SEC Imposes Detailed Disclosure Requirements on Alternative Trading Systems (ATSs) | Practical Law

SEC Imposes Detailed Disclosure Requirements on Alternative Trading Systems (ATSs) | Practical Law

An Update discussing amendments to Regulation ATS and the new disclosure regime applicable to Alternative Trading Systems, including Form ATS-N.

SEC Imposes Detailed Disclosure Requirements on Alternative Trading Systems (ATSs)

Practical Law Legal Update w-015-8759 (Approx. 4 pages)

SEC Imposes Detailed Disclosure Requirements on Alternative Trading Systems (ATSs)

by Practical Law Corporate & Securities
Published on 19 Jul 2018 • USA (National/Federal)
An Update discussing amendments to Regulation ATS and the new disclosure regime applicable to Alternative Trading Systems, including Form ATS-N.
On July 18, 2018, the Securities and Exchange Commission (the Commission) announced the adoption of amendments to Regulation ATS. The 558-page rulemaking:
  • Establishes extensive disclosure requirements for certain alternative trading systems (ATSs).
  • Adopts a process for the Commission to declare ATS-N's ineffective.
  • Requires ATSs to adopt and implement written policies and procedures to protect confidential trading information.
Regulation ATS was adopted in 1998 and is designed to protect investors and resolve disputes that may arise in connection with ATS trading. This Regulation governs alternative trading systems, a regulatory term used for a non-exchange trading venue that matches buyers and sellers to find counterparties for transactions. Most ATSs are regulated as broker-dealers. A list of currently registered ATSs can be downloaded from the SEC's website.
The detailed public disclosures required by new Form ATS-N are extensive and designed to provide information to market participants and regulators about:
  • Potential conflicts of interest.
  • The risk of information leakage as a result of ATS-related activity, the operator, or the operator's affiliates.
  • Operations of the ATS, including order types, fees, execution and priority procedures, market data usage, and procedures used to segment orders.
Preparing Form ATS-N disclosures and adopting and implementing policies and procedures that are reasonably designed to comply with the new rules will no doubt be a challenge to many ATSs. Specifically, new Form ATS-N is comprised of 20 pages of identifying requests and substantive, detailed requests, compared with the current two-page Form ATS. The new disclosure regime calls for, among many others, the disclosure and identification or description of:
  • Safeguards and written procedures designed to protect confidential trading information.
  • Products and services used to effect transactions or to submit, disseminate, or display orders or trading interest, including algorithmic trading products, order management or execution systems, and data feeds.
  • Formal and informal arrangements with business units, affiliates, trading centers, or subscribers.
  • The identity of businesses with trade entry permission.
  • A summary of the roles and responsibilities of individuals with access to confidential trading information.
  • The identification and explanation of each order type, including among other things, order priority, price conditions, order types, such as those orders designed not to remove liquidity, that have a discretionary range, or that require an adjustment to price as changes to the order book occur.
  • Co-location offerings and related services.
  • Trade minimums or maximums, trading routing, opt-outs, hours of operation and accessibility to the market after hours.
  • Messaging regarding trading interest, including the use of messages, transmission, recipients, responses, and the impact on trade execution.
  • A summary of the structure of the marketplace, non-discretionary rules and procedures, segmentation procedures and disclosure.
  • Selection of counter-parties, including policies and procedures relating to interaction between orders or trading interest.
  • Policies, procedures and practices relating to displays, routing, closing, fees, suspension of trading, trade reporting, clearance and settlement, execution access, fair access, and aggregation of data.
The information provided on Form ATS-N will be made available to the public on EDGAR. NMS Stock ATSs will be required to provide a link on their website to the location where the disclosures are available on the Commission's website.
NMS Stock ATSs in operation as of January 7, 2019 will be required to file Form ATS-N beginning on January 7, 2019 and no later than February 8, 2019.