[Federal Register Volume 80, Number 248 (Monday, December 28, 2015)]
[Proposed Rules]
[Pages 80997-81154]
[FR Doc No: 2015-29890]

Vol. 80

Monday,

No. 248

December 28, 2015

Part III

Securities and Exchange Commission

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17 CFR Parts 240, 242, 249

Regulation of NMS Stock Alternative Trading Systems; Proposed Rule

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

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, 249

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

Regulation of NMS Stock Alternative Trading Systems

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

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

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

Electronic Comments

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

Paper Comments

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

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

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

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

Table of Contents

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

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

I. Introduction

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

competition . . . between exchange markets and markets other than
exchange markets.'' \7\ Congress recognized that the securities markets
dynamically change and, accordingly, granted the Commission broad
authority to oversee the implementation, operation, and regulation of
the national market system in accordance with Congressional goals and
objectives.\8\
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    \1\ 15 U.S.C. 78k-1(a)(2).
    \2\ Public Law 94-29, 89 Stat. 97 (1975).
    \3\ 15 U.S.C. 78k-1(a)(1).
    \4\ Section 11A(a)(1)(B) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(B).
    \5\ Section 11A(a)(1)(C)(i) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(C)(i).
    \6\ Section 11A(a)(1)(C)(iv) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1)(C)(iv).
    \7\ See Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844 (December 22, 1998) (Regulation of Exchanges and
Alternative Trading Systems, hereinafter ``Regulation ATS Adopting
Release'') at 70858 n.113 and accompanying text (citing Section
11A(a)(1)(C)(ii) of the Exchange Act, 15 U.S.C. 78k-1(a)(1)(C)(ii)).
The Commission also noted that a fundamental goal of a national
market system was to ``achieve a market characterized by
economically efficient executions, fair competition, [and the] broad
dissemination of basic market information.'' See id. at 70858 n.113
(quoting S. Rep. No. 75, 94th Cong., 1st Sess. 8 (1975) at 101).
    \8\ See id. at 70858 n.110 and accompanying text (citing S. Rep.
No. 75, 94th Cong., 1st Sess. 8 (1975) at 8-9). The Commission also
noted that Congress explicitly rejected mandating specific
components of a national market system because of uncertainty as to
how technological and economic changes would affect the securities
market. See id. at 70858 n.109 and accompanying text (citing S. Rep.
No. 75, 94th Cong., 1st Sess. 8 (1975) at 8-9.
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    In December 1998, the Commission adopted Regulation ATS to advance
the goals of the national market system and establish a regulatory
framework for ATSs.\9\ At that time, there had been a surge in a
variety of alternative trading systems that traded NMS stocks and
furnished services traditionally provided by national securities
exchanges,\10\ such as matching counterparties' orders, executing
trades, operating limit order books, and facilitating active price
discovery.\11\ The Commission observed at the time that, among other
things, activity on ATSs was not fully disclosed, or accessible, to
investors, and that these systems had no obligation to provide
investors a fair opportunity to participate on the systems or to treat
their participants fairly.\12\ The Commission noted in the Regulation
ATS Adopting Release that while ATSs at that time operated in a manner
similar to registered national securities exchanges, each type of
trading center was subject to different regulatory regimes, and that
these differences created disparities that affected investor protection
and the operation of the markets as a whole, calling into question the
fairness of the then-current regulatory requirements.\13\
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    \9\ See generally Regulation ATS Adopting Release, supra note 7.
    \10\ See id. at 70845.
    \11\ See id. at 70848.
    \12\ See id. at 70845.
    \13\ See id. at 70845-46 (noting that alternative trading
systems prior to the adoption of Regulation ATS were private
markets, which were open to only chosen subscribers, and were
regulated as broker-dealers and not like registered national
securities exchanges).
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    In response to the substantial changes in the way securities were
traded at the time, and the regulatory disparity between registered
national securities exchanges and non-exchange markets, the Commission
adopted a new regulatory framework that the Commission believed would
encourage market innovation, while ensuring basic investor
protections,\14\ by giving securities markets a choice to register as
national securities exchanges, or to register as broker-dealers and
comply with Regulation ATS. Regulation ATS was designed to permit
market centers meeting the Commission's updated interpretation of the
definition of ``exchange,'' as set forth in Exchange Act Rule 3b-
16,\15\ to select the regulatory framework more applicable to their
business models. Among other things, Regulation ATS was intended to
better integrate ATSs into the national market system, and ensure that
market participants have fair access to ATSs with significant
volume.\16\
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    \14\ See id. at 70847.
    \15\ 17 CFR 240.3b-16.
    \16\ See Regulation ATS Adopting Release, supra note 7, at
70846, 70874. The Commission also notes that when it adopted
Regulation ATS, it stated its belief that the Commission's
regulation of markets should both accommodate traditional market
structures and provide sufficient flexibility to ensure that new
markets promote fairness, efficiency, and transparency. See
Regulation ATS Adopting Release, supra note 7, at 70846.
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    In the seventeen years since the Commission adopted Regulation ATS,
the equity markets have evolved significantly, resulting in an
increased number of trading centers and a reduced concentration of
trading activity in NMS stocks.\17\ The growth in trading centers and
trading activity has been fueled primarily by advances in technology
for generating, routing, and executing orders. These technologies have
markedly improved the speed, capacity, and sophistication of the
trading mechanisms and processes that are available to market
participants. Today, ATSs that trade NMS stocks have become an integral
part of the national market system, as the number of these ATSs, and
the volume of NMS stocks transacted on them, has increased
significantly since the adoption of Regulation ATS.\18\ Despite the
emergence of ATSs as a significant source of liquidity in NMS stocks
among today's markets, and the fact that ATSs compete with, and operate
with almost the same complexity and sophistication as, registered
national securities exchanges, the regulatory requirements applicable
to ATSs have remained, for the most part, the same since Regulation ATS
was adopted.\19\
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    \17\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72251 (December 5, 2014), 72262 (adopting final rules
for systems compliance and integrity) (``SCI Adopting Release'') at
72262 n.105 and n.106 and accompanying text (discussing the
increased significance of NMS Stock ATSs).
    \18\ See infra notes 116-122 and accompanying text.
    \19\ The Commission notes that when the Commission adopted
Regulation NMS, it also amended Regulation ATS to lower the
threshold that triggers the Regulation ATS fair access requirements
from 20% of the average daily volume in a security to 5%. See
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR
37496, 37550 (June 29, 2005) (``Regulation NMS Adopting Release'').
See also infra notes 92-95 and accompanying text (discussing the
fair access requirements of Regulation ATS).
    When adopting Regulation ATS, the Commission noted that the 20%
volume threshold was based on current market conditions, and that if
such conditions changed, or if the Commission believed that
alternative trading systems with less than 20% of the trading volume
were engaging in inappropriate exclusionary practices or in
anticompetitive conduct, the Commission could revisit the fair
access thresholds. See Regulation ATS Adopting Release, supra note
7, at 70873 n.245. The Commission also stated its intent to monitor
the impact and effect of the fair access rules, as well as the
practices of ATSs, and consider changing the rules if necessary to
prevent anticompetitive behavior and ensure that qualified investors
have access to significant sources of liquidity in the securities
markets. See id.
    See also infra note 107 and accompanying text (discussing
amendments to Regulation ATS in connection with the adoption of
Regulation SCI).
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    Although ATSs and registered national securities exchanges
generally operate in a similar manner and compete as trading centers
for order flow in NMS stocks, each of these types of trading centers is
subject to a separate regulatory regime with a different mix of
benefits and obligations, including with respect to their obligations
to disclose information about their trading operations. Unlike ATSs,
national securities exchanges must register with the Commission
pursuant to Section 6 of the Exchange Act,\20\ and undertake self-
regulatory \21\ obligations over their members. Before a national
securities exchange may commence operations, the Commission must
approve the national securities exchange's application for registration
filed on Form 1. Section 6(b) of the Exchange Act requires, among other
things, that the national securities exchange be so organized and have
the capacity to carry out the purposes of the Exchange Act and to
comply and enforce compliance by its members, and persons associated
with its members, with the federal

securities laws and the rules of the exchange.\22\ Both a national
securities exchange's registration application and the Commission's
order approving the application are public. After registering, a
national securities exchange must file with the Commission any proposed
changes to its rules.\23\ The initial application on Form 1, amendments
thereto, and filings for proposed rule changes, in combination,
publicly disclose important information about national securities
exchanges, such as trading services and fees. As an SRO, a national
securities exchange enjoys certain unique benefits, such as limited
immunity from private liability with respect to its regulatory
functions and the ability to receive market data revenue, among others.
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    \20\ 15 U.S.C. 78f.
    \21\ Section 3(a)(26) of the Exchange Act defines a self-
regulatory organization (``SRO'') as any national securities
exchange, registered securities association, registered clearing
agency, or (with limitations) the Municipal Securities Rulemaking
Board. See 15 U.S.C. 78c(a)(26).
    \22\ See Section 6(b)(1) of the Exchange Act, 15 U.S.C.
78f(b)(1). The Commission must also find that the national
securities exchange has rules that meet certain criteria. See
generally Exchange Act Section 6(b)(2) through (10), 15 U.S.C.
78f(b)(2) through (10).
    \23\ See generally Section 19(b) of the Exchange Act, 15 U.S.C.
78s(b).
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    Although falling within the statutory definition of ``exchange,''
an ATS is exempt from that definition if it complies with Regulation
ATS. Regulation ATS includes the requirement that, as an alternative to
registering as a national securities exchange, an ATS must register as
a broker-dealer with the Commission, which entails becoming a member of
an SRO, such as the Financial Industry Regulatory Authority
(``FINRA'').\24\ Unlike national securities exchanges, ATSs are not
approved by the Commission, but are instead required only to provide
notice of their operations by filing a Form ATS with the Commission 20
days before commencing operations as an ATS.\25\ Form ATS is ``deemed
confidential when filed,'' \26\ and it only requires an ATS to disclose
limited aspects of the ATS's operations. ATSs are neither required to
file proposed rule changes with the Commission nor otherwise publicly
disclose their trading services, operations, or fees.
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    \24\ Section 15(b)(8) of the Exchange Act requires a broker or
dealer to become a member of a registered national securities
association, unless it effects transactions in securities solely on
an exchange of which it is a member. 15 U.S.C. 78o(b)(8).
    \25\ See Regulation ATS Adopting Release, supra note 7, at 70863
and infra Section II.B (discussing the current requirements of
Regulation ATS applicable to all ATSs).
    \26\ See 17 CFR 242.301(b)(2)(vii).
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    The Commission is concerned that the current regulatory
requirements relating to operational transparency for ATSs,
particularly those that execute trades in NMS stocks, may no longer
fully meet the goals of furthering the public interest and protecting
investors. Today, ATSs account for approximately 15.4% of the total
dollar volume in NMS stocks \27\ and as noted, compete with, and
operate with respect to trading in a manner similar to, registered
national securities exchanges. Unlike registered national securities
exchanges, however, there is limited public information available to
market participants about the operations of ATSs, including how orders
and other trading interest may interact, match, and execute on ATSs.
The Commission is concerned that the differences between ATSs that
trade NMS stocks and registered national securities exchanges with
regard to operational transparency may be creating a competitive
imbalance between two functionally similar trading centers that may
trade the same security but are subject to different regulatory
requirements. The Commission is also concerned that this difference in
operational transparency disadvantages market participants by limiting
their ability to adequately assess the relative merits of many trading
centers.\28\ Specifically, the Commission is concerned that the lack of
operational transparency around ATSs limits market participants'
ability to adequately discern how their orders interact, match, and
execute on ATSs and to find the optimal market or markets for their
orders.
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    \27\ See infra Table 1 ``NMS Stock ATSs Ranked by Dollar Trading
Volume--March 30, 2015 to June 26, 2015.'' Total dollar trading
volume on all exchanges and off-exchange trading in the second
quarter of 2015 was approximately $16.3 trillion and approximately
397 billion shares. See id.
    \28\ Market participants may include many different types of
persons seeking to transact in NMS stocks, including broker-dealers
and institutional or retail investors.
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    The Commission is also concerned about the current lack of
transparency around potential conflicts of interest that arise from the
activities of the broker-dealer operator of the NMS Stock ATS and its
affiliates \29\ in connection with the ATS. As discussed herein, an ATS
must register as a broker-dealer pursuant to Rule 301(b)(1) of
Regulation ATS. This broker-dealer operator, its affiliates, or both,
however, may also conduct brokerage or dealing activities in NMS stocks
in addition to operating the ATS.\30\ Broker-dealer operators may also
have affiliates that support the operations of the ATS or trade on it.
The Commission notes that these multi-service broker-dealers that
engage in brokerage and dealing activities, in addition to the
operation of their ATSs, have become more prevalent since the adoption
of Regulation ATS and the other services multi-service broker-dealers
provide have become increasingly intertwined with the operation of
their ATSs. Given the unique position that the broker-dealer operator
and its affiliates occupy with regard to the operation of an ATS,
potential conflicts of interest arise when the various business
interests of the broker-dealer operator or its affiliates compete with
the interests of market participants that access and trade on the
ATS.\31\ Some of the recent settled actions against ATSs highlight this
potential.\32\ As discussed further below, although the operations of
most ATSs and their broker-dealer operators have become more closely
connected, market participants receive limited information about the
activities of the broker-dealer operator and its affiliates and the
potential conflicts of interest that arise from these activities.
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    \29\ The Commission is proposing to define ``affiliate'' for
purposes of proposed Form ATS-N as described and discussed further
below. See infra note 378 and accompanying text. See also
Instruction G to proposed Form ATS-N.
    \30\ Throughout this release, broker-dealer operators of NMS
Stock ATSs that also provide brokerage or dealing services in
addition to operating an NMS Stock ATS are referred to as ``multi-
service broker-dealers''.
    \31\ See infra Section VII.A (discussing the relationship
between NMS Stock ATSs and the other business functions of their
broker-dealer operators). The Commission notes that, although it was
concerned at the time of adoption of Regulation ATS about conflicts
of interest that may be present when the broker-dealer operator of
an ATS also performs other trading functions (see infra notes 530-
532 and accompanying text discussing the Commission's concerns
regarding the potential for misuse of confidential trading
information that led to the adoption of Rule 301(b)(10)), the
business structure of broker-dealers that operate NMS Stock ATSs has
changed since 1998.
    \32\ See infra note 375 and accompanying text.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

II. Current ATS Regulatory Framework

A. Exemption From National Securities Exchange Registration

    A fundamental component of the current ATS regulatory framework
adopted by the Commission in 1998 is Exchange Act Rule 3b-16.\45\ Rule
3b-16 was designed to address the blurring of traditional
classifications between exchanges and broker-dealers as a result of
advances in technology by providing a more comprehensive and meaningful
interpretation of what constitutes an exchange under Section 3(a) of
the Exchange Act.\46\ Rule 3b-16(a) provides a functional test to
assess whether a trading platform meets the definition of exchange
under Section 3(a)(1) of the Exchange Act, and thus is required to
register as a national securities exchange pursuant to Sections 5 and 6
of the Exchange Act.\47\ Under Rule 3b-16, an organization,
association, or group of persons shall be considered to constitute,
maintain, or provide ``a market place or facilities for bringing
together purchasers and sellers of securities or for otherwise
performing with respect to securities the functions commonly performed
by a stock exchange,'' if such organization, association, or group of
persons: (1) Brings together the orders for securities of multiple
buyers and sellers; and (2) uses established, non-discretionary methods
(whether by providing a trading facility or by setting rules) under
which such orders interact with each other, and the buyers and sellers
entering such orders agree to the terms of a trade.\48\
---------------------------------------------------------------------------

    \45\ See 17 CFR 240.3b-16.
    \46\ See Regulation ATS Adopting Release, supra note 7, at
70847. Pursuant to Section 3(a)(1) of the Exchange Act, the
statutory definition of ``exchange'' means ``any organization,
association, or group of persons, whether incorporated or
unincorporated, which constitutes, maintains, or provides a market
place or facilities for bringing together purchasers and sellers of
securities or for otherwise performing with respect to securities
the functions commonly performed by a stock exchange . .
.&ensp.” 15 U.S.C. 78c(a)(1).
    \47\ See 15 U.S.C. 78e and 78f. A ``national securities
exchange'' is an exchange registered as such under Section 6 of the
Exchange Act.
    \48\ See 17 CFR 240.3b-16(a).
---------------------------------------------------------------------------

    The Commission adopted Exchange Act Rule 3b-16(b) to explicitly
exclude certain systems that the Commission believed did not meet the
exchange definition.\49\ Specifically, Rule 3b-16(b) excludes systems
that perform only traditional broker-dealer activities, including: (1)
Systems that route orders to a national securities exchange, a market
operated by a national securities association, or a broker-dealer for
execution, or (2) systems that allow persons to enter orders for
execution against the bids and offers of a single dealer if certain
additional conditions are met.\50\ Accordingly, a system is not
included in the Commission's interpretation of ``exchange'' if: (1) The
system fails to meet the two-part test in paragraph (a) of Rule 3b-16;
(2) the system falls within one of the exclusions in paragraph (b) of
Rule 3b-16; or (3) the Commission otherwise conditionally or
unconditionally exempts \51\ the system from the definition.
---------------------------------------------------------------------------

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

    For those systems that meet the criteria of Rule 3b-16(a) and are
not excluded under Rule 3b-16(b) of the Exchange Act,\52\ Rule 3a1-
1(a)(2) \53\ provides an exemption from the definition of ``exchange.''
Specifically, Exchange Act Rule 3a1-1(a)(2) exempts from the Exchange
Act Section 3(a)(1) definition of ``exchange'' an organization,
association, or group of persons that complies with Regulation ATS,\54\
which includes, among other things, the requirement to register as a
broker-dealer.\55\ Therefore, an organization, association, or group of
persons that complies with Regulation ATS is not subject to Section 5
of the Exchange Act,\56\ which requires that an ``exchange'' register
with the Commission as a national securities exchange pursuant to
Section 6 of the Exchange Act \57\ or otherwise be exempt.
Additionally, an ATS that is not required to register as a national
securities exchange pursuant to Section 5 is not an SRO \58\ and is not
required to comply with applicable requirements.\59\
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    \52\ See 17 CFR 240.3b-16(b).
    \53\ See 17 CFR 240.3a1-1(a)(2).
    \54\ See 17 CFR 240.3a1-1(a)(2). Rule 3a1-1 also provides two
other exemptions from the definition of ``exchange'' for any ATS
operated by a national securities association, and any ATS not
required to comply with Regulation ATS pursuant to Rule 301(a) of
Regulation ATS. See 17 CFR 240.3a1-1(a)(1) and (3).
    \55\ See 17 CFR 242.301(b)(1).
    \56\ 15 U.S.C. 78e.
    \57\ 15 U.S.C. 78f.
    \58\ See supra note 21 (setting forth the statutory definition
of SRO).
    \59\ See, e.g., Section 19 of the Exchange Act, 15 U.S.C. 78s.
---------------------------------------------------------------------------

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

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

B. Conditions to the ATS Exemption; Confidential Notice Regime

    Rule 300(a) of Regulation ATS defines an ATS as: ``any
organization, association, person, group of persons, or system: (1)
[t]hat constitutes, maintains, or provides a market place or facilities
for bringing together purchasers and sellers of securities or for
otherwise performing with respect to securities the functions commonly
performed by a stock exchange within the meaning of [Rule 3b-16]; and
(2) [t]hat does not: (i) [s]et rules governing the conduct of
subscribers other than the conduct of such subscribers' trading on such
organization, association, person, group of persons, or system; or (ii)
[d]iscipline subscribers other than by exclusion

from trading.'' \61\ Governing the conduct of or disciplining
subscribers are functions performed by an SRO that the Commission
believes should be regulated as such.\62\ Accordingly, pursuant to the
definition in Rule 300(a), a trading system that performs SRO
functions, or performs functions common to national securities
exchanges, such as establishing listing standards, is precluded from
the definition of ATS and would be required to register as a national
securities exchange or be operated by a national securities association
(or seek another exemption).\63\
---------------------------------------------------------------------------

    \61\ See 17 CFR 242.300(a).
    \62\ See Regulation ATS Adopting Release, supra note 7, at
70859. As the Commission noted when it adopted Regulation ATS, the
Commission believes that any system that uses its market power to
regulate its participants should be regulated as an SRO. The
Commission noted that it would consider a trading system to be
``governing the conduct of subscribers'' outside the trading system
if it imposed on subscribers, as conditions of participation in
trading, any requirements for which the trading system had to
examine subscribers for compliance. In addition, the Commission
stated its belief that if a trading system imposed as conditions of
participation, directly or indirectly, restrictions on subscribers'
activities outside of the trading system, such a trading system
should be a registered exchange or operated by a national securities
association, but that the limitation would not preclude an
alternative trading system from imposing credit conditions on
subscribers or requiring subscribers to submit financial information
to the alternative trading system. See id.
    \63\ See id.
---------------------------------------------------------------------------

    Rule 301(b)(1) of Regulation ATS requires that every ATS that is
subject to Regulation ATS, pursuant to paragraph (a) of Rule 301,\64\
be registered as a broker-dealer under Section 15 of the Exchange
Act,\65\ and thus become a member of an SRO, such as FINRA.\66\ In the
Regulation ATS Adopting Release, the Commission stated that an ATS that
registers as a broker-dealer must, in addition to complying with
Regulation ATS, comply with the filing and conduct obligations
associated with being a registered broker-dealer, including membership
in an SRO and compliance with SRO rules.\67\
---------------------------------------------------------------------------

    \64\ Pursuant to Rule 301(a), certain ATSs that are subject to
other appropriate regulations are not required to comply with
Regulation ATS. These ATSs include those that are: Registered as an
exchange under Section 6 of the Exchange Act; exempt from exchange
registration based on the limited volume of transactions effected;
operated by a national securities association; registered as a
broker-dealer under Sections 15(b) or 15C of the Exchange Act, or is
a bank, that limits its activities to certain instruments; or
exempted, conditionally or unconditionally, by Commission order,
after application by such alternative trading system. See 17 CFR
242.301(a). For example, an ATS that is registered as a broker-
dealer, or is a bank, and limits its securities activities solely to
government securities is not required to comply with Regulation ATS.
See 17 CFR 242.301(a)(4).
    \65\ See 17 CFR 242.301(b)(1).
    \66\ See Section 15(b)(8) of the Exchange Act; 15 U.S.C.
78o(b)(8). See also supra 24 note and infra note 295 and
accompanying text (setting forth the requirements of Section
15(b)(8) of the Exchange Act).
    \67\ See Regulation ATS Adopting Release, supra note 7, at
70903.
---------------------------------------------------------------------------

    In addition, Rule 301(b)(2) of Regulation ATS requires an ATS to
file an initial operation report with the Commission on Form ATS \68\
at least 20 days before commencing operations.\69\ The Commission
stated in the Regulation ATS Adopting Release that Form ATS would
provide the Commission the opportunity to identify problems that might
impact investors before the system begins to operate.\70\ Unlike a Form
1 filed by a national securities exchange, Form ATS is not approved by
the Commission. Instead, Form ATS provides the Commission with notice
about its operations prior to commencing operations.\71\
---------------------------------------------------------------------------

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

    Form ATS requires, among other things, that an ATS provide
information about: Classes of subscribers and differences in access to
the services offered by the ATS to different groups or classes of
subscribers; securities the ATS expects to trade; any entity other than
the ATS involved in its operations; the manner in which the system
operates; how subscribers access the trading system; procedures
governing order entry and execution; and trade reporting, clearance and
settlement of trades on the ATS. Regulation ATS states that information
filed by an ATS on Form ATS is ``deemed confidential when filed.'' \72\
Thus, under the current regulatory requirements, market participants
generally do not have information about, for example, how orders are
entered, prioritized, handled, and executed on an NMS Stock ATS, ATSs
are not otherwise required to publicly disclose such information.\73\
---------------------------------------------------------------------------

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

    In addition to providing notice of its initial operation, an ATS
must notify the Commission of any changes in its operations by filing
an amendment to its initial operation report. There are three types of
amendments to an initial operation report.\74\ First, if any material
change is made to its operations, the ATS must file an amendment on
Form ATS at least 20 calendar days before implementing such change.\75\
Second, if any information contained in the initial operation report
becomes inaccurate for any reason and has not been previously reported
to the Commission as an amendment on Form ATS, the ATS must file an
amendment on Form ATS correcting the information within 30 calendar
days after the end of the calendar quarter in which the system has
operated.\76\ Third, an ATS must promptly file an amendment on Form ATS
correcting information that it previously reported on Form ATS after
discovery that any information was inaccurate when filed.\77\ Also,
upon ceasing to operate as an ATS, an ATS is required to promptly file
a cessation of operations report on Form ATS.\78\ As is the case with
respect to initial operation reports, Form ATS amendments and cessation
of operations reports serve as notice to the Commission of changes to
the ATS's operations,\79\ and Rule 301(b)(2)(vii) and the instructions
to the form state that Form ATS is ``deemed confidential.'' \80\
---------------------------------------------------------------------------

    \74\ Form ATS is used for three types of submissions: Initial
operation reports; amendments to initial operation reports; and
cessation of operations reports. An ATS designates the type of
submission on the form. See Form ATS.
    \75\ See 17 CFR 242.301(b)(2)(ii). A ``material change,''
includes, but is not limited to, any change to the operating
platform, the types of securities traded, or the types of
subscribers. In addition, the Commission has stated that ATSs
implicitly make materiality decisions in determining when to notify
their subscribers of changes. See Regulation ATS Adopting Release,
supra note 7, at 70864. See also supra Section IV.C.6 (discussing
the proposed materiality standard that would apply to the filing of
amendments on Form ATS-N).
    \76\ See 17 CFR 242.301(b)(2)(iii).
    \77\ See 17 CFR 242.301(b)(2)(iv).
    \78\ See 17 CFR 242.301(b)(2)(v).
    \79\ See Regulation ATS Adopting Release, supra note 7, at
70864.
    \80\ See 17 CFR 242.301(b)(2)(vii); Form ATS at 3, General
Instructions A.7.
---------------------------------------------------------------------------

    Rule 301(b)(9) of Regulation ATS also requires ATSs to periodically
report certain information about transactions on the ATS and
information about certain activities on Form ATS-R within 30 calendar
days after the end of each calendar quarter in which the market has
operated.\81\ Form ATS-R requires quarterly volume information for
specified categories of securities, as well as a list of all securities
traded on the ATS during the quarter and a list of all subscribers that
were participants

during the quarter.\82\ Form ATS-R also requires an ATS that is subject
to the fair access obligations under Rule 301(b)(5) of Regulation ATS
to: (1) Provide a list of all persons granted, denied, or limited
access to the ATS during the period covered by the ATS-R and (2)
designate for each person: (a) Whether they were granted, denied, or
limited access; (b) the date the ATS took such action; (c) the
effective date of such action; and (d) the nature of any denial or
limitation of access.\83\ In the Regulation ATS Adopting Release, the
Commission stated that the information provided on Form ATS-R would
permit the Commission to monitor the trading on ATSs.\84\ Like Form
ATS, Rule 301(b)(2)(vii) and the instructions to Form ATS-R state that
Form ATS-R is ``deemed confidential.'' \85\
---------------------------------------------------------------------------

    \81\ See 17 CFR 242.301(b)(9)(i). Form ATS-R and the Form ATS-R
Instructions are available at https://www.sec.gov/about/forms/formats-r.pdf.
    \82\ See Form ATS-R at 4, Items 1 and 2 (describing the
requirements for Exhibit A and Exhibit B of Form ATS-R). ATSs must
also complete and file Form ATS-R within 10 calendar days after
ceasing to operate. See 17 CFR 242.301(b)(9)(ii); Form ATS-R at 2,
General Instructions A.2 to Form ATS-R.
    \83\ See Form ATS-R at 6, Item 7 (explaining requirements for
Exhibit C).
    \84\ See Regulation ATS Adopting Release, supra note 7, at
70878.
    \85\ See 17 CFR 242.301(b)(2)(vii); Form ATS-R at 2, General
Instruction A.7.
---------------------------------------------------------------------------

    In addition to the reporting requirements under Rules 301(b)(2) and
301(b)(9) of Regulation ATS, an ATS's exemption from national
securities exchange registration is conditioned on the ATS complying
with the other requirements under Regulation ATS. Under Rule 301(b)(3),
an ATS that (1) displays subscriber orders in an NMS stock to any
person (other than an employee of the ATS) and (2) during at least four
of the preceding six calendar months, had an average daily trading
volume of 5% or more of the aggregate average daily share volume for
that NMS stock, as reported by an effective transaction reporting plan,
must: \86\
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

    Under Rule 301(b)(4), an ATS must not charge any fee to broker-
dealers that access the ATS through a national securities exchange or
national securities association that is inconsistent with the
equivalent access to the ATS that is required under Rule
301(b)(3)(iii).\91\
---------------------------------------------------------------------------

    \91\ See 17 CFR 242.301(b)(4). In addition, if the national
securities exchange or national securities association to which an
ATS provides the prices and sizes of orders under Rules
301(b)(3)(ii) and 301(b)(3)(iii) establishes rules designed to
assure consistency with standards for access to quotations displayed
on such national securities exchange, or the market operated by such
national securities association, the ATS shall not charge any fee to
members that is contrary to, that is not disclosed in the manner
required by, or that is inconsistent with any standard of equivalent
access established by such rules. See id.
---------------------------------------------------------------------------

    Under Rule 301(b)(5)--and even if the ATS does not display
subscribers' orders to any person (other than an ATS employee)--an ATS
with 5% or more of the average daily volume in an NMS stock during at
least four of the preceding six calendar months, as reported by an
effective transaction reporting plan, must: \92\
---------------------------------------------------------------------------

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

     Establish written standards for granting access to trading
on its system;
     not unreasonably prohibit or limit any person in respect
to access to services offered by such ATS by applying the above
standards in an unfair or discriminatory manner;
     make and keep records of:
    [cir] all grants of access including, for all subscribers, the
reasons for granting such access; and
    [cir] all denials or limitations of access and reasons, for each
applicant, for denying or limiting access; and
     report the information required in Exhibit C of Form ATS-R
regarding grants, denials, and limitations of access.\93\
---------------------------------------------------------------------------

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

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

    \94\ The fair access requirements also apply for non-NMS stocks
when an ATS reaches a 5% trading threshold in certain securities
other than NMS stocks, including certain equity securities,
municipal securities and corporate debt securities. See 17 CFR
242.301(b)(5)(i).
    \95\ See Regulation ATS Adopting Release, supra note 7, at
70874.
---------------------------------------------------------------------------

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

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

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

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

    \97\ See 17 CFR 242.301(b)(6)(ii). Also, as with the fair access
requirements pursuant to Rule 301(b)(5), Regulation ATS does not
mandate compliance with the requirements under Rule 301(b)(6) when
an ATS reaches a 20% trading threshold if the following conditions
are met: The ATS matches customer orders for a security with other
customer orders; such customers' orders are not displayed to any
person, other than employees of the ATS; and such orders are
executed at a price for such security disseminated by an effective
transaction reporting plan, or derived from such prices.
    See 17 CFR 242.301(b)(6)(iii).

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

    \98\ See SCI Adopting Release, supra note 17.
    \99\ See Regulation ATS Adopting Release, supra note 7, at
70875-76.
    \100\ Regulation SCI does not apply to ATSs that trade only
municipal securities or corporate debt securities. See SCI Adopting
Release, supra note 17, at 72262. Prior to the adoption of
Regulation SCI, Rule 301(b)(6) of Regulation ATS imposed by rule
certain aspects of Commission policy statements with respect to
technology systems of significant-volume ATSs.
     Specifically, Regulation SCI, with regard to SCI entities (as
defined in Regulation SCI; see infra note 101), superseded and
replaced the Commission's prior Automation Review Policy (``ARP''),
established by the Commission's two policy statements, each titled
``Automated Systems of Self-Regulatory Organizations,'' issued in
1989 and 1991, see Securities Exchange Act Release Nos. 27445
(November 16, 1989), 54 FR 48703 (November 24, 1989), and 29185 (May
9, 1991), 56 FR 22490 (May 15, 1991), including the aspects of those
policy statements previously codified in Rule 301(b)(6) of
Regulation ATS applicable to significant-volume ATSs that trade NMS
stocks and non-NMS stocks. See SCI Adopting Release, supra note 17,
at 72252.
    \101\ Regulation SCI defines ``SCI entity'' to mean ``an SCI
self-regulatory organization, SCI alternative trading system, plan
processor, or exempt clearing agency subject to [the Commission's
Automation Review Policies].'' See 17 CFR 242.1000.
    \102\ Regulation SCI defines ``SCI alternative trading system''
or ``SCI ATS'' to mean an ATS, which during at least four of the
preceding six calendar months: (1) Had with respect to NMS stocks
(a) five percent (5%) or more in any single NMS stock, and one-
quarter percent (0.25%) or more in all NMS stocks, of the average
daily dollar volume reported by applicable transaction reporting
plans, or (b) one percent (1%) or more in all NMS stocks of the
average daily dollar volume reported by applicable transaction
reporting plans; or (2) had with respect to equity securities that
are not NMS stocks and for which transactions are reported to a
self-regulatory organization, five percent (5%) or more of the
average daily dollar volume as calculated by the self-regulatory
organization to which such transactions are reported. However, an
SCI ATS is not required to comply with the requirements of
Regulation SCI until six months after satisfying the aforementioned
criteria. See 17 CFR 242.1000.
    \103\ See SCI Adopting Release, supra note 17, at 72252.
    \104\ See id.
    \105\ See id.
    \106\ See id.
    \107\ See supra note 102. Prior to the adoption of Regulation
SCI, the requirements of Rule 301(b)(6) also applied to ATSs that,
during at least 4 of the preceding 6 calendar months, had with
respect to any NMS stock, 20% or more of the average daily volume
reported by an effective transaction reporting plan.
---------------------------------------------------------------------------

    Rule 301(b)(7) \108\ requires all ATSs, regardless of the volume
traded on their systems, to permit the examination and inspection of
their premises, systems, and records, and cooperate with the
examination, inspection, or investigation of subscribers, whether such
examination is being conducted by the Commission or by an SRO of which
such subscriber is a member. Rule 301(b)(8) \109\ requires all ATSs to
make and keep current the records specified in Rule 302 of Regulation
ATS \110\ and preserve the records specified in Rule 303 of Regulation
ATS.\111\
---------------------------------------------------------------------------

    \108\ See 17 CFR 242.301(b)(7).
    \109\ See 17 CFR 242.301(b)(8).
    \110\ See 17 CFR 242.302.
    \111\ See 17 CFR 242.303. In the Regulation ATS Adopting
Release, the Commission stated that these requirements to make,
keep, and preserve records are necessary to create a meaningful
audit trail and to permit surveillance and examination to help
ensure fair and orderly markets. See Regulation ATS Adopting
Release, supra note 7, at 70877-78.
---------------------------------------------------------------------------

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

    \112\ See 17 CFR 242.301(b)(10)(i).
---------------------------------------------------------------------------

    Furthermore, all ATSs must adopt and implement adequate oversight
procedures to ensure that the above safeguards and procedures are
followed.\113\
---------------------------------------------------------------------------

    \113\ See 17 CFR 242.301(b)(10)(ii).
---------------------------------------------------------------------------

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

    \114\ See 17 CFR 240.301(b)(11).
    \115\ When the Commission proposed Regulation ATS, it said that
``it is important that the investing public not be confused about
the market role [ATSs] have chosen to assume.'' See Securities
Exchange Act Release No. 39884 (April 21, 1998), 63 FR 23504, 23523
(April 29, 1998) (``Regulation ATS Proposing Release''). The
Commission expressed concern that ``use of the term `exchange' by a
system not regulated as an exchange would be deceptive and could
mislead investors that such alternative trading system is registered
as a national securities exchange.'' See id.
---------------------------------------------------------------------------

III. Role of ATSs in the Current Equity Market Structure

A. Significant Source of Liquidity for NMS Stocks

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

securities exchanges,\116\ and the Commission estimated that there were
approximately 43 systems that would be eligible to operate as
ATSs.\117\ Currently, there are 18 registered national securities
exchanges, of which there are 11 national securities exchanges that
trade NMS stocks,\118\ and 84 ATSs with a Form ATS on file with the
Commission. Currently, there are 46 ATSs that have noticed on their
Form ATS that they expect to trade NMS stocks.\119\ As the Commission
noted in the SCI Adopting Release, even smaller trading centers, such
as certain high-volume ATSs, now collectively represent a significant
source of liquidity for NMS stocks, and some ATSs have similar and, in
some cases, greater trading volume than some national securities
exchanges.\120\ In the second quarter of 2015, there were 38 ATSs that
reported transactions in NMS stocks, accounting for 59 billion shares
traded in NMS stocks ($2.5 trillion), and represented approximately
15.0% of total share trading volume (15.4% of total dollar trading
volume) on all national securities exchanges, ATSs, and non-ATS OTC
trading venues combined.\121\ During this period, no individual ATS
executed more than approximately 13% of the total share volume on NMS
Stock ATSs and no more than approximately 2% of total NMS stock share
volume.\122\ Given this dispersal of trading volume in NMS stocks among
an increasing number of trading centers, NMS Stock ATSs, with their
approximately 15% market share, represent a significant source of
liquidity in NMS stocks.
---------------------------------------------------------------------------

    \116\ See Regulation ATS Proposing Release, supra note 115, at
23543 n.341.
    \117\ See id. at 23540 n.313 and accompanying text.
    \118\ The Commission notes that National Stock Exchange, Inc.
ceased trading on its system as of the close of business on May 30,
2014. See Securities Exchange Act Release No. 72107 (May 6, 2014),
79 FR 27017 (May 12, 2014) (SR-NSX-2014-14).
    \119\ Data compiled from Forms ATS submitted to the Commission
as of November 1, 2015.
    \120\ See SCI Adopting Release, supra note 17, at 72262.
    \121\ See infra Table 1--``NMS Stock ATSs Ranked by Dollar
Trading Volume--March 30, 2015 to June 26, 2015.'' Total dollar
trading volume on all exchanges and off-exchange trading in the
second quarter of 2015 was approximately $16.3 trillion and
approximately 397 billion shares. See Market Volume Summary, https://www.batstrading.com/market_summary/. See also infra Section
XIII.B.1.
     Competitors for listed-equity (NMS) trading services also
include several hundred OTC market makers and broker-dealers.
    \122\ The NMS Stock ATS with the greatest volume executed
approximately 12.7% of NMS Stock ATS share volume and 1.9% of the
total consolidated NMS stock share trading volume.
    The market share percentages were calculated by Commission staff
using market volume statistics reported by BATS and FINRA ATS data
collected from ATSs pursuant to FINRA Rule 4552. See infra Table 1--
``NMS Stock ATSs Ranked by Dollar Trading Volume--March 30, 2015 to
June 26, 2015.''
    FINRA recently adopted a rule that requires NMS Stock ATSs to
report aggregate weekly volume information and number of trades to
FINRA in certain equity securities, including NMS stocks, some of
which FINRA makes publicly available. Reporting is on a security-by-
security basis for transactions occurring within the ATS. Each ATS
is also required to use a unique MPID in its reporting to FINRA,
such that its volume reporting is distinguishable from other
transaction volume reported by the broker-dealer operator of the
ATS, including volume reported for other ATSs operated by the same
broker-dealer. See FINRA Rules 4552, 6160, 6170, 6480 and 6720. See
also Securities Exchange Act Release No. 71341 (January 17, 2014),
79 FR 4213 (January 24, 2014) (SR-FINRA-2013-042) (order granting
approval of a proposed rule change to require alternative trading
systems to report volume information to FINRA and use a unique
market participant identifier) (``FINRA ATS Reporting Approval'').
    FINRA publishes on its Web site the trading information (volume
and number of trades) reported for each equity security, with
appropriate disclosures that the information is based on ATS-
submitted reports and not on reports produced or validated by FINRA.
See id. at 4214. See also Alternative Trading System (ATS)
Transparency on FINRA's Web site, http://www.finra.org/Industry/Compliance/MarketTransparency/ATS/.
---------------------------------------------------------------------------

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

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

    Most dark pools today, however, primarily execute trades with small
sizes that are more comparable to the average size of trades on
registered national securities exchanges, which is 181 shares.\128\
These dark pools that primarily match smaller orders (though the
matched orders may be ``child'' orders of much larger ``parent''
orders) execute more than 90% of dark pool volume.\129\ The majority of
this volume is executed by dark pools that are operated by multi-
service broker-dealers.\130\ These broker-dealers typically also offer
order routing services, trade as principal in the ATS that they are
operating, or both.\131\
---------------------------------------------------------------------------

    \128\ See infra note 725 and accompanying text.
    \129\ See 2010 Equity Market Structure Release, supra note 124,
75 FR at 3599; see also infra, Table 2--``NMS Stock ATSs Ranked by
Average Trade Size--March 30, 2015 to June 26, 2015.''
    \130\ See infra note 364 and accompanying text and Table 1--
``NMS Stock ATSs Ranked by Dollar Trading Volume--March 30, 2015 to
June 26, 2015.''
    \131\ See 2010 Equity Market Structure Release, supra note 124,
at 3599.
---------------------------------------------------------------------------

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

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

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

    In contrast to dark pools, an ATS could be an Electronic
Communication Network (``ECN''). ECNs are ATSs that provide their best-
priced orders for inclusion in the consolidated quotation data, whether
voluntarily or as required by Rule 301(b)(3) of Regulation ATS.\137\ In
general, ECNs offer trading services (such as displayed or non-
displayed order types, maker-taker pricing, and data feeds) that are
analogous to registered national securities exchanges.\138\
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    \137\ See Rule 600(b)(23) of Regulation NMS, 17 CFR
242.600(b)(23) (definition of ``electronic communications
network''); see also 2010 Equity Market Structure Release, supra
note 124, at 3599.
    \138\ See 2010 Equity Market Structure Release, supra note 124,
at 3599. See infra note 494 (describing the maker-taker pricing
model).
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B. Heightened Operational Complexity and Sophistication of NMS Stock
ATSs

    Since Regulation ATS was adopted, ATSs have gained market share in
NMS stocks and have also evolved to become more complex and
sophisticated trading centers. In addition, ATSs that transact in NMS
stocks increasingly are operated by multi-service broker-dealers that
engage in significant brokerage and dealing activities in addition to
their operation of their ATSs, and the operations of NMS Stock ATSs
have become increasingly intertwined with operations of their broker-
dealer operator, adding to the complexity of the manner in which those
ATSs operate.\139\ The Commission is concerned that market participants
have limited information about the complex operations of NMS Stock ATSs
and the unique relationship between an NMS Stock ATS and its broker-
dealer operator and the affiliates of the broker-dealer operator, who
often provide a significant source of liquidity on the NMS Stock ATS.
The Commission preliminarily believes that improving transparency of
information available to market participants would enable them to
better assess NMS Stock ATSs as potential trading venues.\140\
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    \139\ As exemplified by some commenters' responses and as
discussed further below, market participants are interested in
information about, among other things, ATS affiliations, sharing of
order information, operation of smart order routers and to whom they
give preference, priority rules, order types, calculation of
reference prices, and segmentation. See, e.g., infra notes 186 and
190 and accompanying text (describing comments received from
Blackrock, Inc. and Bloomberg Tradebook LLC).
    \140\ See, e.g., infra note 187 and accompanying text
(describing a comment received from the Consumer Federation of
America).
---------------------------------------------------------------------------

    Since Regulation ATS was adopted, ATSs that effect transactions in
NMS stocks have grown increasingly complex in terms of the services and
functionalities that they offer subscribers. Over the past 16 years,
these ATSs, like registered national securities exchanges, have used
advances in technology to improve the speed, capacity, and efficiency
of their trading functionalities to bring together the orders in NMS
stocks of multiple buyers and sellers using established, non-
discretionary methods under which such orders interact and trade.
Before Regulation ATS was adopted, ATSs primarily operated as ECNs, as
dark pools were not prevalent during that period. Today, the vast
majority of NMS Stock ATSs operate as dark pools. Furthermore, based on
Commission experience, ATSs that traded NMS stocks prior to the
adoption of Regulation ATS did not offer the same services and
functionalities as they do today. Today, most NMS Stock ATSs, like most
registered national securities exchanges, are fully-electronic,
automated systems that provide a myriad of trading services to
facilitate order interaction among various types of users on the NMS
Stock ATS. For example, NMS Stock ATSs offer a wide range of order
types, which are a primary means by which subscribers communicate their
instructions for the handling of their orders on the ATS. Based on
Commission experience, some NMS Stock ATSs allow subscribers to submit
indications of interests, conditional orders, and various types of
pegged orders, often with time-in-force, or other specifications, which
are similar to those offered by exchanges, such as all or none, minimum
execution quantity, immediate or cancel, good till cancelled, and day.
Unlike registered national securities exchanges, however, most NMS
Stock ATSs have adopted a dark trading model, and do not display any
quotations in the consolidated quotation data.
    Additionally, at the time Regulation ATS was adopted, SORs were not
a primary point of access to ATSs that trade NMS stocks. Today,
however, brokers compete to offer sophisticated technology tools to
monitor liquidity at many different venues and to implement order
routing strategies.\141\ Using that knowledge of available liquidity,
many brokers offer smart order routing technology to route orders to
various trading centers to access such liquidity.\142\ Based on
Commission experience, broker-dealer operators frequently use SORs (or
similar functionality) to route orders to their NMS Stock ATSs in
today's marketplace. Furthermore, for some NMS Stock ATSs, most orders
must pass through the broker-dealer operator's SOR (or similar
functionality) to enter the ATS.\143\
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    \141\ See 2010 Equity Market Structure Release, supra note 124,
75 FR at 3602.
    \142\ See id.
    \143\ For a further discussion about the increased use of SORs
(or similar functionalities) by broker-dealer operators of NMS Stock
ATSs, see infra Section VII.B.7.
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    In today's highly automated trading environment, NMS Stock ATSs
offer various matching systems to bring together orders and
counterparties in NMS stocks. These automated matching systems,
including limit order books, crossing systems, and various types of
auctions, are generally pre-programmed to execute orders pursuant to
established non-discretionary methods. These established non-
discretionary methods dictate the terms of trading among multiple
buyers and sellers entering orders into the NMS Stock ATS and generally
include priority and allocation procedures. Based on Commission
experience, some NMS Stock ATSs offer price-time priority, while others
offer midpoint only matching with time priority, or time priority at
other prices derived from the NBBO. Some NMS Stock ATSs may also offer
priority mechanisms with additional overlays. For example, amongst
orders at a given price, priority may be given to a certain type of
order (e.g., agency orders), before then applying time priority.
Additionally, some NMS Stock ATSs offer order routing services similar
to those offered by national securities exchanges.\144\
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    \144\ For example, based on Commission experience, some NMS
Stock ATSs, like national securities exchanges, will route a
subscriber's order to another trading center when the NMS Stock ATS
cannot execute the order without trading through the NBBO, or if
otherwise directed by the subscriber.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

C. Lack of Operational Transparency for NMS Stock ATSs

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

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

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

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

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

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

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

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

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

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

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

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