SEC Proposes Changes to Regulation ATS for Communication Protocol Systems Publications

In support of removing this exemption for banks, the SEC notes the importance of SRO membership for ATSs, and because banks typically operate in reliance on exemptions from broker or dealer status, they are not required to become a member of FINRA. Accordingly, bank-operated ATSs trading only government securities would not be able alternative trading systems examples to rely on the exemption from exchange registration provided by Regulation ATS. The SEC believes a bank in such a situation may adopt a registered affiliate structure for government securities operations by moving its ATS operations into a new or existing broker-dealer affiliate of the bank. For banks currently trading government securities pursuant to an exemption without a registered broker-dealer affiliate, they will need to either register a broker-dealer and ATS or cease the activity.

SEC Proposes to Expand the Definition of an “Exchange”

A trade that is executed bilaterally off the order book of an exchange, but executed subject to the exchange’s rules and reported to the exchange, is classified as an off-order book on exchange trade. From a company’s perspective, there are https://www.xcritical.com/ two characteristics that make equity capital different from other forms of capital that the company can use. First, providers of equity capital (the shareholders) are not guaranteed any fixed interest rate or any given rate of return on the money that they invest.

Alternative Trading System Ats Definition And Regulation

Treasury Securities or in a debt security issued or guaranteed by a U.S. executive agency, as defined in 2 U.S.C. 622(8). Finally, the Commission issued a concept release on the regulatory framework for electronic platforms that trade corporate debt and municipal securities. An ATS is a trading venue that is subject to fewer restrictions and regulations than a national securities exchange. An ATS that does not publicly display unfilled orders is called a “dark market” or “dark pool,” while an ATS that does display such orders, similar to a registered exchange, is considered “lit.” Order display provides buyers and sellers the expectation of liquidity and execution in the ATS. Regulation ATS provides for an exemption from registration as a national securities exchange if certain rules are followed.

SEC Proposes to Broadly Expand the Definition of an «Exchange» and Amend Regulation ATS

Rule 3b-16 currently also requires that a system bring together the orders of multiple buyers and sellers. The alternative trading system shall register as a broker-dealer under section 15 of the Act, (15 U.S.C. 78o). As a result, dark pools, along with high-frequency trading (HFT), are oft-criticized by those in the finance industry; some traders believe that these elements convey an unfair advantage to certain players in the stock market. Over the past 30 years, the SEC has examined how to apply the term «exchange» to systems that have been variously called proprietary trading systems (PTSs), broker-dealer trading systems, and most recently, ATSs. While expanding Regulation ATS to Government Securities ATSs and layering on Regulation SCI requirements was the main headline, all existing ATS operators should carefully review the proposal, as its reach and effects go far beyond government securities. (B) During at least 4 of the preceding 6 calendar months, had an average daily trading volume of 5 percent or more of the aggregate average daily share volume for such NMS stock as reported by an effective transaction reporting plan.

ALTERNATIVE TRADING SYSTEMS (ATS) FOR TOKENIZED SECURITIES

Securities and Exchange Commission (SEC) Form ATS-R is a quarterly update that alternative trading systems (ATS) are required to file with the SEC. Securities and Exchange Commission (SEC) Form ATS-R reports the volume and dollar amount of all trades in securities conducted through the trading system during the previous quarter. In the Proposal, the SEC further stated that Communication Protocol Systems perform similar marketplace functions as registered exchanges and ATSs, and have become venues for investors to discover prices, find a counterparty, and agree upon the terms of a trade. The SEC stated that Communication Protocol Systems do not fall within the definition of “exchange,” and as a result, market participants using these systems cannot avail themselves of the same investor protections, fair and orderly market principles, and SEC oversight that apply to today’s registered exchanges or ATSs.

Sophistication of TCA Application Rises Among Asset Managers

A lot of platforms providing a marketplace for digital tokens fall squarely within the definition of an ATS. Every ATS must still be registered with the SEC, provide multiple disclosures, implement security measures and comply with the federal reporting requirements, as well as state laws in each state where the ATS operates. Rule 301(b)(5) requires an ATS with at least 5% of the average daily volume for a security in at least four of the previous six months to comply with “fair access” requirements, including establishing written standards for granting access to the ATS. An ATS cannot unreasonably deny or limit access to its platform by, for example, applying minimum capital or credit requirements in a discriminatory manner. By exceeding the 5% threshold, tZERO was subject to Rule 301(b)(5) with respect to trading in Overstock’s Series A Blockchain Preferred Securities (OSTKP) in June 2017, its own Preferred Securities (TZROP) beginning in February 2020, and Overstock’s Series A Digitally Enhanced Preferred Securities (OSTKO) in March 2020. TZERO failed to maintain written supervisory procedures (“WSPs”) establishing its fair access obligations and did not update its WSPs to establish fair-access standards until June 2020, after Enforcement staff requested its standards.

Amendments Applicable to NMS Stock ATSs and Other ATSs

Moreover, different types of DEXs may involve other market participants or technology that may provide order books, utilize automated market maker algorithms, and liquidity providers. If the “group of persons” threshold can be met for a DEX, and if a crypto asset available to be exchanged through the DEX is a “security,” there is a question of whether a DEX could be an “exchange” under the current rules and, given the expansion to passive communication protocol systems, a much higher risk of that designation under the proposed rule. This overlap between dark trading volume across off-exchange trading venues and exchange trading is identified in Figure 4.5. Adding the volume of dark trading in exchanges to the dark trading in off‐exchange trading venues (including ATS and non-ATS OTC volume) shows that about 42% of the total trading volume in US equity markets in 2015 was in the form of dark trading. As mentioned above, the fragmentation of trading into multiple venues has been accompanied by an increase in dark trading in the last decade.

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. The SEC did not articulate how a willingness to buy or sell would be evidenced, or the features that would make an IOI non-firm. (3) Is not an exempted security, as defined in section 3(a)(12) of the Act (15 U.S.C. 78c(a)(12)). The Society reserves the right to restrict access to or use of the museum by any user at any time.

While anonymity is great for companies that trade on ATS platforms, it is obviously a double-edged sword for the remainder of the market. Modern ATSs are a product of the rapid technological advances that have revolutionized the way stocks are bought and sold. There are many types of ATSs, and they facilitate the purchase and sale of all types of securities ranging from equities to corporate bonds to Treasuries, and more. Unlike an exchange, which must disclose publicly quotes and prices at which securities transactions occur, an ATS can operate in the dark with only limited information about its operations. The new scheme requires an ATS either to register as a national securities exchange or as a broker dealer and comply with new requirements under Regulation ATS.

The emergence of ATS has reshaped the landscape of financial markets, introducing enhanced liquidity, transparency, and accessibility. Understanding the nuances of ATS is paramount for investors and market participants navigating the complexities of modern trading environments. Comparing the fragmentation between exchange and off-exchange trading in the United States and Europe is not straightforward. It is because trading conducted on ATS is not publicly available and does not appear on national exchange order books. Many different explanations have been proposed for the decline in non-financial company IPOs in advanced economies (Isaksson and Çelik, 2013).

In line with the SEC’s recent barrage of enforcement actions targeting the crypto industry, the reopening validated concerns voiced in comments to the initial proposal. The SEC notes in the reopening release that its purpose is to address the potential effects of the proposed amendments to Rule 3b-16 on trading systems for crypto asset securities and trading systems using distributed ledger technology (“DLT”), including various DeFi systems such as automated market makers (“AMMs”) and DeFi exchanges (“DEXs”). On April 14, 2023, the Securities and Exchange Commission (“SEC”) reopened the comment period and provided supplemental information on proposed amendments to Rule 3b-16 under the Securities Exchange Act of 1934 (“Exchange Act”), which defines certain terms used in the definition of “exchange” in Section 3(a)(1) of the Exchange Act. The reopening is primarily intended to address the significant comments received by the SEC in response to the initial proposal, many of which questioned the proposal’s application to trading systems that enable trading of crypto asset securities. The reopening comment period will end 30 days after its publication in the Federal Register or June 13, 2023, whichever is later.

Rule 301(b)(2) of Regulation ATS requires an ATS to file information with the Commission about its operations, such as its order entry procedures, how it displays orders and quotes, and the role of any entity involved in its operations, and to maintain the accuracy of those disclosures. As noted above, DEXs are intended to be peer-to-peer marketplaces where tokenholders control their crypto wallets and trade directly with each other via smart contracts, and transactions are settled directly on the relevant blockchain. In this regard, the DEX generally takes a passive role in facilitating the ability for tokenholders to connect with other tokenholders to exchange crypto assets for other crypto assets.

• The reopening also offers market participants a second bite at the apple on other areas that previously drew significant comment.
• (C) Such orders are executed at a price for such security disseminated by an effective transaction reporting plan, or derived from such prices.
• From a company’s perspective, there are two characteristics that make equity capital different from other forms of capital that the company can use.
• While the SEC’s volume has been impressive, the speed at which it is issuing proposals and the truncated time limits for comment it is providing mean that the SEC and market participants may not have an opportunity to meaningfully consider the impact that the proposed rules will have.
• (3) In the case of a partnership, has contributed, or has the right to receive upon dissolution, 25 percent or more of the capital of the broker-dealer of the alternative trading system.
• An ATS that does not publicly display unfilled orders is called a “dark market” or “dark pool,” while an ATS that does display such orders, similar to a registered exchange, is considered “lit.” Order display provides buyers and sellers the expectation of liquidity and execution in the ATS.

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The function of an ATS is to match buyers with sellers, generally for large blocks of assets.

Thus, the SEC’s dedication to transparency, that drove the order handling rules, has taken a significant step further. These methods include rules governing trading conduct and trading facilities that standardize the manner of order interaction, such as computer algorithms. The agency has revised its interpretation of the term exchange to apply to ATSs through new rule 3b-16.