Alternative Trading Systems (ATSs) play a crucial role in the financial markets by providing platforms for trading securities outside of traditional stock exchanges. This guide provides a comprehensive overview of the regulations, compliance requirements, and disclosure obligations associated with ATSs. It aims to offer a detailed understanding of the legal framework governing ATSs, ensuring that stakeholders are well-informed about their responsibilities and the regulatory landscape.
Introduction to Alternative Trading Systems (ATSs)
Definition and Purpose
An Alternative Trading System (ATS) is a trading venue that matches buyers and sellers of securities but is not regulated as an exchange. ATSs include electronic communication networks (ECNs), dark pools, and other non-exchange trading platforms. They provide an alternative to traditional stock exchanges, often offering lower costs and greater flexibility.
Historical Context
The concept of ATSs emerged in the 1990s as technological advancements enabled the creation of electronic trading platforms. The Securities and Exchange Commission (SEC) introduced Regulation ATS in 1998 to provide a regulatory framework for these systems, ensuring they operate fairly and transparently.
Regulatory Framework
Regulation ATS
Regulation ATS, adopted by the SEC in 1998, establishes the regulatory requirements for ATSs. It aims to ensure that ATSs operate in a manner consistent with investor protection and market integrity.
Key Provisions
- Registration Requirements: ATSs must register as broker-dealers with the SEC and become members of a self-regulatory organization (SRO), such as the Financial Industry Regulatory Authority (FINRA).
- Fair Access Rule: ATSs that exceed certain trading volume thresholds must provide fair access to their services and cannot unreasonably discriminate against potential participants.
- Transparency and Reporting: ATSs are required to maintain records of their activities and provide regular reports to the SEC, including information on trading volumes and participants.
Amendments to Regulation ATS
The SEC has periodically amended Regulation ATS to address evolving market conditions and technological advancements. Notable amendments include:
- Regulation SCI: Introduced in 2014, Regulation Systems Compliance and Integrity (SCI) requires ATSs to implement robust systems and controls to ensure the integrity and security of their operations.
- Form ATS-N: In 2018, the SEC introduced Form ATS-N, which requires ATSs that trade National Market System (NMS) stocks to provide detailed disclosures about their operations, including conflicts of interest and order types.
Amendments Regarding the Definition of Exchange and ATSs - Federal Register
Regulation ATS for Government Securities
In 2020, the SEC extended Regulation ATS to cover ATSs that trade U.S. government securities. This extension aims to enhance transparency and oversight in the trading of government securities, ensuring that these markets operate efficiently and fairly.
Regulation ATS for ATSs That Trade U.S. Government Securities - Federal Register
Compliance Requirements
Registration and Membership
ATSs must register as broker-dealers with the SEC and become members of an SRO, such as FINRA. This registration process involves submitting detailed information about the ATS's operations, ownership, and control.
Broker-Dealer Registration
- Form BD: ATSs must file Form BD with the SEC, providing information about their business activities, financial condition, and disciplinary history.
- Membership in an SRO: ATSs must become members of an SRO, which involves complying with the SRO's rules and regulations, including those related to financial responsibility, operational capability, and conduct of business.
System Integrity and Security
ATSs are required to implement robust systems and controls to ensure the integrity and security of their operations. This includes:
- Regulation SCI: ATSs must comply with Regulation SCI, which mandates the implementation of policies and procedures to ensure the security, capacity, and integrity of their systems.
- Cybersecurity Measures: ATSs must adopt comprehensive cybersecurity measures to protect against cyber threats and ensure the confidentiality, integrity, and availability of their systems and data.
Recordkeeping and Reporting
ATSs are subject to extensive recordkeeping and reporting requirements to ensure transparency and regulatory oversight.
Recordkeeping
- Books and Records: ATSs must maintain detailed records of their trading activities, including order and trade information, participant identities, and system logs.
- Retention Period: Records must be retained for a specified period, typically five years, and must be readily accessible for inspection by the SEC and SROs.
Reporting
- Form ATS: ATSs must file Form ATS with the SEC, providing information about their operations, trading volumes, and participants.
- Form ATS-R: ATSs must file quarterly reports on Form ATS-R, detailing their trading activities, including the number of trades, volume, and types of securities traded.
Requirements for Alternative Trading - Reginfo.gov
Disclosure Obligations
Form ATS-N
Form ATS-N, introduced in 2018, requires ATSs that trade NMS stocks to provide detailed disclosures about their operations. This form aims to enhance transparency and provide market participants with critical information about the ATS's practices and potential conflicts of interest.
Key Disclosure Requirements
- Ownership and Control: ATSs must disclose information about their ownership and control, including any affiliations with broker-dealers or other market participants.
- Order Types and Execution: ATSs must provide detailed information about the types of orders they accept and their execution practices, including any priority rules or matching algorithms.
- Conflicts of Interest: ATSs must disclose any potential conflicts of interest, including relationships with affiliates, payment for order flow arrangements, and proprietary trading activities.
Fair Access and Non-Discrimination
ATSs that exceed certain trading volume thresholds are subject to the Fair Access Rule, which requires them to provide fair access to their services and prohibits unreasonable discrimination against potential participants.
Fair Access Rule
- Thresholds: The Fair Access Rule applies to ATSs that account for more than 5% of the average daily trading volume in any NMS stock.
- Non-Discrimination: ATSs must establish objective standards for access to their services and cannot unreasonably discriminate against potential participants based on factors such as size, trading volume, or business model.
Regulation of NMS Stock Alternative Trading Systems - SEC.gov
Enforcement and Penalties
SEC Enforcement Actions
The SEC has the authority to enforce compliance with Regulation ATS and other applicable regulations. Enforcement actions may include:
- Fines and Penalties: The SEC can impose fines and penalties on ATSs that violate regulatory requirements, including failure to register, inadequate recordkeeping, and non-compliance with disclosure obligations.
- Suspension or Revocation of Registration: The SEC can suspend or revoke the registration of an ATS that engages in fraudulent or manipulative practices or fails to comply with regulatory requirements.
Self-Regulatory Organizations (SROs)
SROs, such as FINRA, also play a critical role in enforcing compliance with regulatory requirements. SROs conduct regular examinations of ATSs to ensure compliance with their rules and regulations, including those related to financial responsibility, operational capability, and conduct of business.
FINRA Examinations
- Routine Examinations: FINRA conducts routine examinations of ATSs to assess their compliance with regulatory requirements, including those related to registration, recordkeeping, and reporting.
- Targeted Examinations: FINRA may also conduct targeted examinations in response to specific concerns or complaints, focusing on areas such as trading practices, cybersecurity, and conflicts of interest.
SEC Operations: Increased Workload Creates Challenges - GAO.gov
Alternative Trading Systems (ATSs) play a vital role in the financial markets by providing platforms for trading securities outside of traditional stock exchanges. The regulatory framework governing ATSs, including Regulation ATS and its amendments, aims to ensure that these systems operate fairly, transparently, and in a manner consistent with investor protection and market integrity.
Compliance with regulatory requirements, including registration, system integrity, recordkeeping, and disclosure obligations, is essential for ATSs to maintain their operations and avoid enforcement actions. By adhering to these requirements, ATSs can contribute to the efficiency and stability of the financial markets, providing valuable alternatives for market participants.
For more detailed information on the regulations governing ATSs, please refer to the official resources provided by the SEC and other regulatory bodies.
Regulation of NMS Stock Alternative Trading Systems - SEC.gov
Amendments Regarding the Definition of Exchange and ATSs - Federal Register
Regulation ATS for ATSs That Trade U.S. Government Securities - Federal Register
Requirements for Alternative Trading - Reginfo.gov
SEC Operations: Increased Workload Creates Challenges - GAO.gov
