Dark-Pool Operators in Spotlight


The Securities and Exchange Commission has turned the spotlight on dark-liquidity pool operators by approving a new disclosure rule for Regulation ATS unanimously.

The new rule, known as Rule 304, requires the operators of ATS platforms that trade NMS stocks to file Form ATS-N, which would publicly disclose the operator and its affiliates activities and operations.

Brett Redfearn, SEC

“The purpose of this review is not to evaluate the innovations or merits of ATSes, but primarily to evaluate whether the disclosures are sufficient and provide a process for the Commission to protect investors when an ATS’ disclosures reveal non-compliance with Federal securities laws,” said Brett Redfearn, director, Division of Trading and Markets at the SEC. “During the comment period for this rule, the vast majority of commenters supported the goals of transparency.”

“For the first time, ATSes that trade NMS stocks will be required to publicly reveal important information on who they are, what they do and how they do it,” said outgoing Commissioner Kara Stein. “Investors will gain a range of insights into the range of trading centers available and their services and fees.”

Among some of the disclosures that the rule requires are the trading activity and of the ATS operator and its affiliates; whether ATS subscribers can opt out of interacting with the broker-dealer and affiliate’s trading interests; arrangements between the broker-dealer, its affiliates, and trading centers to access the ATS’ trading services; and information regarding priority rules, arrangements with liquidity providers, segmentation of orders, trading interests, and counterparty selection.

The form also requires the disclosure of the ATS’s operating including means of order entry; order types and sizes, conditional orders, and indications-of-interests; fees; criteria for eligibility and ineligibility for ATS services.

Under Rule 304, the SEC will post the effective Form ATSN to its website using its EDGAR platform while ATS operators will need to provide a link to the host form on their websites.

The rule does not provide exemptions from the definition of exchanges to an NMS ATS unless its initial Form ATS-N is in effect.

An initial Form ATS-N would become effective under Rule 304 unless the Commission declares it ineffective after reviewing the firm by the expiration of its review period.

The SEC has set its initial review filing window between January 7, 2019, and February 8, 2019. It then has 120 calendar days to make its assessment and may extend the review period for another 120 calendar days. For those NMS ATSes that are not operating during the initial review window, the SEC will have a 120 calendar day review period, which it can extend for another 90 calendar days if it deems necessary.

If an ATS operator fails to comply with the new requirements, it would no longer qualify for exemption from the definition of an exchange under the terms of the Exchange Act and would risk operating as an unregistered exchange.

The rule also mandates that all ATS operators will need to put their safeguards and procedures to protect confidential trading information into writing.

However, Commissioners Stein and Robert Jackson noted that they felt the rule was not broad enough and did not address the ATS platforms trading over-the-counter securities, government securities, municipal securities, or corporate debt securities.

“All ATSes should need to disclose all conflicts of interest and be required to protect confidential trading information,” said Commissioner Stein. “This minimal set of requirements should be required of all alternative trading systems in order to strengthen the entire trading environment.”

On the heels of the Fixed-Income Market Structure Advisory Committee’s July 16 meeting, SEC Chairman Jay Clayton instructed SEC staff to review and assess disclosures related to debt securities and present a recommendation to the Commission.

“We are addressing one set of securities today,” he said. “We need to continue to look across the various trading venues as markets develop, including the fixed-income markets. I’m very pleased with how FIMSAC members have dug into these issues and have been having candid and lively debates.”

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