).

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]

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 Start Printed Page 38795to 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 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]

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 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.

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 Start Printed Page 38796their 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-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 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.

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.

Start Printed 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.

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]

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.

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.

Start Printed 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).

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]

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.

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 Start Printed Page 38799also 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 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 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 Start Printed Page 38800Legacy 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]

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.

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]

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 Start Printed Page 38801system.[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.

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 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).

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 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 Start Printed Page 38802discovery 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

(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 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]

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 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, Start Printed Page 38803the 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]

(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]

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.

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 Start Printed Page 38804meaningless 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 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.

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 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 Start Printed Page 38805order 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.

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.

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]

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 Start Printed Page 38806Commission 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 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]

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]

Start Printed 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.

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.

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]

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 Start Printed Page 38808impact 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 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 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]

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.

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 Start Printed Page 38809that 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 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 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 Start Printed Page 38810will 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 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]

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 Start Printed Page 38811decisions 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.

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.

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 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 Start Printed Page 38812attempt.” [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 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 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 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 Start Printed Page 38813ATSs 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 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 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 Start Printed Page 38814potential 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 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 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 Start Printed Page 38815expiration 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]

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 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 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.

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 Start Printed Page 38816becomes 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]

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.

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 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] Start Printed Page 38817In 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 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.

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 Start Printed Page 38818more 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

(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]

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]

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 Start Printed Page 38819operators 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 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]

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.

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.

(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 Start Printed Page 38820Forms 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 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.

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 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.

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 Start Printed Page 38821send 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]

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 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.

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 Start Printed Page 38822the 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.

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

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.

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 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 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]

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 Start Printed Page 38823communication 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 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 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.

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 Start Printed Page 38824information (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 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.

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 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 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 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 Start Printed Page 38825information 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 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 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 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 Start Printed Page 38826regarding 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 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.

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).

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 Start Printed Page 38827routes 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 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]

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]

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.

Start Printed 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.

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]

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 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]

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.

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 Start Printed Page 38829explained 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, 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 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 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]

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 Start Printed Page 38830principal). 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 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 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.

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 Start Printed Page 38831is 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.

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.

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.

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 Start Printed Page 38832ATS 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 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]

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 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]

Another commenter states that Form ATS-N should only require disclosure Start Printed Page 38833of 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 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 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.

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 Start Printed Page 38834about 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.

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 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 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 Start Printed Page 38835Stock 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 broker-dealer 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 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 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 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.

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]

Start Printed 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.

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 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 Start Printed Page 38837would 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 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 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]

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.

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 Start Printed Page 38838interest.[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 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 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.

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 Start Printed Page 38839will help market participants discern any benefit or disadvantage they may receive in comparison to other market participants or the broker-dealer operator.

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 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.

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 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 broker-dealers. This request is similar to the Start Printed Page 38840proposed 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 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 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 Start Printed Page 38841using 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 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]

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 Start Printed Page 38842must 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]

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 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.

We also received several other comments on the request for information in Part III, Item 6 of proposed Form ATS-N, which as Start Printed Page 38843explained 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 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]

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 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]

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 Start Printed Page 38844functionalities) 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]

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.

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.

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 Start Printed Page 38845recommends 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 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.

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.

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 Start Printed Page 38846Form 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.

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]

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 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 Start Printed Page 38847participants 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.

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 broker-dealers.[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, 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” Start Printed Page 38848from 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.

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]

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 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 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).

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 Start Printed Page 38849NMS 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 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 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 Start Printed Page 38850different 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, 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.

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]

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.

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.

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 Start Printed Page 38851high-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 FormATS-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).

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 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]

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 Start Printed Page 38852intend 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 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.

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 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 Start Printed Page 38853underlying 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 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-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 Start Printed Page 38854discussed 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]

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]

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.

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 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]

Start Printed Page 38855

We have revised the request so that Part III, Item 15 of adopted FormATS-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.

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]

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]

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 Start Printed Page 38856believe 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]

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 FormATS-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).

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 Start Printed Page 38857Commission 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 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 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.

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.

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]

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 Start Printed Page 38858the 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.

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.

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.

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).

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 Start Printed Page 38859will 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 FormATS-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 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 Start Printed Page 38860NMS 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, 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 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 Start Printed Page 38861more 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 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 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 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 FormATS-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 Start Printed Page 38862subscribers.[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, 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.

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.

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.

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 Start Printed Page 38863triggered 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 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.

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]

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 Start Printed Page 38864mandated 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 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.

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]

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 Start Printed Page 38865standard 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 FormATS-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.

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.

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 Start Printed Page 38866believe 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]

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 broker-dealer operator and its affiliates.[1104] Part Start Printed Page 38867III 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

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 FormATS-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 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]

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]

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 Start Printed Page 38868stocks 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]

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]

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 Start Printed Page 38869calendar 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 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 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 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 Start Printed Page 38870the 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]

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 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 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 Start Printed Page 38871burden 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 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).

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.

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]

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 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) Start Printed Page 38872and (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 disclos