[Federal Register Volume 83, Number 152 (Tuesday, August 7, 2018)]
[Rules and Regulations]
[Pages 38768-38936]
[FR Doc No: 2018-15896]

Vol. 83

Tuesday,

No. 152

August 7, 2018

Part II

Securities and Exchange Commission

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

Regulation of NMS Stock Alternative Trading Systems; Final Rule

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

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, 242, and 249

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

Regulation of NMS Stock Alternative Trading Systems

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

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

FOR FURTHER INFORMATION CONTACT: Tyler Raimo, Senior Special Counsel,
at<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 Megan Mitchell, 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: We are adopting: (1) Amendments to 17 CFR
242.300 through 242.303 (``Regulation ATS'') to add new 17 CFR 242.304
(``Rule 304'') under the Exchange Act to provide new conditions for NMS
Stock ATSs seeking to rely on the exemption from the definition of
``exchange'' provided by 17 CFR 240.3a1-1(a) (``Rule 3a1-1(a)'') of the
Exchange Act; (2) new Form ATS-N \1\ under the Exchange Act, which NMS
Stock ATSs will file to comply with the new conditions provided under
Rule 304; and (3) related amendments to 17 CFR 242.300; 17 CFR 242.301,
17 CFR 242.303, and 17 CFR 240.3a1-1 under the Exchange Act
(respectively, ``Rule 300,'' ``Rule 301,'' and ``Rule 303'' of
Regulation ATS, and ``Rule 3a1-1''). We are also adopting amendments to
17 CFR 242.301(b)(10) and 17 CFR 242.303 (``Rules 301(b)(10) and 303 of
Regulation ATS'') under the Exchange Act to require all ATSs to make
and keep written safeguards and written procedures to protect
subscribers' confidential trading information.
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    \1\ 17 CFR 249.640.
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Table of Contents

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

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

XI. Regulatory Flexibility Act Certification

I. Introduction

    NMS Stock ATSs, including trading centers commonly referred to as
dark pools,\2\ have become an integral part of the national market
system. Since the adoption of Regulation ATS in 1998,\3\ the number of
these ATSs, and the volume of NMS stocks traded on them, has
significantly increased. NMS Stock ATSs, which meet the definition of
an exchange but are not required to register as national securities
exchanges, compete with, and operate with complexity akin to, national
securities exchanges. Many NMS Stock ATSs are operated by multi-service
broker-dealers, whose business activities have become increasingly
intertwined with those of the ATS, adding further complexity to their
operations of NMS Stock ATSs and creating the potential for conflicts
between the interests of the broker-dealer operator and the ATS's
subscribers.
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    \2\ The term ``dark pool'' is not used or defined in the
Exchange Act or Commission rules. For purposes of this release, the
term refers to NMS Stock ATSs that do not publicly display
quotations in the consolidated quotation data. See Securities
Exchange Act Release No. 76474 (Nov. 18, 2015), 80 FR 80998, 81008
n.123 (Dec. 28, 2015) (``Proposal''). Currently, NMS Stock ATSs
operate predominantly as dark pools. See infra Section II.A.1.
    A ``trading center'' means a national securities exchange or
national securities association that operates an SRO trading
facility, an ATS, an exchange market maker, an OTC market maker, or
any other broker or dealer that executes orders internally by
trading as principal or crossing orders as agent. 17 CFR
242.600(b)(78). Some trading centers, such as OTC market makers,
also offer dark liquidity, primarily in a principal capacity, and do
not operate as ATSs. For purposes of this adopting release, these
trading centers are not defined as dark pools because they are not
ATSs.
    \3\ Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844, 70863 (December 22, 1998) (Regulation of
Exchanges and Alternative Trading Systems) (``Regulation ATS
Adopting Release'').
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    Despite their role in the equity markets, little information is
widely available to market participants about NMS Stock ATSs, which
restricts their ability to adequately assess these ATSs as potential
routing destinations. On November 18, 2015, we proposed to amend
Regulation ATS with the stated goals of enhancing operational
transparency for NMS Stock ATSs to enable market participants to make
more informed order routing decisions, and to facilitate better
Commission oversight of these trading venues.\4\ To achieve these
goals, we proposed to require NMS Stock ATSs to publicly report on new
Form ATS-N information about how the ATS operates and activities of the
broker-dealer operator and its affiliates that relate to the ATS; and
provide a process for the Commission to determine whether an NMS Stock
ATS qualifies for the exemption from the definition of ``exchange,'' in
which the Commission would, by order, declare a Form ATS-N effective
or, after notice and opportunity for hearing, ineffective.
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    \4\ See Proposal, supra note 2. Section 11A(a)(2) of the
Exchange Act (15 U.S.C. 78k-1(a)(2)) enacted as part of the
Securities Acts Amendments of 1975 (``1975 Amendments'') (Pub. L.
94-29, 89 Stat. 97 (1975)) directs the Commission, having due regard
for the public interest, the protection of investors, and the
maintenance of fair and orderly markets, to use its authority under
the Exchange Act to facilitate the establishment of a national
market system for securities in accordance with the Congressional
findings and objectives set forth in Section 11A(a)(1) of the
Exchange Act. See 15 U.S.C. 78k-1(a)(1). See also Regulation ATS
Adopting Release, supra note 3, at 70858; Proposal, supra note 2, at
80999-81000.
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    We received 32 comment letters on the Proposal from a variety of
interested persons, including ATSs, a national securities exchange,
broker-dealers, institutional investors, industry trade groups, the
Commission's Investor Advocate, and the Attorney General of the State
of New York.\5\ Commenters generally support the goals of the Proposal,
although some commenters express concern about various specific
elements, and recommend certain modifications or clarifications. We are
adopting Form ATS-N and amendments to Regulation ATS and Exchange Act
Rule 3a1-1(a) with modifications from the Proposal, as discussed
below.\6\
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    \5\ Comments received on the Proposal are available on the
Commission's website, available at: https://www.sec.gov/comments/s7-23-15/s72315.shtml. See Appendix A for a citation key to comment
letters cited in this release.
    \6\ If any of the provisions of these rules, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given
effect without the invalid provision or application.
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II. Background

A. Role of ATSs in the Current Equity Market Structure

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

pools accounted for 7.9% of NMS share volume.\14\ Additionally, no
individual ATS executed more than 20.1% of the total share volume on
NMS Stock ATSs or more than 2.3% of total NMS stock share volume during
the first quarter of 2018.\15\ Given this dispersal of trading volume
in NMS stocks among an increasing number of trading centers, NMS Stock
ATSs, with their approximately 11.4% market share, represent a
significant source of liquidity in NMS stocks.
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    \7\ See Securities Exchange Act Release No. 39884 (April 21,
1998), 63 FR 23504, 23523 (April 29, 1998) (``Regulation ATS
Proposing Release'') at 23543 n.341.
    \8\ See id. at 23540 n.313 and accompanying text.
    \9\ Data compiled from Forms ATS submitted to the Commission as
of March 31, 2018.
     NYSE National, Inc. (f.k.a. National Stock Exchange, Inc.) was
not trading as of March 31, 2018 but filed a proposed rule change
with the Commission for its proposed relaunch. See Securities
Exchange Act Release No. 82819 (March 7, 2018) 83 FR 11098 (March
13, 2018) (NYSENAT-2018-02) (notice of proposed ruled change). The
Commission has approved the proposed rule change. See Securities
Exchange Act Release No. 83289 (May 17, 2018) 83 FR 23968 (May 23,
2018) (NYSENAT-2018-02) (order approving proposed ruled change).
     In contrast to dark pools, an ATS could be an Electronic
Communication Network (``ECN''), which are ATSs that provide their
best-priced orders for inclusion in the consolidated quotation data,
whether voluntarily or as required by Rule 301(b)(3) of Regulation
ATS. See Rule 600(b)(23) of Regulation NMS, 17 CFR 242.600(b)(23)
(definition of ``electronic communications network''); see also 2010
Equity Market Structure Release, supra note 13, at 3599. In general,
ECNs offer trading services (such as displayed or non-displayed
order types, maker-taker pricing, and data feeds) that are analogous
to national securities exchanges. See id. Currently, however, based
on Form ATS filings, there are no NMS Stock ATSs operating as ECNs.
    \10\ See infra Table 1--``NMS Stock ATSs Ranked by Dollar
Trading Volume--January 1, 2018 to March 30, 2018'' (citing Trade
and Quote (TAQ) Data).
    \11\ Data compiled from Forms ATS and Forms ATS-R filed with the
Commission as of the end of, and for the first quarter of 2018.
    \12\ See infra Table 1--``NMS Stock ATSs Ranked by Dollar
Trading Volume--January 1, 2018 to March 30, 2018.'' See id. (citing
Trade and Quote (TAQ) Data).
     During the second quarter of 2015, there were 38 ATSs that
reported transactions in NMS stocks, accounting for 59 billion
shares traded in NMS stocks ($2.5 trillion), which represented
approximately 15.0% of total share trading volume (15.4% of total
dollar trading volume) on all national securities exchanges, ATSs,
and non-ATS OTC trading venues combined. See Proposal, supra note 2,
at 81008 n.121 and accompanying text.
     Competitors for listed-equity (NMS) trading services also
include several hundred OTC market makers and broker-dealers.
    \13\ See Regulation of Non-Public Trading Interest, Securities
Exchange Act Release No. 60997 (November 13, 2009) 74 FR 61208,
61209 n.9 (November 23, 2009) (``Regulation of Non-Public Trading
Interest'').
     In 2009, there were 32 active dark pools trading in NMS stocks.
See Securities Exchange Act Release No. 61358 (January 14, 2010), 75
FR 3594 (January 21, 2010) (``2010 Equity Market Structure
Release'')), at 3598 n.22 and accompanying text.
    \14\ See id. at 3598.
    \15\ The NMS Stock ATS with the greatest volume executed
approximately 20.1% of NMS Stock ATS share volume and 2.3% of the
total consolidated NMS stock share trading volume.
    The market share percentages were calculated by Commission staff
using aggregate trade data reported by ATSs to the FINRA equity
trade reporting facilities and made available on FINRA's website and
TAQ Data. See infra Table 1--``NMS Stock ATSs Ranked by Dollar
Trading Volume--January 1, 2018 to March 30, 2018.''
    Pursuant to FINRA rules, each ATS is required to use a unique
MPID in its reporting to FINRA, such that its volume reporting is
distinguishable from other transaction volume reported by the
broker-dealer operator of the ATS, including volume reported for
other ATSs operated by the same broker-dealer. See FINRA Rules 6160,
6170, 6480, and 6720. FINRA aggregates on a weekly basis ATS data
reported by ATSs to the FINRA equity trade reporting facilities. The
data can be viewed on a security-by-security basis or by ATS. See
FINRA Rules 6110 and 6610. See also Securities Exchange Act Release
No. 76931 (January 19, 2016), 81 FR 4076 (January 25, 2016) (SR-
FINRA-2016-002) (notice of filing and immediate effectiveness of a
proposed rule change relating to ATS volume and trading information)
(``FINRA ATS Reporting Notice'').
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2. Operational Complexity; Conflict of Interests

    NMS Stock ATSs have grown increasingly complex in terms of the
services and functionalities that they offer subscribers, and they have
used advances in technology to improve the speed, capacity, and
efficiency of the trading functionalities that they offer to execute
orders in NMS stocks.\16\ Additionally, NMS Stock ATSs today offer a
wide range of order types, matching systems to bring together orders
and counterparties in NMS stocks, order interaction protocols, or
opportunities to customize trading parameters, such as parameters that
allow subscribers to preference interaction of their order flow with
that of certain other specific subscribers or types of subscribers.\17\
A variety of market participants use these ATSs to display or execute
orders and trading interest in NMS stocks, including broker-dealers
that route customer orders to ATSs for execution and potential price
improvement, and asset managers that seek to execute large size orders
without suffering adverse price impact.\18\
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    \16\ ATSs that traded NMS stocks prior to the adoption of
Regulation ATS did not offer the same services and functionalities
that they do today. See Proposal, supra note 2, at 81009.
    \17\ See id. at 81009-81010.
    \18\ Market participants may include many different types of
persons seeking to transact in NMS stocks, including broker-dealers
and institutional or retail investors. See id. at 81001 n.28 and
accompanying text.
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    The relationships between broker-dealer operators \19\ and the ATSs
they operate have also become more complex and intertwined since the
adoption of Regulation ATS.\20\ The broker-dealer operator of an NMS
Stock ATS controls all aspects of the operation of the ATS, including,
among other things: the means of access to the ATS; who may trade on
the ATS; how orders are matched and executed; and any differences in
access to services among subscribers.\21\ The broker-dealer operator,
or its affiliate, may also own, and control access to, the technology
and systems that support the trading facilities of the NMS Stock ATS,
or provide and control the personnel servicing the ATS's trading
facilities.\22\ Additionally, the broker-dealer operator, or in some
cases, its affiliates, determines the means by which orders are entered
on the ATS, in many cases, through the use of a smart order router that
is owned and operated by the broker-dealer operator or one of its
affiliates.\23\ The broker-dealer operator, or in some cases, its
affiliates, also controls the market data that the ATS uses to match,
and execute orders and the transmission of, and access to, confidential
order and execution information sent to and from the ATS.\24\ The
operations of the NMS Stock ATS and the other operations of the broker-
dealer operator are usually closely intertwined, and the broker-dealer
operator may leverage its information technology, systems, personnel,
and market data, and those of its affiliates, to operate the ATS.
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    \19\ See Proposal, supra note 2, at 81010, 81041-81043.
    \20\ See id.
    \21\ See id. at 81010.
    \22\ See id. Some technology or functions of an ATS may be
licensed from a third party. The broker-dealer operator of the ATS
is nonetheless legally responsible for ensuring that all aspects of
the ATS comply with applicable laws. See id. at 81041 n.362.
    \23\ See id. at 81041.
    \24\ See id. For example, the broker-dealer operator determines
the source of market data that the NMS Stock ATS uses to calculate
the NBBO and how the NBBO will be calculated.
---------------------------------------------------------------------------

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

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

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

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

    \29\ See 17 CFR 240.3b-16. See generally Regulation ATS Adopting
Release, supra note 3. See also Proposal, supra note 2, at 81004
(discussing the current exemption from the definition of exchange
available to ATSs).
    \30\ See 15 U.S.C. 78f.
    \31\ See 17 CFR 240.3b-16(a).
    \32\ See Regulation ATS Adopting Release, supra note 3, at
70852. Specifically, Rule 3b-16(b) excludes from the definition of
exchange systems that perform only traditional broker-dealer
activities, including: (1) systems that route orders to a national
securities exchange, a market operated by a national securities
association, or a broker-dealer for execution, or (2) systems that
allow persons to enter orders for execution against the bids and
offers of a single dealer if certain additional conditions are met.
    \33\ See 17 CFR 240.3b-16(e).
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    Section 5 of the Exchange Act \34\ requires an organization,
association, or group of persons that meets the definition of
``exchange'' under Section 3(a)(1) of the Exchange Act,\35\ unless
otherwise exempt, to register with the Commission as a national
securities exchange pursuant to Section 6 of the Exchange Act.\36\
Registered national securities exchanges are also SROs,\37\ and must
comply with regulatory requirements applicable to both national
securities exchanges and SROs.\38\ Before a national securities
exchange may commence operations, the Commission must approve the
national securities exchange's application for registration filed on
Form 1. Section 6(b) of the Exchange Act requires, among other things,
that the national securities exchange be so organized and have the
capacity to carry out the purposes of the Exchange Act and to comply,
and enforce compliance by its members and persons associated with its
members, with the federal securities laws and the rules of the
exchange.\39\ Both a national securities exchange's registration
application and the Commission's order approving the application are
public. After registering, a national securities exchange must file
with the Commission any proposed changes to its rules.\40\ The initial
application on Form 1, amendments thereto, and filings for proposed
rule changes, in combination, publicly disclose important information
about national securities exchanges, such as the trading services they
offer and fees they charge for those services.
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    \34\ 15 U.S.C. 78e.
    \35\ Pursuant to Section 3(a)(1) of the Exchange Act, the
statutory definition of ``exchange'' means ``any organization,
association, or group of persons, whether incorporated or
unincorporated, which constitutes, maintains, or provides a market
place or facilities for bringing together purchasers and sellers of
securities or for otherwise performing with respect to securities
the functions commonly performed by a stock exchange. . . .'' 15
U.S.C. 78c(a)(1).
    \36\ 15 U.S.C. 78f. A ``national securities exchange'' is an
exchange registered as such under Section 6 of the Exchange Act.
     A trading platform that meets the definition of ``exchange''
under Section 3(a)(1) of the Exchange and fails to register with the
Commission as a national securities exchange pursuant to Section 6
of the Exchange Act, unless exempt, risks operating as an
unregistered exchange in violation of Section 5 of the Exchange Act.
See, e.g., Report of Investigation Pursuant to Section 21(a) of the
Securities Exchange Act of 1934: The DAO, Securities Exchange Act
Release No. 81207 (July 25, 2017) https://www.sec.gov/litigation/investreport/34-81207.pdf (``DAO Report'') (finding that certain
tokens offered and sold by a ``virtual'' organization were
securities, and confirming that issuers of distributed ledger or
blockchain technology-based securities must register offers and
sales of such securities unless a valid exemption applies, and that
securities exchanges providing for trading in these securities must
register unless they are exempt). Specifically, we confirmed that a
system that meets the criteria of Rule 3b-16(a), and is not excluded
under Rule 3b-16(b), must register as a national securities exchange
pursuant to Sections 5 and 6 of the Exchange Act or operate pursuant
to an appropriate exemption. See id. at Section III.D. See also In
the Matter of BTC Trading, Corp. and Ethan Burnside, Respondents,
Securities Exchange Act Release No. 73783 (December 8, 2014),
https://www.sec.gov/litigation/admin/2014/33-9685.pdf (order
instituting administrative and cease-and-desist proceedings, making
findings, and imposing remedial sanctions and a cease-and-desist
order and alleging, among other things, that an operator of two
online venues through which account holders could trade securities
using virtual currencies violated Section 5 of the Exchange Act by
failing to register the trading venues as exchanges).
    \37\ Section 3(a)(26) of the Exchange Act defines a self-
regulatory organization as any national securities exchange,
registered securities association, registered clearing agency, or
(with limitations) the Municipal Securities Rulemaking Board. See 15
U.S.C. 78c(a)(26). See also Proposal, supra note 2, at 81000-81001
nn. 20-26 and accompanying text (discussing certain differences
between certain obligations and benefits applicable to national
securities exchanges and those applicable to ATSs).
    \38\ See, e.g., 15 U.S.C. 78f and 78s.
    \39\ See Section 6(b)(1) of the Exchange Act, 15 U.S.C.
78f(b)(1). The Commission must also find that the national
securities exchange has rules that meet certain criteria. See
generally Exchange Act Section 6(b)(2) through (10), 15 U.S.C.
78f(b)(2) through (10).
    \40\ See generally Section 19(b) of the Exchange Act, 15 U.S.C.
78s(b), and Exchange Act Rule 19b-4, 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

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

C. Conditions to the ATS Exemption; Confidential Notice Regime

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Prior to the Commission's adoption of Regulation SCI,\76\ NMS Stock
ATSs were required to comply with Rule 301(b)(6), which requires
certain ATSs trading 20% or more of the volume in any equity security
or debt securities to comply with standards regarding the capacity,
integrity, and security of their automated systems.\77\ Regulation SCI
superseded and replaced Rule 301(b)(6)'s requirements with regard to
ATSs that trade NMS stocks and equity securities that are not NMS
stocks \78\ and requires SCI entities,\79\ including NMS Stock ATSs
that meet the definition of an ``SCI ATS,'' \80\ to establish written
policies and procedures reasonably designed to ensure that their
systems have levels of capacity, integrity, resiliency, availability,
and security adequate to maintain their operational capability and
promote the maintenance of fair and orderly markets, and that they
operate in a manner that complies with the Exchange Act.\81\
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    \76\ See Securities Exchange Act Release No. 73639 (November 19,
2014), 79 FR 72251 (December 5, 2014) (adopting final rules for
systems compliance and integrity) (``SCI Adopting Release'').
    \77\ See 17 CFR 242.301(b)(6).
    \78\ Regulation SCI does not apply to ATSs that trade municipal
securities or corporate debt securities. See SCI Adopting Release,
supra note 76, at 72262.
    \79\ Regulation SCI defines ``SCI entity'' to mean ``an SCI
self-regulatory organization, SCI alternative trading system, plan
processor, or exempt clearing agency subject to [the Commission's
Automation Review Policies].'' See 17 CFR 242.1000.
    \80\ Regulation SCI defines ``SCI alternative trading system''
or ``SCI ATS'' to mean an ATS, which during at least four of the
preceding six calendar months: (1) Had with respect to NMS stocks
(a) five percent (5%) or more in any single NMS stock, and one-
quarter percent (0.25%) or more in all NMS stocks, of the average
daily dollar volume reported by applicable transaction reporting
plans, or (b) one percent (1%) or more in all NMS stocks of the
average daily dollar volume reported by applicable transaction
reporting plans; or (2) had with respect to equity securities that
are not NMS stocks and for which transactions are reported to a
self-regulatory organization, five percent (5%) or more of the
average daily dollar volume as calculated by the self-regulatory
organization to which such transactions are reported. However, an
SCI ATS is not required to comply with the requirements of
Regulation SCI until six months after satisfying the aforementioned
criteria. See 17 CFR 242.1000.
    \81\ See SCI Adopting Release, supra note 76, 79 FR at 72252.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

D. Concerns Regarding the Lack of Operational Transparency

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

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

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

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

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

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

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

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

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

III. Heightened Regulatory Requirements for NMS Stock ATSs

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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